AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 2004JUNE 24, 2008
 REGISTRATION NOS. 333-115580
- --------------------------------------------------------------------------------

                                  NO. 333-142238
UNITED STATES
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,
_____________________________
CICERO INC.
             (Exact
(Exact Name of Registrant as Specified in Its Charter)


            DELAWARE                                           11-2920559
(State or Other Jurisdiction of                            (I.R.S.  Employer
Incorporation or Organization)                           Identification Number)


                       
DELAWARE
11-2920559
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S.  Employer Identification Number)
7372 SERVICES, PREPACKAGED SOFTWARE
                          -----------------------------
                (PrimaryServices, Prepackaged Software
_____________________________

(Primary Standard Industrial Classification Code)


                              1433 STATE HIGHWAY 34
                          FARMINGDALE, NEW JERSEY 07727
                                 (609) 987-9001
          (Address, Including Zip Code, and Telephone Number, Including
             Area Code, of Registrant's Principal Executive Offices)

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

                                JOHN P. BRODERICK
                             CHIEF FINANCIAL OFFICER
                              LEVEL 8 SYSTEMS, INC.
                              1433 STATE HIGHWAY 34
                          FARMINGDALE, NEW JERSEY 07727
                                 (609) 987-9001
                          -----------------------------
            (Name, 
8000 Regency Parkway
Suite 542
Cary, NC 27518
(919) 380-5000
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant’s Principal Executive Offices)
_____________________________
John P. Broderick
Chief Financial Officer
Cicero Inc.
8000 Regency Parkway
Suite 542
Cary, NC 27518
(919) 380-5000
_____________________________
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)

                                   COPIES TO:

                              SCOTT D. SMITH, ESQ.
                     POWELL, GOLDSTEIN, FRAZER

Copies to:

Lawrence M. Bell, Esq.
Golenbock Eiseman Assor Bell & MURPHYPeskoe LLP
                     191 PEACHTREE STREET, N.E., SUITE 1600
                             ATLANTA, GEORGIA 30303
                                 (404) 572-6600

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

      APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
437 Madison Ave
New York, NY 10022
(212) 907-7300
_____________________________

Approximate Date of Commencement of Proposed Sale to the Public:  From time to time or at one time after the effective date of this registration statement as determined by the selling stockholders.
If any of the securities being registered on this formForm 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]

      T

If this formForm is filed to register additional securities for an offering pursuant to Rule 462(b) under 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 formForm 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 this formForm is a post-effective amendment filed pursuant to Rule 462(d) 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£

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the prospectus is expectedExchange Act. (Check One):

Large accelerated filer £
Accelerated filer £
Non-accelerated filer £
Smaller reporting company T

CALCULATION OF REGISTRATION FEE
 
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED
 
AMOUNT TO BE
REGISTERED
 
PROPOSED
MAXIMUM OFFERING
PRICE PER SHARE(1)
 
PROPOSED MAXIMUM
AGGREGATE OFFERING
PRICE
 
AMOUNT OF
REGISTRATION FEE
 
Common Stock, par value $.001 per share
 
 
7,492,348
(1)
 
$
0.17
 
 
$
1,273,699.16
 
 
$
51.39
 
 
Warrants for Common Stock, par value $.001 per share
 
 
 188,285
 
 
$
0.18
 
 
$
33,891,.30
 
 
 
 
 

(1)
Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c ) under the Securities Act of 1933 and based upon the average high and low prices of the registrant’s common stock on the Over the Counter  Bulletin Board on June 5, 2008.


The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to be made pursuant to Rule 434,
please check the following box. [ ]



                                                 CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                           PROPOSED         PROPOSED MAXIMUM
   TITLE OF EACH CLASS OF                       AMOUNT TO BE           MAXIMUM OFFERING    AGGREGATE OFFERING     AMOUNT OF
SECURITIES TO BE REGISTERED                      REGISTERED              PRICE PER UNIT           PRICE        REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------

Common Stock, par value $.001 per share          3,635,535 (1)              $0.10 (1)        $363,553.50 (1)          $46.06
- ------------------------------------------------------------------------------------------------------------------------------------


(1)   In connection withdelay its initial filing on Form S-1 on May 18, 2004,effective date until the Registrant paidshall file a filing feefurther amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of $595 with respect to the registration of
      13,307,135 shares of its common stock with a proposed maximum aggregate
      offering price of $3,859,069 (estimated solely for the purpose of
      computing the amount of the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, based uponas amended, or until this Registration Statement shall become effective on such date as the average ofCommission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the high and low
      prices of the common stock as reported on the Over-the-Counter Bulletin
      Board on May 10, 2004). Concurrentregistration statement filed with the filing of this Amendment No.
      2,Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the Registrant has transmitted $46.06, representing the additional
      filing fee payable with respect to the increase of 3,635,535 shares of
      common stock in the amount to be registered, representing a proposed
      maximum aggregate offering price for such share increase of $363,553.50
      (estimated solely for the purpose of computing the amount of the
      registration fee pursuant to Rule 457(c) under the Securities Act based
      upon the average of the high and low prices of the common stock as
      reported on the Over-the-Counter Bulletin Board on August 18, 2004).

      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 THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

      PURSUANT TO RULE 429 OF THE SECURITIES ACT OF 1933, THE PROSPECTUS WHICH
IS A PART OF THIS REGISTRATION STATEMENT IS A COMBINED PROSPECTUS AND INCLUDES
ALL THE INFORMATION CURRENTLY REQUIRED IN A PROSPECTUS RELATING TO THE
SECURITIES COVERED BY REGISTRATION STATEMENT NOS. 333-104892, 333-82768 AND
333-100983 PREVIOUSLY FILED BY REGISTRANT. THIS REGISTRATION STATEMENT, ALSO
CONSTITUTES A POST-EFFECTIVE AMENDMENT TO REGISTRATION STATEMENT NOS.
333-104892, 333-82768 AND 333-100983.




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

THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

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


                  offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED August 20, 2004

                                   JUNE 24, 2008

PROSPECTUS

                                44,947,629 SHARES

                          [LOGO ] LEVEL 8 SYSTEMS,

7,680,633 Shares of Common Stock

CICERO INC.


This prospectus relates to the resale of up to 44,947,6297,680,633 shares of our common stock, $.001 par value, which are being offered for resale from time to time by the stockholders named in the section entitled "Selling Stockholders"“Selling Stockholders” on page 3.10. The number of shares the selling stockholders may offer and sell under this prospectus includes common shares:

      o     the selling stockholders currently hold;

      o     issuable to them upon the conversion of outstanding convertible
            preferred stock;

      o     issuable to them upon the exercise of warrants previously issued by
            us. The selling stockholders may also offer additional shares of common stock acquired upon conversion of convertible preferred stock
            or exercise of the warrants as a result of anti-dilution provisions,
            stock splits, stock dividends or similar transactions; and

      o     issuable to them upon conversion of outstanding convertible
            promissory notes.

      stock:

·
the selling stockholders currently hold;
·
issuable to them upon the conversion of outstanding convertible preferred stock; and
·
issuable to them upon the exercise of warrants previously issued.

We are registering these shares to satisfy registration rights of the selling stockholders.

We are not offering or selling any shares under this prospectus and we will not receive any of the proceeds from any resales by the selling stockholders. We will,may, however, receive the proceeds from the exercise of the warrants issued to the selling stockholders. The selling stockholders may sell the shares of common stock from time to time in various types of transactions, including on the Over-the-Counter Bulletin Board and in privately negotiated transactions. For additional information on methods of sale, you should refer to the section entitled "Plan“Plan of Distribution"Distribution” on page 3.

      13.

On August 19, 2004,June 18, 2008, the last sales price of the common stock quoted on the Over-the-Counter Bulletin Board was $0.10$0.17 per share. Our company's common stock is quoted on the Over-the-Counter Bulletin Board under the symbol "LVEL."

      INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE“CICN.”

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 3.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODYSTATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.  ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this Prospectus is ____________


TABLE OF CONTENTS

ABOUT THIS PROSPECTUS
i
Prospectus Summary
1
Risk Factors
3
Use of Proceeds
8
Price Range of Our Common Stock
8
Dividend Policy
9
Selling Stockholders
10
Plan of Distribution
13
Selected Consolidated Financial Data
14
Business
15
Properties
27
Legal Proceedings
27
Management’s Discussion and Analysis of Financial Condition  and Results of Operations
28
Significant Accounting Policies and Estimates
37
Management
40
Executive Compensation
45
Principal Stockholders
48
Certain Relationships and Related Party Transactions
50
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
52
Description of Capital Stock
52
Legal Matters
54
Experts
54
Available Information
54
Index to Financial Statements
F-1


_____________________________

ABOUT THIS PROSPECTUS.........................................................i
Prospectus Summary............................................................1
Risk Factors..................................................................3
Use of Proceeds...............................................................7
Price Range of Our Common Stock...............................................7
Dividend Policy...............................................................7
Selling Stockholders..........................................................8
Plan of Distribution.........................................................18
Selected Consolidated Financial Data.........................................20
Business ....................................................................21
Properties ..................................................................30
Legal Proceedings............................................................30
Management's Discussion and Analysis of Financial Condition  and
  Results of Operations......................................................31
Significant Accounting Policies and Estimates................................48
Management ..................................................................51
Executive Officers...........................................................52
Executive Compensation.......................................................54
Principal Stockholders.......................................................56
Certain Relationships and Related Party Transactions.........................57
Changes in and Disagreements With Accountants on Accounting and
  Financial Disclosure.......................................................57
Description of Capital Stock.................................................58
Legal Matters................................................................59
Experts......................................................................59
Available Information........................................................60
Index to Financial Statements...............................................F-1

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

                              ABOUT THIS PROSPECTUS

      This prospectus is a part of a registration statement that we have filed
with the Securities and Exchange Commission using a "shelf registration"
process. 

You should read this prospectus and any accompanying prospectus supplement, as well as any post-effective amendments to the registration statement of which this prospectus is a part, together with the additional information described under "Available Information"“Available Information” before you make any investment decision.

The terms "Level 8," "we," "our"“Cicero,” “we,” “our” and "us"“us” refer to Level 8 Systems,Cicero Inc. and its consolidated subsidiaries unless the context suggests otherwise.  The term "you"“you” refers to a prospective purchaser of our common stock. Unless otherwise
indicated, all dollar amounts presented are in thousands, except per share
amounts.

      

You should not rely only on theany information other than contained in this prospectus or any accompanying prospectus supplement.  We have not authorized anyone to provide you with information different from that contained in this prospectus or any accompanying prospectus supplement.  These securities are being offered for sale and offers to buy these securities are only being solicited in jurisdictions where offers and sales are permitted.  The information contained in this prospectus and any accompanying prospectus supplement is accurate only as of the date on their respective covers, regardless of the time of delivery of this prospectus or any accompanying prospectus supplement or any sale of the securities.

i


                  SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

      This prospectus contains certain forward-looking statements, including or
related to our future results, including certain projections and business
trends. Assumptions relating to forward-looking statements involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all
Table of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this prospectus, the words "estimate," "project," "intend," "believe,"
"expect" and similar expressions are intended to identify forward- looking
statements. Although we believe that assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate, and we
may not realize the results contemplated by the forward-looking statement.
Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause us to alter our business strategy or
capital expenditure plans that may, in turn, affect our results of operations.
In light of the significant uncertainties inherent in the forward-looking
information included in this prospectus, you should not regard the inclusion of
such information as our representation that we will achieve any strategy,
objective or other plans. The forward-looking statements contained in this
prospectus speak only as of the date of this prospectus as stated on the front
cover, and we have no obligation to update publicly or revise any of these
forward-looking statements. These and other statements, which are not historical
facts are based largely on management's current expectations and assumptions and
are subject to a number of risks and uncertainties that could cause actual
results to differ materially from those contemplate by such forward-looking
statements. These risk and uncertainties include, among others, the risks and
uncertainties described in "Risk Factors" (page 3).


                                       ii
Contents
PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors"“Risk Factors” and the financial statements, before making an investment decision. References to "we," "our," "Level 8"“we,” “our,” “Cicero” and the "Company"“Company” generally refer to Level 8 Systems,Cicero Inc., a Delaware corporation.

We provide next generation applicationbusiness integration productssoftware, which enables organizations to integrate new and services
that are based on open technology standards and are licensed to a varied range
of customers. Our software helps organizations leverage their extensive system
and business process investments, increase operational efficiencies, reduce
costs and strengthen valued customer relationships by uniting disparate
applications, systems,existing information and processes at the desktop. Our business integration software addresses the emerging need for companies’ information systems to deliver enterprise-wide views of their business information processes. In addition to software products, the Company also provides technical support, training and consulting services as part of its commitment to providing its customers with industry-leading integration solutions.  The Company’s consulting team has in-depth experience in developing successful enterprise-class solutions as well as valuable insight into the business information needs of customers in the largest 5000 corporations worldwide (the “Global 5000”).

Our focus is on the emerginggrowing desktop integration and business process automation market with our Cicero(R)Cicero® product. CiceroCicero® is a business application integration software productplatform that maximizesenhances end-user productivity, streamlines business operations and integrates systems and applications that would not otherwise work together.  CiceroCicero® software offers a proven, innovative departure from traditional, costly and labor-intensive approaches toenterprise application integration, which occurs at the server level.  Cicero® provides non-invasive application integration at the desktop level.  Desktop level integration provides the user with a single environment with a consistent look and feel for diverse applications across multiple operating environments, reduces enterprise integration implementation cost and time, and supports a Service-Oriented Architecture (SOA).

By using Cicero® software, we believe companies can decrease their customer management costs, improve their customer service and more efficiently cross-sell the full range of their products and services resulting in an overall increase in return on their information technology investments.  In addition, we believe Cicero® software enables organizations to reduce the business risks inherent in replacement or re-engineering of mission-critical applications and extend the productive life and functional reach of their application portfolio.

Cicero® software is engineered to integrate diverse business applications and shape them to more effectively serve the people who use them.  Cicero® provides an intuitive integration and development environment, which simplifies the integration of complex multi-platform applications. Cicero® can streamline end-user tasks by providing a single, seamless user interface for simple access to multiple systems or be configured to display one or more composite applications to enhance productivity.  Our software enables automatic information sharing among line-of-business applications and tools.

Cicero® software is ideal for deployment in contact centers where its highly productive, task-oriented user interface promotes user efficiency.   By integrating diverse applications across multiple operating systems, Cicero® software is also ideal for the financial services, for which Cicero® was initially developed, insurance, telecommunications, intelligence, security, law enforcement, governmental and other industries requiring a cost-effective, proven application integration solution.

Recent Developments

In March 2008, the Company was notified that enables clientsa group of investors including two members of the Board of Directors acquired a short term promissory note due SDS Merchant Fund in the principal amount of $250,000. The note is unsecured and bears interest at 10% per annum. In March, our Board of Directors approved a resolution to transform applications, business
processesconvert this debt plus accrued interest into common stock of the Company. The total principal and human expertiseinterest amounted to $361,827 and was converted into 1,417,264 shares of common stock. Mr. John Steffens, the Company’s Chairman, acquired 472,516 shares and Mr. Bruce Miller, also a seamless, cost effective business solutionmember of our Board of Directors, acquired 472,374 shares.

In October 2007, we agreed to restructure a promissory note payable to Bank Hapoalim and guaranty by BluePhoenix Solutions. Under a new agreement with BluePhoenix, we made a principal reduction payment to Bank Hapoalim in the amount of $300,000. Simultaneously, BluePhoenix paid $1,671,000 to Bank Hapoalim, thereby discharging that provides a cohesive, task-orientedindebtedness. The Company and role-centric interface that is
designed to work the way people think.

RECENT DEVELOPMENTS

      In June 2004, weBluePhoenix entered into a convertiblenew promissory note with Anthony
Pizi,(which we refer to as the Company's Chairman and Chief Executive Officer, or Mr. Pizi. The note,Note) in the face amount of $112, bears$1,021,000, bearing interest at 1% per monthLIBOR plus 1.0% and is convertible
into 560,000maturing on December 31, 2011. In addition, BluePhoenix acquired 2,546,149 shares of our common stock and warrantsin exchange for $650,000 paid to purchase 560,000 sharesBank Hapoalim to retire that indebtedness. In March 2008, we amended the terms of our common stock at $0.20 per share. Also in June 2004, Mr. Pizi entered into
a second convertible promissory note in the face amount of $15 which is
convertible into 90,118 shares of our common stock and warrants to purchase
90,118 shares of our common stock at $0.17 per share. These warrants expire
three years from the date of grant.

      Also in June 2004, we entered into a convertible loan agreementNote with Mark
and Carolyn Landis, who are related by marriage to Mr. Pizi, in the amount of
$125.BluePhoenix Solutions. Under the terms of the agreement,original Note, the loan bears interest at 1% per monthCompany was to make a principal reduction payment in the amount of $350,000 on January 30, 2009. The Company and is convertibleBluePhoenix agreed to accelerate that principal payment to March and April 2008 in return for a conversion of $50,000 into 781,250195,848 shares of ourthe Company’s common stock. In March, the Company paid $200,000 plus accrued interest and in April, the Company paid $100,000 plus accrued interest.

1
Table of Contents

In October 2007, we completed a private sale of shares of its common stock and warrants to purchase 781,250 sharesa group of investors, four of which are members of our common stock exercisable at $0.16. The warrants
expire in three years from the date of grant.

      In May 2004, we entered into convertible loans aggregating $185 from
several investors including a member of the Company's Board of Directors. Under the terms of these agreements, the loans bear interest at 1% per month and are
convertible into an aggregate of 578,125that agreement, we sold 2,169,311 shares of our common stock for $0.2457 per share for a total of $533,000. Participating in this consortium were Mr. John L. (Launny) Steffens, the Company’s Chairman, and warrants
to purchase an aggregateMessrs. Bruce Miller, Don Peppers, and Bruce Percelay, members of 578,125the Board.  Mr. Steffens converted the principal amount of his short term notes with the Company of $250,000 for 1,017,501 shares of common stock.  Mr. Miller invested $20,000 for 81,400 shares of common stock, Mr. Peppers acquired 101,750 shares for a $25,000 investment and Mr. Bruce Percelay acquired 40,700 shares for a $10,000 investment.

The Offering

Common stock offered by selling stockholders:  7,680,633 shares.

Use of proceeds:  The selling stockholders will receive all net proceeds from sale of our common stock exercisable at
$0.32. The warrants expire in three yearscovered by this prospectus.  We will not receive any proceeds from this offering other than from the dateexercise of grant.

      In April 2004, we entered into a convertible loan agreement with Mr. Pizi
in the amount of $100,000. Under the terms of the agreement, the loan is
convertible into 270,270 shares of our common stock and warrants to purchase 270,270 shares of our common stock exercisable at $0.37. The warrants expire in
three years from the date of grant.

      On March 1, 2004, we entered into a consulting services agreement with Mr.
Ralph F. Martino. Under the terms of the agreement, we agreed to issue 66,667
shares per month, up to an aggregate of 200,001 shares of our common stock, as
compensation for services rendered over the following three-month period. On
June 1, 2004, we renewed the agreement for three additional months and agreed to
issue 88,889 shares per month up to an aggregate of 266,667 shares of our common
stock.

      On March 1, 2004, we entered into a reseller/consulting agreement with
Pyxislink. Under the terms of the agreement, we agreed to issue warrants to
purchase 25,000 shares of our common stock quarterly, over the next four
quarters. The warrants are exercisable for five years from the issue date and
the exercise price is $0.38 per share.

      In March 2004, we entered into a convertible loan agreement with Mark and
Carolyn Landis, who are related by marriage to Mr. Pizi in the principal amount
of $125,000. Under the terms of the agreement, the loan is convertible into
446,429 shares of our common stock and warrants to purchase 446,429 shares of
our common stock exercisable at $0.28. The warrants expire in three years from
the date of grant. We also entered into convertible loan agreements with
Frederick Mack and C. Glen Dugdale, each in the principal amount of $50,000.
Under the terms of the agreement, each loan is convertible into 135,135 shares
of our common stock and warrants to purchase 135,135 shares of our common stock
at $0.37 per share. The warrants expire in three years from the date of grant.

                                       1



      In March 2004, pursuant to an existing agreement, we issued 150,000 shares
of common stock to Liraz Systems Ltd. ("Liraz") in consideration for extension
of the debt guarantee to Bank Hapoalim.

      On January 9, 2004, we acquired substantially all of the assets and
certain liabilities of Critical Mass Mail, Inc., d/b/a Ensuredmail(R). The
acquisition was completed using our common stock. The aggregate purchase price
of the assets and liabilities was $750,000. We issued 2,027,027 common shares as
consideration for the purchase. The primary assets acquired in the acquisition
were Critical Mail, Inc.'s federally certified Ensuredmail(R) e-mail encryption
technology and products.

      Concurrent with the acquisition of the assets of Critical Mass Mail, Inc.,
we completed a common stock financing round wherein we raised $1,247,000 of
capital from several new investors as well as certain investors of Critical Mass
Mail. We sold 3,369,192 shares of common stock at a price of $0.37 per share. As
part of the financing, we also issued warrants to purchase 3,369,192 shares of
our common stock at an exercise price of $0.37. The warrants expire three years
from the date of grant.

      On October 15, 2003, we completed a private placement of 1,894,444 shares
of common stock and warrants to purchase 473,611 shares of common stock. The
warrants are exercisable at $0.45 per share

Risk Factors:  See “Risk Factors” beginning on page 3 and other information included in this prospectus for a discussion of common stock and have a
three-year term. We received $852,500factors you should carefully consider before deciding to invest in aggregate proceeds and used $200,000 of
the proceeds to pay down our term loan.

      On November 15, 2003, we reached an agreement with Bank Hapoalim, the
holder of our term loan and Liraz, the guarantor of the term loan, to extend the
maturity date of the term loan until November 14, 2004. In consideration for the
extension of the guaranty, we issued 150,000 shares of our common stock to a
designated subsidiary of Liraz and agreed to issue an additional 150,000 shares
on March 31, 2004.

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

      shares.



We were incorporated as Level 8 Systems, Inc. in New York in 1988 and re-incorporated in Delaware in 1999. Effective August 2004,In November 2006, our stockholders approved the change of our name to Cicero Inc. Our principal executive offices were relocated
to 1433 State Highway 34, Farmingdale, New Jersey 07727.are located at 8000 Regency Parkway, Suite 542, Cary, North Carolina 27518.  Our telephone number is (609) 987-9001(919) 380-5000 and our web site is located at WWW.LEVEL8.COM.www.ciceroinc.com. Information contained on our web site is not a part of this prospectus.

2
Table of Contents
RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the specific risk factors listed below together with the other information included in this prospectus before you decide whether to purchase shares of our common stock. Additional risks and uncertainties not presently known to us, including those that are not yet identified or that we currently think are immaterial, may also adversely affect our business, results of operations and financial condition. The market price of our common stock could decline due to any of these risks, and you could lose all or part of your investment.

WE DEPEND ON AN UNPROVEN STRATEGY FOR ONGOING REVENUE.

      In 2001,

There is substantial doubt as to whether we determined that our best possibilitycan continue as a going concern.

Because we incurred net operating losses of long- term success
would be to concentrate our sales efforts intoapproximately $2.0 million for the customer contact centersyear ended December 31, 2007 and $0.5 million for the three months ended March 31, 2008, and losses from continuing operations of large companies, whereapproximately $6.7 million for the customer service representatives of our target market
interact with their customers via telephone, facsimile, electronic mailprevious two fiscal years we experienced negative cash flows from operations, had significant working capital deficiencies at March 31, 2008, and other means of communication. The success of our strategy is highly dependentbecause we are relying on
market acceptance of Cicero, which we have licensed from Merrill Lynch. Cicero
has no track record of sales to the financial services industrya newly developed and marketed product, there is no
certaintysubstantial doubt that we will have strong market penetration with our Cicero offering.

      Cicero was officially launched incan continue to operate as a general release version in June 2001.going concern. While we have limited significant sales of Ciceroattracted some additional capital to date, we have yetcontinue to establish a predictable revenue stream. A previous version of Cicero has been in
use on over 30,000 workstations at Merrill Lynch for approximately five years.
We have substantially modified the version of Cicero used at Merrill Lynch to
introduce a commercial product that may be implemented in our target markets.

      Furthermore, we have ceased our sales and marketing efforts with respect
to our historical revenue producing products, the Geneva Integration Suite line
of products, and our historical business of Enterprise Application Integration
at the server level. We have sold all assets associated with the Geneva
AppBuilder software, which represented approximately 59% of our revenue in
fiscal year 2001. We also sold our Geneva Message Queuing and XIPC products in
the third quarter of 2001 and our Star/SQL and CTRC products in second quarter
of 2002. In October 2002, we sold our Systems Integration business, which
consisted of Geneva Enterprise Integrator, and Geneva Business Process
Automator. These sales represent substantially all of the products in our
Messaging and Application Engineering segment and all the products in our
Systems Integration Segment. Our past performance and revenues therefore provide
no indication of our future prospects and revenues.

      Our new strategy is subject to the following specialized risks that may
adversely affect our long-term revenue and profitability prospects:

      o     Cicero was originally developed internally by Merrill Lynch and has
            no track record of successful sales to organizations within the
            financial services industry and may not gain market acceptance;

      o     We are approaching a different segment of the financial services
            industry, the customer contact center, compared to our sales and
            marketing efforts in the past andfund operations, there can be no assurance that we can successfully sellobtain additional financing and market into this industry; and o if we do obtain financing that it will be on terms that are favorable to us or our stockholders.


We have had very limited success because the financial conditiona history of the
            Company has caused concern for enterprise customerslosses and expect that would be
            dependent on Cicero for their long-term needs.

WE HAVE A HISTORY OF LOSSES AND EXPECT THAT WE WILL CONTINUE TO EXPERIENCE
LOSSES AT LEAST THROUGH 2004.

      we will continue to experience losses at least through third quarter of 2008.

We experienced operating losses and net losses infor each of the years from 1998 1999, 2000, 2001,
2002, 2003 and for the six months ended June 30, 2004.through 2007. We incurred a net loss of $25.1$3.68 million in 2005, $3.0 million in 2006, $2.0 million for 1998, $15.5 million for 1999, $28.4 million for 2000, $105.1
million for 2001, $18.2 million for 2002, $10.0 million for 20032007 and $7.3$0.5 million for the sixthree months ended June 30, 2004.March 31, 2008.  As of June 30, 2004,March 31, 2008, we had a working capital deficit of $7.7$6.3 million and an accumulated deficit of $220$237 million. Our ability to generate positive cash flow is dependent upon achieving
and sustaining certain cost reductions and generating sufficient revenues.


                                       3

Therefore, due to these and other factors, we expect that we will continue to experience net losses through the endthird quarter of 2004.2008. We have not generated sufficient revenues to pay for all of our operating costs or other expenses and have relied on financing transactions over the last threeseveral fiscal years to pay our operating costs and other expenses. We cannot predict with accuracy our future results of operations and believe that any period-to-period comparisons of our results of operations are not meaningful.  Furthermore, there can be no assurance that if we are unable to generate sufficient revenue from operations that we will be able to continue to access the capital markets to fund our operations, or that if we are able to do so that it will be on satisfactory terms.

THERE IS SUBSTANTIAL DOUBT AS TO WHETHER WE CAN CONTINUE AS A GOING CONCERN.

      Because we incurred net operating losses


We develop new and unproven technology and products.

To date, our products have not been widely accepted in the market place and therefore may be considered unproven. The markets for our products are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. Our future success will depend to a substantial degree upon our ability to market and enhance our existing products and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and emerging and evolving industry standards.

We depend on an unproven strategy for ongoing revenue.

Our future revenues are entirely dependent on acceptance of $7.3 million for the six
months ended June 30, 2004 and $10.0 million for the year ended December 31,
2003, weCicero® which had limited success in commercial markets to date. We have experienced negative cash flows from operations for the past three years. At March 31, 2008, we had significanta working capital deficiencies at June 30, 2004, and because we are relying on
acceptancedeficiency of a newly developed and marketed product,approximately $6,330,000.  Accordingly, there is substantial doubt that we can continue as a going concern, and the independent auditor’s report accompanying our financial statements raises doubt about our ability to operatecontinue as a going concern.  WhileIn order to address these issues and to obtain adequate financing for our operations for the next twelve months, we have attracted some
additional capital toare actively promoting and expanding our product line and continue to fund operations,negotiate with significant customers who have demonstrated interest in the Cicero® technology. We are experiencing difficulty increasing sales revenue largely because of the inimitable nature of the product as well as customer concerns about our financial viability. Cicero® software is a new “category defining” product in that most Enterprise Application Integration or EAI projects are performed at the server level and Cicero®’s integration occurs at the desktop level without the need to open and modify the underlying code for those applications being integrated. Many companies are not aware of this new technology or tend to look toward more traditional and accepted approaches although emerging competition has increased the public awareness of this new form of technology. We are attempting to solve the former problem by improving the market’s knowledge and understanding of Cicero® through increased marketing and leveraging its limited number of reference accounts while enhancing its list of resellers and system integrators to assist in the sales and marketing process. Additionally, we are seeking additional equity capital or other strategic transactions in the near term to provide additional liquidity, however, there can beis no assurance that we can obtain additional financing and if we do obtain financing that it
will be able to obtain any additional funding.

3
Table of Contents

Our new strategy is subject to the following specialized risks that may adversely affect our long-term revenue and profitability prospects:

·
Cicero® was originally developed internally by Merrill Lynch and has no track record of successful sales to organizations within the financial services industry and may not gain market acceptance;
·
We are approaching a different segment of the financial services industry, the customer contact center, compared to our sales and marketing efforts in the past and there can be no assurance that we can successfully sell and market into this industry; and
·
We have had very limited success because the financial condition of the Company has caused concern for enterprise customers that would be dependent on Cicero® for their long-term needs.

Economic conditions could adversely affect our revenue growth and cause us not to achieve desired revenue.

Our ability to generate revenue depends on terms that are favorablethe overall demand for desktop integration software and services. Our business depends on overall economic conditions, the economic and business conditions in our target markets and the spending environment for information technology projects, and specifically for desktop integration in those markets. A weakening of the economy in one or more of our geographic regions, unanticipated major events and economic uncertainties may make more challenging the spending environment for our software and services, reduce capital spending on information technology projects by our customers and prospective customers, result in longer sales cycles for our software and services or cause customers or prospective customers to usbe more cautious in undertaking larger transactions. Those situations may cause a decrease in our revenue. A decrease in demand for our software and services caused, in part, by an actual or anticipated weakening of the economy, may result in a decrease in our stockholders.

THE SO-CALLED "PENNY STOCK RULE" COULD MAKE IT CUMBERSOME FOR BROKERS AND
DEALERS TO TRADE IN OUR COMMON STOCK, MAKING THE MARKET FOR OUR COMMON STOCK
LESS LIQUID WHICH COULD CAUSE THE PRICE OF OUR STOCK TO DECLINE.

      revenue rates.


The “penny stock” rule will limit brokers and dealers ability to trade in our common stock, making the market for our common stock less liquid which could cause the price of our stock to decline.

Our common stock is quoted on the Over-the-Counter Bulletin Board.

Trading of our common stock on the OTC Bulletin BoardOTCBB may be subject to certain provisions of the Securities Exchange Act of 1934, as amended, commonly referred to as the "penny stock" rule. A penny stock is generally defined to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. If our stock is deemed to be a penny stock, trading in our stock will be subject to additional sales practice requirements on broker-dealers.broker-
dealers. These may require a broker-dealer to:

      o     make a special suitability determination for purchasers of our
            shares;

      o     receive the purchaser's written consent to the transaction prior to
            the purchase; and

      o     deliver to a prospective purchaser of our stock, prior to the first
            transaction, a risk disclosure document relating to the penny stock
            market.

      

·
make a special suitability determination for purchasers of our shares;

·
receive the purchaser's written consent to the transaction prior to the purchase; and

·
deliver to a prospective purchaser of our stock, prior to the first transaction, a risk disclosure document relating to the penny stock market.

Consequently, penny stock rules may restrict the ability of broker-dealers to trade and/or maintain a market in our common stock. Also, prospective investors may not want to get involved with the additional administrative requirements, which may have a material adverse effect on the trading of our shares.

FUNDS FROM OUR SERIES D PREFERRED STOCK FINANCING REMAIN IN ESCROW AND ARE NOT
AVAILABLE TO THE COMPANY.

      In March 2003,

Because we closedcannot accurately predict the saleamount and timing of Series D Preferred Stock and
warrants. Pursuant to the termsindividual sales, our quarterly operating results may vary significantly, which could adversely impact our stock price.

4
Table of the financing transaction, $2 million of the
$3.5 million proceeds of the financing were placed in escrow. $775,900 of these
proceeds remains in escrow. If we are unable to finalize arrangements for an
Asian joint venture with the lead investors, the lead investors have the right
to cause us to purchase $1 million of the Series D Preferred Stock with the
funds that were placed in escrow and to the extent the escrow is insufficient,
the Company would need to finance the rest of the repurchase right to the lead
investor.

BECAUSE WE CANNOT ACCURATELY PREDICT THE AMOUNT AND TIMING OF INDIVIDUAL SALES,
OUR QUARTERLY OPERATING RESULTS MAY VARY SIGNIFICANTLY, WHICH COULD ADVERSELY
IMPACT OUR STOCK price.

      Contents

Our quarterly operating results have varied significantly in the past, and we expect they will continue to do so in the future. We have derived, and expect to continue to derive in the near term, a significant portion of our revenue from relatively large customer contracts or arrangements. The timing of revenue recognition from those contracts and arrangements has caused and may continue to cause fluctuations in our operating results, particularly on a quarterly basis. Our quarterly revenues and operating results typically depend upon the volume and timing of customer contracts received during a given quarter and the percentage of each contract, which we are able to recognize as revenue during the quarter. Each of these factors is difficult to forecast. As is common in the software industry, the largest portion of software license revenues are typically recognized in the last month of each fiscal quarter and the third and fourth quarters of each fiscal year. We believe these patterns are partly attributable to budgeting and purchasing cycles of our customers and our sales commission policies, which compensate sales personnel for meeting or exceeding periodic quotas.


                                       4

Furthermore, individual CiceroCicero® sales are large and each sale can or will account for a large percentage of our revenue and a single sale may have a significant impact on the results of a quarter. The sales of both our historical products and CiceroCicero® can be classified as generally large in size to a small discrete number of customers. In addition, the substantial commitment of executive time and financial resources that have historically been required in connection with a customer'scustomer’s decision to purchase CiceroCicero® and our historical products increases the risk of quarter-to-quarter fluctuations. CiceroCicero® sales require a significant commitment of time and financial resources because it is an enterprise product. Typically, the purchase of our products involves a significant technical evaluation by the customer and the delays frequently associated with customers'customers’ internal procedures to approve large capital expenditures and to test, implement and accept new technologies that affect key operations. This evaluation process frequently results in a lengthy sales process of several months. It also subjects the sales cycle for our products to a number of significant risks, including our customers'customers’ budgetary constraints and internal acceptance reviews. The length of our sales cycle may vary substantially from customer to customer.

      We typically do not have any material backlog of unfilled software orders,
and

Our product revenue may fluctuate from quarter to quarter due to the completion or commencement of significant assignments, the number of working days in a quarter and the utilization rate of services personnel. As a result of these factors, we believe that a period-to-period comparison of our historical results of operations is not necessarily meaningful and should not be relied upon as indications of future performance. In particular, our revenues in the third and fourth quarters of our fiscal years may not be indicative of the revenues for the first and second quarters. Moreover, if our quarterly results do not meet the expectations of our securities analysts and investors, the trading price of our common stock would likely decline.

LOSS OF KEY PERSONNEL ASSOCIATED WITH CICERO DEVELOPMENT COULD ADVERSELY AFFECT
OUR BUSINESS.

      

Loss of key personnel associated with Cicero® development could adversely affect our business.

Loss of key executive personnel or the software engineers we have hired with specialized knowledge of the CiceroCicero® technology could have a significant impact on our execution of our new strategy givegiven that they have specialized knowledge developed over a long period of time with respect to the CiceroCicero® technology.  Furthermore, because of our restructuring and reduction in the number of employees, we may find it difficult to recruit new employees in the future.

DIFFERENT COMPETITIVE APPROACHES OR INTERNALLY DEVELOPED SOLUTIONS TO THE SAME
BUSINESS PROBLEM COULD DELAY OR PREVENT ADOPTION OF CICERO.

Different competitive approaches or internally developed solutions to the same business problem could delay or prevent adoption of Cicero®.

Cicero® is designed to address in a novel way the problems that large companies face integrating the functionality of different software applications by integrating these applications at the desktop. To effectively penetrate the market for solutions to this disparate application problem, CiceroCicero® will compete with traditional Enterprise Application Integration, or EAI, solutions that attempt to solve this business problem at the server or back-office level. Server level EAI solutions are currently sold and marketed by companies such as NEON, Mercator, Vitria, and BEA. There can be no assurance that our potential customers will determine that Cicero'sCicero®’s desktop integration methodology is superior to traditional middleware EAI solutions provided by the competitors described above in addressing this business problem. Moreover, the information systems departments of our target customers, large financial institutions, are large and may elect to attempt to internally develop an internal solution to this business problem rather than to purchase the CiceroCicero® product. CiceroCicero® itself was originally developed internally by Merrill Lynch to solve these integration needs.

Accordingly, we may not be able to provide products and services that compare favorably with the products and services of our competitors or the internally developed solutions of our customers. These competitive pressures could delay or prevent adoption of CiceroCicero® or require us to reduce the price of our products, either of which could have a material adverse effect on our business, operating results and financial condition.

WE MAY BE UNABLE TO ENFORCE OR DEFEND OUR OWNERSHIP AND USE OF PROPRIETARY AND
LICENSED TECHNOLOGY.

      

5
Table of Contents

Our ability to compete may be subject to factors outside our control.

We believe that our ability to compete depends in part on a number of competitive factors outside our control, including the ability of our competitors to hire, retain and motivate senior project managers, the ownership by competitors of software used by potential clients, the development by others of software that is competitive with our products and services, the price at which others offer comparable services and the extent of our competitors’ responsiveness to customer needs.

The markets for our products are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions.

Our future success will depend to a substantial degree upon our ability to enhance our existing products and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and emerging and evolving industry standards.

The introduction of new or enhanced products also requires us to manage the transition from older products in order to minimize disruption in customer ordering patterns, as well as ensure that adequate supplies of new products can be delivered to meet customer demand. There can be no assurance that we will successfully develop, introduce or manage the transition to new products.

We have in the past, and may in the future, experience delays in the introduction of our products, due to factors internal and external to our business. Any future delays in the introduction or shipment of new or enhanced products, the inability of such products to gain market acceptance or problems associated with new product transitions could adversely affect our results of operations, particularly on a quarterly basis.

We may face damage to the reputation of our software and/or a loss of revenue if our software products fail to perform as intended or contain significant defects.

Our software products are complex, and significant defects may be found following introduction of new software or enhancements to existing software or in product implementations in varied information technology environments. Internal quality assurance testing and customer testing may reveal product performance issues or desirable feature enhancements that could lead us to reallocate product development resources or postpone the release of new versions of our software. The reallocation of resources or any postponement could cause delays in the development and release of future enhancements to our currently available software, require significant additional professional services work to address operational issues, damage the reputation of our software in the marketplace and result in potential loss of revenue. Although we attempt to resolve all errors that we believe would be considered serious by our partners and customers, our software is not error-free. Undetected errors or performance problems may be discovered in the future, and known errors that we consider minor may be considered serious by our partners and customers. This could result in lost revenue, delays in customer deployment or legal claims and would be detrimental to our reputation. If our software experiences performance problems or ceases to demonstrate technology leadership, we may have to increase our product development costs and divert our product development resources to address the problems.

We may be unable to enforce or defend our ownership and use of proprietary and licensed technology.

We originally licensed the Cicero® technology and related patents on a worldwide basis from Merrill Lynch, Pierce, Fenner & Smith Incorporated in August of 2000 under a license agreement containing standard provisions and a two-year exclusivity period. On January 3, 2002, the license agreement was amended to extend our exclusive worldwide marketing, sales and development rights to Cicero® in perpetuity (subject to Merrill Lynch's rights to terminate in the event of bankruptcy or a change in control of the Company) and to grant ownership rights in the Cicero® trademark. Merrill Lynch indemnifies us with regard to the rights granted to us by them. Consideration for the original Cicero® license consisted of 10,000 shares of our common stock. In exchange for the amendment, we granted an additional 2,500 shares of common stock to MLBC, Inc., a Merrill Lynch affiliate and entered into a royalty sharing agreement. Under the royalty sharing agreement, we pay a royalty of 3% of the sales price for each sale of Cicero® or related maintenance services. The royalties over the life of the agreement are not payable in excess of $20 million. We have completely re-engineered the Cicero® software to provide increased functionality and much more powerful integration capabilities.

6
Table of Contents

Our success depends to a significant degree upon our proprietary and licensed technology. We rely on a combination of patent, trademark, trade secret and copyright law, contractual restrictions and passwords to protect our proprietary technology. However, these measures provide only limited protection, and there is no guarantee that our protection of our proprietary rights will be adequate. Furthermore, the laws of some jurisdictions outside the United States do not protect proprietary rights as fully as in the United States. In addition, our competitors may independently develop similar technology; duplicate our products or design around our patents or our other intellectual property rights. We may not be able to detect or police the unauthorized use of our products or technology, and litigation may be required in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of our proprietary rights. Additionally, with respect to the CiceroCicero® line of products, there can be no assurance that Merrill Lynch will protect its patents or that we will have the resources to successfully pursue infringers. Any litigation to enforce our intellectual property rights would be expensive and time-consuming, would divert management resources and may not be adequate to protect our business.


                                       5

We do not believe that any of our products infringe the proprietary rights of third parties. However, companiesas the number of software products in the industry increases and the functionality of these products further overlaps, we believe that software industry have experienced
substantial litigation regarding intellectual propertydevelopers and third parties could
assert claims that we have infringed their intellectual property rights.licensors may become increasingly subject to infringement claims. In addition, we may be required to indemnify our distribution partners and end- users for similar claims made against them. Any claims against us, with or without merit, would be time consuming, divert management resources, and could require us to spend significant time and money in litigation, pay damages, develop new intellectual property or acquire licenses to intellectual property that is the subject of the infringement claims. These licenses, if required, may not be available on acceptable terms. As a result, intellectual property claims against us could have a material adverse effect on our business, operating results and financial condition.

WE HAVE NOT PAID ANY DIVIDENDS ON OUR COMMON STOCK AND IT IS LIKELY THAT NO
DIVIDENDS WILL BE PAID IN THE FUTURE.

      

Our business may be adversely impacted if we do not provide professional services to implement our solutions.

Customers that license our software typically engage our professional services staff or third-party consultants to assist with product implementation, training and other professional consulting services. We believe that many of our software sales depend, in part, on our ability to provide our customers with these services and to attract and educate third-party consultants to provide similar services. New professional services personnel and service providers require training and education and take time and significant resources to reach full productivity. Competition for qualified personnel and service providers is intense within our industry. Our business may be harmed if we are unable to provide professional services to our customers to effectively implement our solutions of if we are unable to establish and maintain relationships with third-party implementation providers.

Because our software could interfere with the operations of customers, we may be subject to potential product liability and warranty claims by these customers.

Our software enables customers’ software applications to integrate   and is often used for mission critical functions or applications. Errors, defects or other performance problems in our software or failure to provide technical support could result in financial or other damages to our customers. Customers could seek damages for losses from us. In addition, the failure of our software and solutions to perform to customers’ expectations could give rise to warranty claims.  The integration of our software with our customer’s applications, increase the risk that a customer may bring a lawsuit us. Even if our software is not at fault, a product liability claim brought against us, even if not successful, could be time consuming and costly to defend and could harm our reputation.
We have not paid any cash dividends on our common stock and it is likely that no cash dividends will be paid in the future.

We have never declared or paid cash dividends on our common stock and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

PROVISIONS OF OUR CHARTER AND BYLAWS AND DELAWARE LAW COULD DETER TAKEOVER
ATTEMPTS.

      Section 203 of the Delaware General Corporation Law, which prohibits
certain persons from engaging in business combinations with Level 8, may have
anti-takeover effects and may delay, defer or prevent a takeover attempt that a
stockholder may consider to be in the holder's best interests. These provisions
of Delaware law also may adversely affect the market price

 Provisions of our common stock.
Charter and Bylaws could deter takeover attempts.

Our certificate of incorporation authorizes the issuance, without stockholder approval, of preferred stock, with such designations, rights and preferences as the board of directors may determine preferences as from time to time. Such designations, rights and preferences established by the board may adversely affect our stockholders. In the event of issuance, the preferred stock could be used, under certain circumstances, as a means of discouraging, delaying or preventing a change of control of Level 8.the Company. Although we have no present intention to issue any shares of preferred stock in addition to the currently outstanding preferred stock, we may issue preferred stock in the future.

OUR STOCKHOLDERS MAY BE DILUTED BY THE EXERCISE OF OPTIONS AND WARRANTS AND
CONVERSION OF PREFERRED STOCK OR BY THE REGISTRATION OF ADDITIONAL SECURITIES
FOR RESALE.

      We have reserved 10,900,000 shares

7
Table of common stock for issuance under our
employee incentive plans and 120,000 shares under our outside director incentive
plan. As of June 30, 2004, options to purchase an aggregate of 7,529,637 of
common stock were outstanding pursuant to our employee and director incentive
plans. As of June 30, 2004, warrants to purchase an additional 16,172,208 shares
of common stock are outstanding. We have also reserved 188,528 shares of common
stock for issuance upon conversionContents

Some of the outstandingrights granted to the holders of our Series A3A-1 Preferred Stock 2,394,063 sharescould prevent a potential acquirer from buying our company.

Holders of common stock for issuance upon conversion of the outstandingour Series B3A-1 Preferred Stock 3,068,421 shareshave the right to block the company from consummating a merger, sale of common stock for issuance upon
conversionall or substantially all of its assets or recapitalization.  Accordingly, the outstandingholder of our Series CA-1 Preferred Stock and 8,411,125, sharescould prevent the consummation of common stock for issuance upona transaction in which our stockholders could receive a substantial premium over the conversion of the outstanding Series D
Preferred Stock. The exercise of such options and warrants or conversion of
preferred stock and the subsequent sale of the underlying common stock in the
public market could adversely cause thecurrent market price of our common stock to
decline.


                                       6
for their shares.


USE OF PROCEEDS

We will not receive any proceeds from the sale of shares by the selling stockholders in this offering but willmay receive proceeds from the exercise of warrants held by certain of the selling stockholders.  We expect to use any proceeds we receive for working capital and for other general corporate purposes, including research and product development.
PRICE RANGE OF OUR COMMON STOCK

Our common stock was traded on the Nasdaq National Market under the symbol
"LVEL" from 1996 until December 23, 2002. From December 24, 2002 until January
23, 2003, our common stock traded on the Nasdaq SmallCap Market. As of January
24, 2003, our common stock was delisted from the Nasdaq SmallCap Market and is currently quoted on the OTCOver-The-Counter Bulletin Board. In January 2007 we formally changed our name to Cicero Inc. and now trade under the ticker CICN.  The chart below sets forth the high and low stock prices for the quarters of 2004 and for the quarters of the fiscal years ended December 31, 2003, 20022007, and 2001.


                  2004               2003                2002                 2001
QUARTER      High      Low      High      Low       High      Low       High          Low

First      $0.45     $0.35     $0.40     $0.15     $3.19     $1.26     $6.38     $   2.39
Second     $0.39     $0.12     $0.35     $0.24     $1.70     $0.34     $3.25     $   2.75
Third        N/A       N/A     $0.77     $0.24     $0.71     $0.25     $4.99     $   1.45
Fourth       N/A       N/A     $0.48     $0.28     $0.56     $0.17     $3.10     $   1.20
2006 and for the first two quarters of 2008 (through May 31), as retroactively adjusted for the 100:1 reverse stock split.  As of May 31, 2008, we had 226 registered stockholders of record.

 
 
2007
 
 
2006
 
Quarter
 
High
 
 
Low
 
 
High
 
 
Low
 
First
 
$
2.60
 
 
$
1.02
 
 
$
3.00
 
 
$
1.80
 
Second
 
$
1.13
 
 
$
0.16
 
 
$
2.50
 
 
$
1.00
 
Third
 
$
0.75
 
 
$
0.24
 
 
$
2.10
 
 
$
1.10
 
Fourth
 
$
0.29
 
 
$
0.15
 
 
$
4.50
 
 
$
1.30
 


 
 
2008
 
Quarter
 
High
 
 
Low
 
First
 
$
0.25
 
 
$
0.14
 
Second
 
$
0.19
 
 
$
0.14
 


The closing price of the common stock on May 30, 2008, was $0.17 per share.

Our common stock is designated as “penny stock” and thus may be illiquid.  The SEC has adopted rules (Rules 15g-2 through l5g-6 of the Exchange Act), which regulate broker-dealer practices in connection with transactions in “penny stocks.”  Penny stocks generally are any non-NASDAQ or non-exchange equity securities with a price of less than $5.00, subject to certain exceptions.  The penny stock rules require a broker-­dealer to deliver a standardized risk disclosure document to provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customers account, to make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a stock that is subject to the penny stock rules.  Since our common stock is subject to the penny stock rules, persons holding or receiving such stock may find it more difficult to sell their shares.  The market liquidity for the stock could be severely and adversely affected by limiting the ability of broker-dealers to sell the shares and the ability of stockholders to sell their stock in any secondary market.
The trading volume in our common stock has been and is extremely limited. The limited nature of the trading market can create the potential for significant changes in the trading price for the common stock as a result of relatively minor changes in the supply and demand for our common stock and perhaps without regard to our business activities.
The market price of our common stock on August 19, 2004 was $0.10 per
share. Asmay be subject to significant fluctuations in response to numerous factors, including: variations in our annual or quarterly financial results or those of August 19, 2004, we had 231 registered shareholdersour competitors; conditions in the economy in general; announcements of record.

                                 key developments by competitors; loss of key personnel; unfavorable publicity affecting our industry or us; adverse legal events affecting us; and sales of our common stock by existing stockholders.

8
Table of Contents
DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock.   We
anticipate that allThe payment of cash dividends on our common stock in the future will depend on our earnings, will be retained forcapital requirements, and operating and financial condition and on such other factors as our board of directors may consider appropriate.  We currently expect to use all available funds to finance the operationfuture development and expansion of our business and for working capital and do not anticipate paying any cash dividends foron our common stock in the foreseeable future.


                                       7
future

9
Table of Contents
SELLING STOCKHOLDERS

Our shares of common stock to which this prospectus relates are being registered for resale by the selling stockholders. The following shows the name and number of shares of our common stock owned by the selling stockholders who may sell shares covered by this Prospectus.

      prospectus.

In March 2008, the Company was notified that a group of investors including two members of the Board of Directors acquired a short term promissory note due SDS Merchant Fund in the principal amount of $250,000. The note is unsecured and bears interest at 10% per annum. In March, our Board of Directors approved a resolution to convert this debt plus accrued interest into common stock of the Company. The total principal and interest amounted to $361,827 and was converted into 1,417,264 shares of common stock. Mr. John Steffens, the Company’s Chairman, acquired 472,516 shares and Mr. Bruce Miller, also a member of our Board of Directors, acquired 472,374 shares.

In October 2007, we agreed to restructure a promissory note (which we refer to as the Note) payable to Bank Hapoalim and guaranty by BluePhoenix Solutions. Under a new agreement with BluePhoenix, we made a principal reduction payment to Bank Hapoalim in the amount of $300,000. Simultaneously, BluePhoenix paid $1,671,000 to Bank Hapoalim, thereby discharging that indebtedness. The Company and BluePhoenix entered into a new Note in the amount of $1,021,000, bearing interest at LIBOR plus 1.0% and maturing on December 31, 2011. In addition, BluePhoenix acquired 2,546,149 shares of our common stock in exchange for $650,000 paid to Bank Hapoalim to retire that indebtedness. In March 2008, we amended the terms of the Note with BluePhoenix Solutions. Under the terms of the original Note, the Company was to make a principal reduction payment in the amount of $350,000 on January 30, 2009. The Company and BluePhoenix agreed to accelerate that principal payment to March and April 2008 in return for a conversion of $50,000 into 195,848 shares of the Company’s common stock. In March, the Company paid $200,000 plus accrued interest and in April, the Company paid $100,000 plus accrued interest.

In October 2007, we completed a private sale of shares of our common stock to a group of investors, four of which are members of our Board of Directors. Under the terms of that agreement, we sold 2,169,311 shares of our common stock for $0.2457 per share for a total of $533,000. Participating in this consortium were Mr. John L. (Launny) Steffens, the Company’s Chairman, and Messrs. Bruce Miller, Don Peppers, and Bruce Percelay, members of the Board.  Mr. Steffens converted the principal amount of his short term notes with the Company of $250,000 for 1,017,501 shares of common stock.  Mr. Miller invested $20,000 for 81,400 shares of common stock, Mr. Peppers acquired 101,750 shares for a $25,000 investment and Mr. Bruce Percelay acquired 40,700 shares for a $10,000 investment.

The selling stockholders may resell all, a portion or none of such shares of common stock from time to time. The table below sets forth, as of the date of this prospectus, with respect to each selling stockholder, based upon information made available to us by each selling stockholder, the number of shares of common stock beneficially owned, the number of shares of common stock registered by this prospectus and the number and percent of outstanding common stock that will be owned after the sale of the registered shares of common stock assuming the sale of all of the registered shares of common stock under this prospectus and all other currently effective prospectuses. Because the selling
stockholders may offer all, some or noneprospectus.

Name
 
Number of Shares of Common Stock Beneficially Owned Prior to Offering (1)
 
 
Number of Shares of Common Stock Offered
 
 
Shares Owned After Offering
 
 
Percent of Common Stock Beneficially Owned After Offering
 
Steffens, John L. +
 
 
5,382,668
(2)
 
 
2,072,623
(3)
 
 
3,310,045
 
 
 
7.2
%
Ahab International, Ltd.(a)
 
 
4,813,698
(4)
 
 
323,661
 
 
 
4,490,037
 
 
 
9.8
%
Ahab Partners, LP (a)
 
 
4,101,688
(5)
 
 
354,837
 
 
 
3,746,851
 
 
 
8.2
%
BluePhoenix Solutions, Ltd. (b)
 
 
2,801,997
 
 
 
2,801,997
 
 
 
-
 
 
 
-
 
Miller, Bruce +
 
 
1,982,244
(6)
 
 
556,398
 
 
 
1,425,846
 
 
 
3.1
%
Paneyko, Steve
 
 
1,638,559
 
 
 
81,400
 
 
 
1,557,159
 
 
 
3.4
%
Percelay, Bruce +
 
 
1,073,486
 
 
 
40,700
 
 
 
1,032,786
 
 
 
2.3
%
Lucas, Scott
 
 
979,734
 
 
 
40,700
 
 
 
939,034
 
 
 
2.1
%

10
Table of their respective sharesContents


Name
 
Number of Shares of Common Stock Beneficially Owned Prior to Offering (1)
 
 
Number of Shares of Common Stock Offered
 
 
Shares Owned After Offering
 
 
Percent of Common Stock Beneficially Owned After Offering
 
Casey, Kenneth
 
 
819,164
 
 
 
40,700
 
 
 
778,464
 
 
 
1.7
%
Lustgarten, Scott
 
 
722,893
(7)
 
 
40,700
 
 
 
682,193
 
 
 
1.5
%
Haines Family Assoc LP (c)
 
 
716,315
(8)
 
 
623,214
 
 
 
93,101
 
 
 
-
 
Keates, Richard M.D.
 
 
672,925
(9)
 
 
122,100
 
 
 
550,825
 
 
 
1.2
%
Stevens, Jim
 
 
497,399
(10)
 
 
40,700
 
 
 
456,699
 
 
 
-
 
Weitzman, Hervey
 
 
270,283
(11)
 
 
20,350
 
 
 
249,933
 
 
 
-
 
Wittenbach, Roger
 
 
180,593
 
 
 
20,350
 
 
 
160,243
 
 
 
-
 
Howard, Joan
 
 
165,130
 
 
 
28,490
 
 
 
136,640
 
 
 
-
 
Corwin, Leonard
 
 
130,450
(12)
 
 
10,175
 
 
 
120,275
 
 
 
-
 
Robinson, Jonathon
 
 
125,732
 
 
 
20,350
 
 
 
105,382
 
 
 
-
 
Grodko, Steven
 
 
124,385
(13)
 
 
124,135
 
 
 
250
 
 
 
-
 
Blanck, Richard
 
 
107,461
 
 
 
12,210
 
 
 
95,251
 
 
 
-
 
Peppers, Don +
 
 
101,750
 
 
 
101,750
 
 
 
-
 
 
 
-
 
Whalen, Chris
 
 
80,993
 
 
 
80,993
 
 
 
-
 
 
 
-
 
Grodko, Sandra
 
 
43,700
(14)
 
 
40,700
 
 
 
3,000
 
 
 
-
 
Sweet, Christine
 
 
40,700
 
 
 
40,700
 
 
 
-
 
 
 
-
 
Sutro, Peter
 
 
40,192
 
 
 
12,210
 
 
 
27,982
 
 
 
-
 
Miller, Douglas & Anita E.
 
 
28,490
 
 
 
28,490
 
 
 
-
 
 
 
-
 
Total
 
 
27,642,629
 
 
 
7,680,633
 
 
 
19,961,996
 
 
 
 
 

+
Member of the Board of Directors of the Company
  (a)
Jonathan Gallen is an investment adviser for, and exercises sole voting and investment authority with respect to the securities held by, each of (i) Ahab  Partners,  L.P.,  (ii) Ahab International,  Ltd.

  (b)
Yael Peretz,, representative of BluePhoenix Solutions, Ltd., exercises sole or shared voting or dispositive power with respect to the securities held by BluePhoenix Solutions Ltd.

  (c)
John Haines, representative of common
stock, no definitive estimate as to the number of shares thereof that will be
held by the selling stockholders after such offering can be provided.


                                                                                    NUMBER OF SHARES OF
                                         NUMBER OF SHARES NUMBER OF SHARES OF       COMMON STOCK TO BE
                                         OF COMMON STOCK  COMMON STOCK WHICH       OWNED AFTER OFFERING
                                                                                --------------------------
NAME                                        OWNED (1)     MAY BE OFFERED (1)      NUMBER          PERCENT

Brown Simpson Partners I, Ltd. (a)          5,936,921      5,936,921  (2)             --             --
SDS Merchant Fund, LP (b)                   4,173,481      4,173,481  (3)             --             --
Landis, Mark & Carolyn P                    2,426,896      3,654,575  (4)             --             --
North Sound Legacy International (c)        2,894,793      2,894,793  (5)             --             --
North Sound Legacy Institutional  (c)       2,760,605      2,760,605  (6)             --             --
Pizi, Anthony                               2,641,607      2,374,197  (7)      1,187,798            3.1%
Critical Mass Mail (d)                      2,027,027      2,027,027  (8)             --             --
Seneca Capital LP (e)                       1,936,235      1,936,235  (9)             --             --
Seneca Capital International, LTD (e)       1,902,771      1,902,771 (10)             --             --
Mack, Fred                                  1,504,562      1,895,187 (11)             --             --
Advanced Systems Europe, BV(f)              1,481,561      1,481,561 (12)             --             --
Miller, Bruce                                 851,389        851,389 (13)             --             --
Stevens, Jim                                  797,014        797,014 (14)             --             --
Forman, Murray                                772,796        772,796 (15)             --             --



                                       8

                                                                                    NUMBER OF SHARES OF
                                         NUMBER OF SHARES NUMBER OF SHARES OF       COMMON STOCK TO BE
                                         OF COMMON STOCK  COMMON STOCK WHICH       OWNED AFTER OFFERING
                                                                                --------------------------
NAME                                        OWNED (1)     MAY BE OFFERED (1)      NUMBER          PERCENT

Dugdale, Glen & Joan                          552,410        687,545 (16)             --             --
Chalfin, Stuart                               560,810        560,810 (17)             --             --
Weiss, Joseph                                 560,810        560,810 (17)             --             --
Spain, Bernard                                540,540        540,540 (18)             --             --
Martino, Ralph                                466,668        466,668 (19)             --             --
Shah, Natwar                                  460,526        460,526 (20)             --             --
Clement, Conrad                               430,270        430,270 (21)             --             -- Haines Family AssocAssociates, LP, (g)                    424,474        424,474 (22)             --             --
Delphi Partners Limited (h)                   409,367        409,367 (23)             --             --
Mack, Fredrick 4-30-92 Trust (i)              387,576        387,576 (24)             --             --
Bank, Marvin                                  442,065        364,940 (25)             --             --
North Sound Legacy (c)                        306,727        306,727 (26)             --             --
Vertical Ventures Investments, LLC (j)        460,557        460,557 (27)             --             --
Grodko, Sandra                                300,000        300,000 (28)             --             --
Liraz Systems (k)                             234,869        234,869 (29)             --             --
Weiss, Michael                                211,579        211,579 (30)             --             --
Lustgarten, Martin estateexercises sole or shared voting or dispositive power with respect to the securities held by Haines Family Associates, LP.

(1)
The number of 211,214        211,214 (31)             --             --
Mack, Earl I Charitable Trust A (l)           208,334        208,334 (32)             --             --
Feldman, Michael                              189,190        189,190 (33)             --             --
Bank Hapoalim (m)                             172,751        172,751 (34)             --             --
Forman, Irving                                164,474        164,474 (35)             --             --
Nager, Richard                                164,474        164,474 (35)             --             --
Hatalski, Nick                                 78,125        156,250 (36)             --             --
Leppo, Robert D                                78,125        156,250 (36)             --             --
Shelanski, Joseph                             143,250        143,250 (37)             --             --
Whelden, Larry                                138,889        138,889 (38)             --             --
C. Glenshares of common stock owned by each selling stockholder includes the aggregate number of shares of common stock which may be obtained by each stockholder upon conversion of all of the Series A1 Preferred Stock owned by the stockholder. It also includes the aggregate number of shares of common stock that may be obtained upon exercise of warrants to purchase common stock owned by such stockholder. The informtation in this table assumes that all shares offered are sold.
(2)
Includes 14,832 shares of common stock issuable upon conversion of Series A-1 Preferred Stock, and Joan O. Dugdale CRT (n)           138,889        138,889 (38)             --             --
Leavitt, Philip                               135,136        135,136 (39)             --             --
Turner, William & Barbara                     120,000        120,000 (40)             --             --
Baena, Douglas                                108,108        108,108 (41)             --             --
Pyxis Link Corp (o)                           100,000        100,000 (42)             --             --
Simkovitz, Phillip                             84,324         84,324 (43)             --             --
Simpson, James                                 83,334         83,334 (44)             --             --
Gable, Sidney                                  82,236         82,236 (45)             --             --
Lustgarten, Scott                              82,236         82,236 (45)             --             --
Vegh, Robert                                   82,236         82,236 (45)             --             --
Freeman, Don                                   81,082         81,082 (46)             --             --
Diamond Investments II, LLC (p)                80,000         80,000 (47)             --             --
Keates, Richard M.D                            80,000         80,000 (47)             --             --
Emerson, Alice                                 69,445         69,445 (48)             --             --
Robinson, John                                 69,445         69,445 (48)             --             --
Weitzman, Hervey                               69,445         69,445 (48)             --             --
Wilkins, James                                 69,445         69,445 (48)             --             --
Wittenbach, Roger                              69,445         69,445 (48)             --             --
Friedman, Mark                                 67,568         67,568 (49)             --             --
Gordon, Allan                                  67,568         67,568 (49)             --             --
Kushner, Ron                                   67,568         67,568 (49)             --             --
Littman, Leslie                                67,568         67,568 (49)             --             --
Rothbard, Melvyn                               67,568         67,568 (49)             --             --
Rothbard, Norman                               67,568         67,568 (49)             --             --
Rutstein, Larry                                67,568         67,568 (49)             --             --
Puggi, James A                                 31,250         62,500 (50)             --             --
Dweck, Ike                                     57,697         57,697 (51)             --             --
Corwin, Leonard                               205,555         55,555 (52)             --             --
Spivak, Virginia                               55,555         55,555 (53)             --             --
Blank, Richard                                 54,054         54,054 (54)             --             --
Chugh, Narinder                                54,054         54,054 (54)             --             --
Krubiner, Paul & Marjorie                      54,054         54,054 (54)             --             --
Schneider, Steven                              54,054         54,054 (54)             --             --
Lemery, John                                   41,666         41,666 (55)             --             --
Wolf, Jack                                     41,666         41,666 (55)             --             --
Brooks, Marshall                               37,838         37,838 (56)             --             --
Tamberelli, Frank                              32,895         32,895 (57)             --             --
Whyte, Jacqueline                              29,730         29,730 (58)             --             --
Lerner, Arthur                                 27,028         27,028 (59)             --             --
Mack, Fred Trust (Hailey Mack) (i)             20,834         20,834 (60)             --             --
Mack, Fred Trust (Jason Mack) (i)              20,834         20,834 (60)             --             --
Feder, Mark                                    82,236         16,447 (61)             --             --
Grodko, Steven                                 12,500         12,500 (62)             --             --
Kanevsky, Paul                                100,000        100,000                  --             --
DeFranco, Joseph                               30,000         30,000                  --             --
Seidle, John R                                 30,000         30,000                  --             --
Sandor, Patty                                  10,000         10,000                  --             --
                                           ----------     ----------
TOTALS                                     43,501,225     44,947,629
207,529 shares of common stock issuable upon exercise of warrants.  The exercise price of 4,912 warrants at $40 per share, the exercise price of 14,332 warrants at $10 per share, and the exercise price of 188,285 warrants at $0.18 per share.  Also includes 5,160,307 shares of common stock.  Mr. Steffens is a member of the Company’s Board of Directors.



                                       9


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

      (a)   Mitchel Kaye, Chief Investment Officer with Xmark Asset Management,
            LLC, Xmark Funds, exercises sole or shared voting or dispositive
            power with respect to the securities held by Brown Simpson Partners,
            I, Ltd.

      (b)   Steve Derby, representative
(3)
Includes 1,884,338 shares of common stock and 188,285 of common stock issuable upon exercise of warrants at $0.18 per share.

11
Table of SDS Merchant Fund, LP, exercises sole
            or shared voting or dispositive power with respect to the securities
            held by SDS Merchant Fund, LP.

      (c)   Thomas McAuley, Chief Investment OfficerContents

(4)
Owns 4,801,186 shares of common stock and 12,512 shares issuable upon the exercise of warrants.  The exercise prices of the warrants are as follows: 3,194 at $40.00 per share, and 9,318 at $10.00 per share.

(5)
Owns 4,094,950 shares of common stock and 6,738 shares issuable upon the exercise of warrants.  The exercise prices of the warrants are as follows: 1,720 at $40.00 per share, and 5,018 at $10.00 per share.
(6)
Owns 19,166 shares of common stock issuable upon exercise of warrants.  The exercise price of 2,457 warrants at $40 per share, and the exercise price of 16,709 warrants at $10 per share.  Also includes 1,963,078 shares of common stock.  Mr. Miller is a member of the Company’s Board of Directors.
(7)
Owns 1,000 shares of common stock issuable upon conversion of Series A-1 Preferred Stock.  Also owns and may offer from time to time under this prospectus 329 shares of common stock issuable upon exercise of warrants exercisable at $10 per share.  Also includes 721,564 shares of common stock.
(8)
Owns 2,000 shares of common stoc issuable upon conversion of Series A-1 preferred stock.  Also owns 2,858 shares of common stock issuable upon exercise of warrants exercisable at $10 per share.   Also includes 711,457 shares of common stock.
(9)
Owns 18,778 shares of common stock issuable upon exercise of warrants.  The exercise price of 1,982 warrants is $20 per share, and the exercise price of 16,796 warrants is $10 per share.  Also includes 654,147 shares of common stock.
(10)
Owns 6,031 shares of common stock issuable upon exercise of warrants exercisable at $10 per share.  Also owns 491,368 shares of common stock.
(11)
Owns 278 shares of common stock issuable upon exercise of warrants exercisable at $10 per share.  Also includes 270,005 shares of common stock.
(12)
Owns 222 shares of common stock issuable upon exercise of warrants exercisable at $10 per share.  Also includes 130,228 shares of common stock.
(13)
Owns 250 shares of common stock issuable upon exercise of warrants exercisable at $10 per share.  Also includes 124,135 shares of common stock.
(14)
Owns 3,000 shares of common stock issuable upon exercise of warrants exercisable at $10 per share.  Also includes 40,700 shares of common stock.

12
Table of North Sound Legacy,
            exercises sole or shared voting or dispositive power with respect to
            the securities held by North Sound Legacy.

      (d)   Joseph H. Weiss, chairman of the board of directors of Critical Mass
            Mail, Inc., exercises sole or shared voting or dispositive power
            with respect to the securities held by Critical Mass Mail Inc.

      (e)   Gregg Grimmelbein, Chief Financial Officer of Seneca, exercises sole
            or shared voting or dispositive power with respect to the securities
            held by Seneca.

      (f)   Adee Shafran, representative of Advanced Systems Europe, BV,
            exercises sole or shared voting or dispositive power with respect to
            the securities held by Advanced Systems Europe, BV.

      (g)   John Haines, representative of Haines Family Associates, LP,
            exercises sole or shared voting or dispositive power with respect to
            the securities held by Haines Family Associates, LP.

      (h)   Bruce Miller, general partner of Delphi Partners, Ltd., exercises
            sole or shared voting or dispositive power with respect to the
            securities held by Delphi Partners, Ltd.

      (i)   Fred Mack, trustee of 4-30-92 Trust, Fred Mack Trust - Hailey Mack,
            and Fred Mack Trust - Jason Mack, exercises sole or shared voting or
            dispositive power with respect to the securities held by 4-30-92
            Trust, Fred Mack Trust - Hailey Mack, and Fred Mack Trust - Jason
            Mack.

      (j)   Joshua Silverman, representative of Vertical Ventures Investments,
            LLC, exercises sole or shared voting or dispositive power with
            respect to the securities held by Vertical Ventures Investments,
            LLC.

      (k)   Iris Yahal, representative of Liraz Systems, exercises sole or
            shared voting or dispositive power with respect to the securities
            held by Liraz Systems.

      (l)   Earle I. Mack, registered agent for Earle I Mack Charitable Trust A,
            exercises sole or shared voting or dispositive power with respect to
            the securities held by Earle I Mack Charitable Trust A.

      (m)   Eyal Issaharov, representative of Tarshish Hahzakot Vehashkaot
            Hapoalim Ltd, exercises sole or shared voting or dispositive power
            with respect to the securities held by Bank Hapoalim.

      (n)   Matthew Yaakovian, trustee of C. Glen and Joan O. Dugdale CRT,
            exercises sole or shared voting or dispositive power with respect to
            the securities held by C. Glen and Joan O. Dugdale CRT.

      (o)   Robin Pearce, representative of Pyxis Link Corp, exercises sole or
            shared voting or dispositive power with respect to the securities
            held by Pyxis Link Corp.


                                       10



      (p)   Richard A. Paysor, manager and registered agent of Diamond
            Investments II, LLC, exercises sole or shared voting or dispositive
            power with respect to the securities held by Diamond Investments II,
            LLC.

      (1)   The number of shares of common stock owned by each selling
            stockholder includes the aggregate number of shares of common stock
            which may be obtained by each stockholder upon conversion of all of
            the Series A3 Preferred Stock, Series B3 Preferred Stock, Series C
            Preferred Stock and/or Series D Preferred Stock owned by the
            stockholder. It also includes the aggregate number of shares of
            common stock that may be obtained upon exercise of warrants to
            purchase common stock owned by such stockholder. The shares offered
            by this prospectus may be sold by the selling stockholder from time
            to time. The number of shares, if any, offered by each selling
            stockholder and the corresponding number of shares beneficially
            owned by each selling stockholder after each sale will vary
            depending upon the terms of the individual sales.

      (2)   Brown Simpson Partners I, Ltd. owns and may offer from time to time
            under this prospectus 1,197,032 shares of common stock issuable upon
            the conversion of Series B3 Preferred Stock. It also owns and may
            offer from time to time under this prospectus 460,526 shares of
            common stock issuable upon the conversion of Series C Preferred
            Stock. It also owns and may offer from time to time under this
            prospectus 4,009,093 shares issuable upon the exercise of warrants.
            The exercise price of 115,132 warrants is $0.38 per share of common
            stock. The exercise price of 270,270 warrants is $0.37 per share of
            common stock. The exercise price of 3,623,691 warrants is $0.40 per
            share of common stock. Also includes 270,270 shares of common stock.
            Brown Simpson Partners I, Ltd. is not currently the beneficial owner
            of all of such shares of common stock.

      (3)   SDS Merchant Fund, L.P. owns and may offer from time to time under
            this prospectus 2,848,625 shares of common stock issuable upon
            conversion of Series D Preferred Stock. It also owns and may offer
            from time to time under this prospectus 595,721 shares of common
            stock issuable upon exercise of Series D-1 Warrants at an exercise
            price of $0.07 per share. It also owns and may offer from time to
            time under this prospectus 457,813 shares of common stock issuable
            upon exercise of Series D-2 Warrants at an exercise price the lower
            of $0.20 or the trading price of Level 8's common stock at the time
            of exercise. The holders may not exercise the warrants into shares
            of our common stock or convert shares of Series D Preferred Stock,
            if after the exercise or conversion, such holder, together with any
            of its affiliates, would beneficially own over 4.99% of the
            outstanding shares of our common stock. This restriction may not be
            altered, amended, deleted or changed in any manner without the
            written approval of the holders of a majority of the outstanding
            shares of our common stock and, in the case of the Series D
            Preferred Stock, also the holders of a majority of the outstanding
            shares of Series D Preferred Stock, and in the case of any Series
            D-1 Warrant or Series D-2 Warrant, also the holder of such warrant.
            However, the 4.99% limitation would not prevent the holders from
            acquiring and selling in excess of 4.99% of our common stock through
            a series of exercises and conversions. Also includes 271,322 shares
            of common stock.

      (4)   Includes 263,158 shares of common stock issuable upon the conversion
            of Series C Preferred Stock. Also owns and may offer from time to
            time under this prospectus 1,528,603 shares of common stock issuable
            upon the exercise of warrants. The exercise price of 781,250 shares
            is $0.16 per share of common stock, 446,429 shares is $0.28 per
            share of common stock, 135,135 shares exercisable at $0.37 per share
            of common stock, 65,789 shares exercisable at $0.38 per share of
            common stock, and 100,000 shares of common stock issuable upon the
            exercise of warrants at an exercise price of $0.60 per share of
            common stock. Also owns and may offer from time to time under this
            prospectus 446,429 shares of common stock issuable upon conversion
            of $125,000 principal amount of convertible promissory note, issued
            on February 1, 2004 at a conversion price of $0.28 and 781,250
            shares of common stock issuable upon conversion of $125,000
            principal amount of convertible promissory note, issued on June 30,
            2004 at a conversion price of $0.16. Also includes 635,135 shares of
            common stock. Currently not the beneficial owner of all such shares
            of common stock.


                                       11



      (5)   North Sound Legacy International Fund Ltd. owns and may offer from
            time to time under this prospectus 2,359,375 shares of common stock
            issuable upon conversion of Series D Preferred Stock. It also owns
            and may offer from time to time under this prospectus 389,562 shares
            of common stock issuable upon exercise of Series D-1 Warrants at an
            exercise price of $0.07 per share. It also owns and may offer from
            time to time under this prospectus 113,501 shares of common stock
            issuable upon exercise of Series D-2 Warrants at an exercise price
            the lower of $0.20 or the trading price of Level 8's common stock at
            the time of exercise. The holders may not exercise the warrants into
            shares of our common stock or convert shares of Series D Preferred
            Stock, if after the exercise or conversion, such holder, together
            with any of its affiliates, would beneficially own over 4.99% of the
            outstanding shares of our common stock. This restriction may not be
            altered, amended, deleted or changed in any manner without the
            written approval of the holders of a majority of the outstanding
            shares of our common stock and, in the case of the Series D
            Preferred Stock, also the holders of a majority of the outstanding
            shares of Series D Preferred Stock, and in the case of any Series
            D-1 Warrant or Series D-2 Warrant, also the holder of such warrant.
            However, the 4.99% limitation would not prevent the holders from
            acquiring and selling in excess of 4.99% of our common stock through
            a series of exercises and conversions. Also includes 32,355 shares
            of common stock.

      (6)   North Sound Legacy Institutional Fund LLC owns and may offer from
            time to time under this prospectus 2,250,000 shares of common stock
            issuable upon conversion of Series D Preferred Stock. It also owns
            and may offer from time to time under this prospectus 371,503 shares
            of common stock issuable upon exercise of Series D-1 Warrants at an
            exercise price of $0.07 per share. It also owns and may offer from
            time to time under this prospectus 108,239 shares of common stock
            issuable upon exercise of Series D-2 Warrants at an exercise price
            the lower of $0.20 or the trading price of Level 8's common stock at
            the time of exercise. The holders may not exercise the warrants into
            shares of our common stock or convert shares of Series D Preferred
            Stock, if after the exercise or conversion, such holder, together
            with any of its affiliates, would beneficially own over 4.99% of the
            outstanding shares of our common stock. This restriction may not be
            altered, amended, deleted or changed in any manner without the
            written approval of the holders of a majority of the outstanding
            shares of our common stock and, in the case of the Series D
            Preferred Stock, also the holders of a majority of the outstanding
            shares of Series D Preferred Stock, and in the case of any Series
            D-1 Warrant or Series D-2 Warrant, also the holder of such warrant.
            However, the 4.99% limitation would not prevent the holders from
            acquiring and selling in excess of 4.99% of our common stock through
            a series of exercises and conversions. Also includes 30,863 shares
            of common stock.

      (7)   Includes 394,737 shares of common stock issuable upon conversion of
            Series C Preferred Stock. Also owns and may offer from time to time
            under this prospectus 1,019,072 shares of common stock issuable upon
            the exercise of warrants. The exercise price of 90,118 shares is
            $0.17 per share of common stock, the exercise price of 560,000
            shares is $0.20 per share of common stock, the exercise price of
            270,270 shares is $0.37 per share of common stock, and the exercise
            price of 98,684 shares is $0.38 per share of common stock. Also owns
            and may offer from time to time under this prospectus 270,270 shares
            of common stock issuable upon conversion of $100,000 principal
            amount of convertible promissory note, issued on April 12, 2004 at a
            conversion price of $0.37, 560,000 shares of common stock issuable
            upon conversion of $112,000 principal amount of convertible
            promissory note, issued on June 11, 2004 at a conversion price of
            $0.20, and 90,118 shares of common stock issuable upon conversion of
            $15,320 principal amount of convertible promissory note, issued on
            June 14, 2004 at a conversion price of $0.17. Also includes 40,000
            shares of common stock. Mr. Pizi is the CEO and a director of the
            Company. Mr. Pizi also holds 1,187,798 shares of common stock,
            including shares of common stock which may be acquired upon the
            exercise of stock options exercisable within 60 days of this
            prospectus, which shares are not being registered for resale by
            means of this prospectus.

      (8)   Critical Mass Mail owns and may offer from time to time under this
            prospectus 2,027,027 shares of common stock.


                                       12



      (9)   Seneca Capital, L.P. owns and may offer from time to time under this
            prospectus 417,205 shares of common stock issuable upon the
            conversion of Series B3 Preferred Stock. It also owns and may offer
            from time to time under this prospectus 188,408 shares of common
            stock issuable upon the conversion of Series A3 Preferred Stock. It
            also owns and may offer from time to time under this prospectus
            1,060,352 shares issuable upon the exercise of warrants. The
            exercise price of 790,082 warrants is $0.40 per share of common
            stock. The exercise price of 270,270 warrants is $0.37 per share of
            common stock. Also includes 270,270 shares of common stock. Seneca
            Capital, L.P. is not currently the beneficial owner of all of such
            shares of common stock.

      (10)  Seneca Capital International, Ltd. owns and may offer from time to
            time under this prospectus 779,826 shares of common stock issuable
            upon the conversion of Series B3 Preferred Stock. It also owns and
            may offer from time to time under this prospectus 1,122,945 shares
            issuable upon the exercise of warrants. The exercise price of the
            warrants is $0.40 per share of common stock. Seneca Capital
            International, Ltd. is not currently the beneficial owner of all of
            such shares of common stock.

      (11)  Includes 394,737 shares of common stock issuable upon conversion of
            Series C Preferred Stock and 632,883 shares of common stock issuable
            upon the exercise of warrants. The exercise price of 390,625 shares
            is $0.32 per share of common stock and the exercise price of 202,703
            shares is $0.37 per share of common stock. 22,222 shares issuable
            upon the exercise of warrants at an exercise price of $0.45 per
            share of common stock and 17,333 shares of common stock issuable
            upon exercise of warrants at an exercise price of $0.60 per share.
            Also owns and may offer from time to time under this prospectus
            390,625 shares of common stock issuable upon conversion of $125,000
            principal amount of convertible promissory note, issued on May 10,
            2004 at a conversion price of $0.32. Also includes 476,942 shares of
            common stock.

      (12)  Advanced Systems Europe owns and may offer from time to time under
            this prospectus 120 shares of common stock subject to adjustment,
            issuable upon conversion of 1 share of Series A3 Preferred Stock it
            currently owns. It also owns and may offer from time to time under
            this prospectus 886,997 shares issuable upon the exercise of
            warrants. The exercise price of 775,886 warrants is $0.40 per share
            of common stock. The exercise price of 111,111 warrants is $0.45 per
            share of common stock. Also includes 594,444 shares of common stock.
            Advanced Systems Europe B.V. is not currently the beneficial owner
            of all of such shares of common stock.

      (13)  Includes 23,594 shares of common stock issuable upon exercise of
            Series D-2 Warrants at an exercise price the lower of $0.20 or the
            trading price of Level 8's common stock at the time of exercise.
            Also includes 250,000 shares of common stock issuable upon the
            exercise of warrants at an exercise price of $0.37 per share. Also
            includes 27,778 shares of common stock issuable upon the exercise of
            warrants at an exercise price of $0.45 per share of common stock
            Also includes 550,017 shares of common stock.

      (14)  Includes 234,375 shares of common stock issuable upon conversion of
            Series D Preferred Stock, 88,359 shares of common stock issuable
            upon exercise of Series D-1 Warrants at an exercise price of $0.07
            per share, 35,391 shares of common stock issuable upon exercise of
            Series D-2 Warrants at an exercise price the lower of $0.20 or the
            trading price of Level 8's common stock at the time of exercise,
            150,000 shares of common stock issuable upon exercise of warrants at
            an exercise price of $0.37 per share, and 27,778 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.45 per share. Also includes 261,111 shares of common stock.

      (15)  Includes 78,125 shares of common stock issuable upon conversion of
            Series D Preferred Stock, 29,453 shares of common stock issuable
            upon exercise of Series D-1 Warrants at an exercise price of $0.07
            per share, 11,797 shares of common stock issuable upon exercise of
            Series D-2 Warrants at an exercise price the lower of $0.20 or the
            trading price of Level 8's common stock at the time of exercise.
            Also includes 394,737 shares of common stock issuable upon
            conversion of Series C Preferred Stock, 98,684 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.38 and 26,667 shares of common stock issuable upon exercise of
            warrants at an exercise price of $0.60. Also includes 133,333 shares
            of common stock.


                                       13



      (16)  Includes 93,750 shares of common stock issuable upon conversion of
            Series D Preferred Stock, 35,344 shares of common stock upon
            exercise of Series D-1 Warrants at an exercise price of $0.07 and
            14,156 shares of common stock issuable upon exercise of Series D-2
            Warrants at an exercise price the lower of $0.20 or the trading
            price of Level 8's common stock at the time of exercise. Also
            includes 202,703 shares of common stock issuable upon exercise of
            warrants at an exercise price of $0.38 and 27,778 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.45. Also owns and may offer from time to time under this
            prospectus 135,135 shares of common stock issuable upon conversion
            of $50,000 principal amount of convertible promissory note, issued
            on March 5, 2004 at a conversion price of $0.37. Also includes
            178,679 shares of common stock.

      (17)  Owns and may offer from time to time under this prospectus 280,405
            shares of common stock. Also includes 280,405 shares issuable upon
            the exercise of warrants at an exercise price of $0.37 per share.

      (18)  Includes 270,270 shares of common stock and 270,270 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.37 per share.

      (19)  Includes 466,668 shares of common stock received as compensation for
            consulting services.

      (20)  Includes 368,421 shares of common stock issuable upon conversion of
            Series C Preferred Stock and 92,105 shares of common stock upon
            exercise of warrants at an exercise price of $0.38.

      (21)  Includes 135,135 shares issuable upon the exercise of warrants at an
            exercise price of $0.37 per share and 26,667 shares issuable upon
            the exercise of warrants at an exercise price of $0.60 per share of
            common stock. Also includes 268,468 shares of common stock.

      (22)  Includes 131,579 shares of common stock issuable upon conversion of
            Series C Preferred Stock and 32,895 shares of common stock upon
            exercise of warrants at an exercise price of $0.38. Also includes
            100,000 shares issuable upon the exercise of warrants at $0.37 per
            share and 10,000 shares issuable upon the exercise of warrants at a
            $0.60 exercise price per share. Also includes 150,000 shares of
            common stock.

      (23)  Includes 11,797 shares of common stock issuable upon exercise of
            Series D-2 Warrants at an exercise price of the lower of $0.20 or
            the trading price of Level 8's common stock at the time of exercise,
            150,000 shares of common stock issuable upon exercise of warrants at
            an exercise price of $0.37 per share and 13,889 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.45 per share. Also includes 233,681 shares of common stock.

      (24)  Includes 203,125 shares of common stock issuable upon conversion of
            Series D Preferred Stock, 30,672 shares of common stock issuable
            upon exercise of Series D-2 Warrants at an exercise price the lower
            of $0.20 or the trading price of Level 8's common stock at the time
            of exercise and 9,334 shares of common stock issuable upon exercise
            of warrants at an exercise price of $0.60 per share. Also includes
            144,445 shares of common stock.

      (25)  Includes 65,789 shares of common stock issuable upon the conversion
            of Series C Preferred Stock and 16,447 shares of common stock
            issuable upon the exercise of warrants at an exercise price of $0.38
            per share of common stock. Also includes 101,352 shares issuable
            upon the exercise of warrants at $0.37 per share and 13,333 shares
            issuable upon the exercise of warrants at a $0.60 exercise price.
            Also includes 168,019 shares of common stock. Mr. Bank also owns
            77,125 shares of registered common stock, which were purchased in
            the open market.


                                       14



      (26)  North Sound Legacy Fund LLC owns and may offer from time to time
            under this prospectus 250,000 shares of common stock issuable upon
            conversion of Series D Preferred Stock. It also owns and may offer
            from time to time under this prospectus 41,278 shares of common
            stock issuable upon exercise of Series D-1 Warrants at an exercise
            price of $0.07 per share. It also owns and may offer from time to
            time under this prospectus 12,026 shares of common stock issuable
            upon exercise of Series D-2 Warrants at an exercise price the lower
            of $0.20 or the trading price of Level 8's common stock at the time
            of exercise. The holders may not exercise the warrants into shares
            of our common stock or convert shares of Series D Preferred Stock,
            if after the exercise or conversion, such holder, together with any
            of its affiliates, would beneficially own over 4.99% of the
            outstanding shares of our common stock. This restriction may not be
            altered, amended, deleted or changed in any manner without the
            written approval of the holders of a majority of the outstanding
            shares of our common stock and, in the case of the Series D
            Preferred Stock, also the holders of a majority of the outstanding
            shares of Series D Preferred Stock, and in the case of any Series
            D-1 Warrant or Series D-2 Warrant, also the holder of such warrant.
            However, the 4.99% limitation would not prevent the holders from
            acquiring and selling in excess of 4.99% of our common stock through
            a series of exercises and conversions. Also includes 3,423 shares of
            common stock.

      (27)  Includes 176,719 shares of common stock issuable upon exercise of
            Series D-1 Warrants at an exercise price of $0.07 per share, 70,781
            shares of common stock issuable upon exercise of Series D-2 Warrants
            at an exercise price the lower of $0.20 or the trading price of
            Level 8's common stock at the time of exercise and 213,057 shares of
            common stock issuable upon exercise of warrants at an exercise price
            of $0.60 per share.

      (28)  Includes 150,000 shares of common stock and 150,000 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.37 per share.

      (29)  Liraz owns and may offer from time to time under this prospectus
            2,632 shares of common stock (subject to adjustment) issuable upon
            conversion of 1 share of Series C Preferred Stock it currently owns,
            and shares of common stock issuable upon exercise of warrants to
            purchase 82,237 shares of common stock (subject to adjustment) for
            $0.38 per share. Also includes 150,000 shares of common stock for
            its guaranty of Level 8's term loan effective to November 8, 2004.

      (30)  Includes 105,263 shares of common stock issuable upon the conversion
            of Series C Preferred Stock and 26,316 shares of common stock
            issuable upon the exercise of warrants at an exercise price of $0.38
            per share of common stock. Includes 13,333 shares issuable upon the
            exercise of warrants at an exercise price of $0.60 per share of
            common stock. Also includes 66,667 shares of common stock.

      (31)  Includes 211,214 shares of common stock issuable upon exercise of
            warrants at an exercise price of $0.32 per share.

      (32)  Includes 41,667 shares of common stock issuable upon exercise of
            warrants at an exercise price of $0.45 per share. Also includes
            166,667 shares of common stock.

      (33)  Includes 94,595 shares of common stock and 94,595 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.37 per share.

      (34)  Includes 172,751 shares of common stock issuable upon the exercise
            of warrants at an exercise price of $4.342 per share.

      (35)  Includes 131,579 shares of common stock issuable upon conversion of
            Series C Preferred Stock and 32,895 shares of common stock upon
            exercise of warrants at an exercise price of $0.38.

      (36)  Includes 78,125 shares of common stock issuable upon exercise of
            warrants at an exercise price of $0.32 per share and 78,125 shares
            of common stock issuable upon conversion of $25,000 principal amount
            of convertible promissory note, issued on May 6, 2004 at a
            conversion price of $0.32.

      (37)  Includes 93,750 shares of common stock issuable upon conversion of
            Series D Preferred Stock, 35,344 shares of common stock issuable
            upon exercise of Series D-1 Warrants at an exercise price of $0.07
            per share and 14,156 shares of common stock issuable upon exercise
            of Series D-2 Warrants at an exercise price the lower of $0.20 or
            the trading price of Level 8's common stock at the time of exercise.

      (38)  Includes 27,778 shares of common stock issuable upon exercise of
            warrants at an exercise price of $0.45 per share. Also includes
            111,111 shares of common stock.


                                       15



      (39)  Includes 67,568 shares of common stock and 67,568 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.37 per share.

      (40)  Includes 20,000 shares of common stock issuable upon exercise of
            warrants at an exercise price of $0.60 per share. Also includes
            100,000 shares of common stock.

      (41)  Includes 54,054 shares of common stock and 54,054 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.37 per share.

      (42)  Includes 100,000 shares of common stock issuable upon exercise of
            warrants at an exercise price of $0.38 per share.

      (43)  Includes 42,162 shares of common stock and 42,162 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.37 per share.

      (44)  Includes 16,667 shares of common stock issuable upon exercise of
            warrants at an exercise price of $0.45 per share. Also includes
            66,667 shares of common stock.

      (45)  Includes 65,789 shares of common stock issuable upon the conversion
            of Series C Preferred Stock and 16,447 shares of common stock
            issuable upon the exercise of warrants at an exercise price of $0.38
            per share of common stock subject to adjustment.

      (46)  Includes 40,541 shares of common stock and 40,541 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.37 per share.

      (47)  Includes 13,333 shares issuable upon the exercise of warrants at an
            exercise price of $0.60 per share of common stock. Also includes
            66,667 shares of common stock.

      (48)  Includes 13,889 shares of common stock issuable upon exercise of
            warrants at an exercise price of $0.45 per share. Also includes
            55,556 shares of common stock.

      (49)  Includes 33,784 shares of common stock and 33,784 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.37 per share.

      (50)  Includes 31,250 shares of common stock issuable upon exercise of
            warrants at an exercise price of $0.32 per share and includes 31,250
            shares of common stock issuable upon conversion of $10,000 principal
            amount of convertible promissory note, issued on May 6, 2004 at a
            conversion price of $0.32.

      (51)  Includes 16,447 shares of common stock issuable upon the exercise of
            warrants at an exercise price of $0.38 per share of common stock
            subject to adjustment, 29,453 shares of common stock issuable upon
            exercise of Series D-1 Warrants at an exercise price of $0.07 per
            share, 11,797 shares of common stock issuable upon exercise of
            Series D-2 Warrants at an exercise price the lower of $0.20 or the
            trading price of Level 8's common stock at the time of exercise.

      (52)  Includes 11,111 shares of common stock issuable upon exercise of
            warrants at an exercise price of $0.45 per share. Also include
            44,444 shares of common stock. Mr. Corwin also owns 150,000 shares
            of registered common stock, which were purchased in the open market.

      (53)  Includes 11,111 shares of common stock issuable upon exercise of
            warrants at an exercise price of $0.45 per share. Also include
            44,444 shares of common stock.

      (54)  Includes 27,027 shares of common stock and 27,027 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.37 per share.

      (55)  Includes 8,333 shares of common stock issuable upon the exercise of
            warrants at an exercise price of $0.45 per share. Also include
            33,333 shares of common stock.


                                       16



      (56)  Includes 18,919 shares of common stock and 18,919 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.37 per share.

      (57)  Includes 26,316 shares of common stock issuable upon the conversion
            of Series C Preferred Stock and 6,579 shares of common stock
            issuable upon the exercise of warrants at an exercise price of $0.38
            per share of common stock.

      (58)  Includes 14,865 shares of common stock and 14,865 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.37 per share.

      (59)  Includes 13,514 shares of common stock and 13,514 shares of common
            stock issuable upon exercise of warrants at an exercise price of
            $0.37 per share.

      (60)  Includes 4,167 shares of common stock issuable upon exercise of
            warrants at an exercise price of $0.45 per share. Also include
            16,667 shares of common stock.

      (61)  Includes 16,447 shares of common stock issuable upon the exercise of
            warrants at an exercise price of $0.38 per share of common stock
            subject to adjustment. Mr. Feder also owns 65,789 shares of
            registered common stock held through a broker.

      (62)  Includes 12,500 shares of common stock issuable upon exercise of
            warrants at an exercise price of $0.45 per share.


                                       17
Contents
PLAN OF DISTRIBUTION

We are registering the shares of common stock on behalf of the selling stockholders. All costs, expenses and fees in connection with the registration of the shares offered by this prospectus will be borne by us, other than brokerage commissions and similar selling expenses, if any, attributable to the sale of shares which will be borne by the selling stockholders. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.  Sales of shares may be effected by selling stockholders from time to time in one or more types of transactions (which may include block transactions) on the Nasdaq National
Market, the Nasdaq SmallCap Market,, in the over-the-counter market, any exchange or quotation system, in negotiated transactions, through put or call options transactions relating to the shares, through short sales of shares, or a combination of any such methods of sale, and any other method permitted pursuant to applicable law, at market prices prevailing at the time of sale, or at negotiated prices. Such transactions may or may not involve brokers or dealers.
The selling stockholders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities, nor is there an
underwriter or coordinated broker acting in connection with the proposed sale of
shares by the selling stockholders.

      

The selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions. In connection with such transactions, broker-dealers or other financial institutions may engage in short sales of the shares or of securities convertible into or exchangeable for the shares in the course of hedging positions they assume with selling stockholders. The selling stockholders may also enter into options or other transactions with broker-dealers or other financial institutions which require the delivery to such broker-dealers or other financial institutions of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as amended or supplemented to reflect such transaction). The selling stockholders may pledge and/or loan these shares to broker-dealers who may borrow the shares against their hedging short position and in turn sell these shares under the prospectus to cover such short position.

The selling stockholders may make these transactions by selling shares directly to purchasers or to or through broker-dealers, which may act as agents or principals. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from selling stockholders and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal, or both (which compensation as to a particular broker-dealer is not expected to be in excess of customary commissions).

The selling stockholders and any broker-dealers that act in connection with the sale of shares may be deemed to be "underwriters"“underwriters” within the meaning of Section 2(11) of the Securities Act, and any commissions received by such broker-dealers or any profit on the resale of the shares sold by them while acting as principals might be deemed to be underwriting discounts or commissions under the Securities Act. The selling stockholders may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares against certain liabilities, including liabilities arising under the Securities Act.

Because selling stockholders may be deemed "underwriters"“underwriters” within the meaning of Section 2(11) of the Securities Act, the selling stockholders may be subject to the prospectus delivery requirements of the Securities Act. We have informed the selling stockholders that the anti-manipulative provisions of Regulation M promulgated under the Exchange Act may apply to their sales in the market.

Selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act provided they meet the criteria and conform to the requirements of Rule 144.

Upon our being notified by a selling stockholder that any material arrangement has been entered into with a broker-dealer for the sale of shares through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing:

      o     

·
the name of each such selling stockholder and of the participating broker-dealer(s);

·
the number of shares involved;

·
the initial price at which such shares were sold;

·
the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable;

13
Table of each such selling stockholder and of the participating
            broker-dealer(s);

      o     the number of shares involved;

      o     the initial price at which such shares were sold;


                                       18



      o     the commissions paid or discounts or concessions allowed to such
            broker-dealer(s), where applicable;

      o     that such broker-dealer(s) did not conduct any investigation to
            verify the information set out or incorporated by reference in this
            prospectus; and

      o     other facts material to the transactions.

      Contents

·
that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus; and

·
other facts material to the transactions.

In addition, upon our being notified by a selling stockholder that a donee or pledgee intends to sell more than 500 shares, a supplement to this prospectus will be filed. The selling stockholder may from time to time pledge or grant a security interest in some or all of the shares or common stock or warrants owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.

The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.


                                       19


SELECTED CONSOLIDATED FINANCIAL DATA

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

                                                                      YEAR ENDED DECEMBER 31,
                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                1999            2000         2001           2002            2003
                                                ----            ----         ----           ----            ----
SELECTED STATEMENT OF OPERATIONS DATA

Revenue ......................................  $ 52,920      $ 83,729      $ 17,357      $  3,101      $    530
Loss from continuing operations ..............  $(15,477)     $(28,367)     $(58,060)     $(13,142)     $ (9,874)
Loss from continuing operations
per common share - basic and diluted .........  $  (1.78)     $  (2.10)     $  (3.70)     $  (0.75)     $  (0.54)
Weighted average common and common
equivalent shares outstanding- basic and
diluted ......................................     8,918        14,019        15,958        18,877        21,463

                                                   SIX MONTHS ENDED JUNE 30,
                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                       2003            2004
                                                       ----            ----
SELECTED STATEMENT OF OPERATIONS DATA                      (unaudited)

Revenue ......................................     $    320      $    333
Loss from continuing operations ..............     $ (5,398)     $ (7,414)
Loss from continuing operations
per common share - basic and diluted .........     $  (0.31)     $  (0.22)
Weighted average common and common
equivalent shares outstanding- basic and
diluted ......................................       19,460        33,063

                                                                                       AT DECEMBER 31,
                                                               1999            2000         2001           2002            2003
                                                               ----            ----         ----           ----            ----
SELECTED BALANCE SHEET DATA

    Working capital (deficiency) ......................     $     (36)     $  28,311     $  (4,529)     $  (6,254)     $  (6,555)
    Total assets ......................................       133,581        169,956        35,744         11,852          5,362
    Long-term debt, including current maturities ......        27,593         27,133         4,845          2,893          2,756
    Senior convertible redeemable preferred stock .....            --             --            --             --          3,355
Loans from related companies, net of current maturities         4,000             --            --             --             --
Stockholders' equity (deficit) ........................        72,221        117,730        13,893          1,653         (6,103)

                                                                SIX MONTHS ENDED JUNE 30,
                                                                 2003            2004
                                                                 ----            ----
SELECTED BALANCE SHEET DATA                                          (unaudited)

    Working capital (deficiency) ......................       $  (5,926)     $  (7,835)
    Total assets ......................................           9,089          1,117
    Long-term debt, including current maturities ......           2,380          3,330
    Senior convertible redeemable preferred stock .....           3,530          2,692
Loans from related companies, net of current maturities              --             --
Stockholders' equity (deficit) ........................          (3,080)       (10,644)



                                       20


 
 
Year Ended December 31,
(in thousands, except per share data)
 
 
Three Months Ended March 31,
 
 
 
2003
 
 
2004
 
 
2005
 
 
2006
 
 
2007
 
 
2007
 
 
2008
 
SELECTED STATEMENT OF OPERATIONS DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
530
 
 
$
775
 
 
$
785
 
 
$
972
 
 
$
1,808
 
 
$
232
 
 
$
470
 
Loss from continuing operations
 
$
(9,874
)
 
$
(9,731
)
 
$
(3,681
)
 
$
(2,997
)
 
$
(1,975
)
 
$
(529
)
 
$
(485
)
Loss from continuing operations per common share – basic and diluted
 
$
(54.00
)
 
$
(27.05
)
 
$
(8.27
)
 
$
(0.25
)
 
$
(0.05
)
 
$
(0.01
)
 
$
(0.01
)
Weighted average common and common equivalent shares outstanding– basic and diluted
 
 
215
 
 
 
360
 
 
 
445
 
 
 
35,182
 
 
 
36,771
 
 
 
38,930
 
 
 
43,879
 


 
 
December 31,
 
 
March 31,
 
 
 
2003
 
 
2004
 
 
2005
 
 
2006
 
 
2007
 
 
2007
 
 
2008
 
SELECTED BALANCE SHEET DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Working capital (deficiency)
 
$
(6,555
)
 
$
(10,255
)
 
$
(13,894
)
 
$
(7,894
)
 
$
(6,132
)
 
$
(7,870
)
 
$
(6,330
)
Total assets
 
 
5,362
 
 
 
530
 
 
 
241
 
 
 
597
 
 
 
1,251
 
 
 
739
 
 
 
620
 
Long-term debt, including current maturities
 
 
2,756
 
 
 
5,444
 
 
 
7,931
 
 
 
2,932
 
 
 
2,558
 
 
 
33
 
 
 
1,122
 
Senior convertible redeemable preferred stock
 
 
3,355
 
 
 
1,367
 
 
 
1,061
 
 
 
--
 
 
 
--
 
 
 
--
 
 
 
--
 
Stockholders' deficiency
 
 
(6,103
)
 
 
(11,857
)
 
 
(15,076
)
 
 
(7,912
)
 
 
(7,433
)
 
 
(7,884
)
 
 
(7,431
)

14
Table of Contents
BUSINESS

OVERVIEW

      We provide next generation application

Overview

Cicero Inc, formerly known as Level 8 Systems, Inc. (“we”, “us” or the “Company”) is a provider of business integration productssoftware, which enables organizations to integrate new and services
that are based on open technology standards and are licensed to a wide range of
customers. Our software helps organizations leverage their extensive system and
business process investments, increase operational efficiencies, reduce costs
and strengthen valued customer relationships by uniting disparate applications,
systems,existing information and processes at the desktop. Our business integration software addresses the emerging need for companies’ information systems to deliver enterprise-wide views of their business information processes. In addition to software products, we also provide technical support, training and consulting services as part of its commitment to providing its customers with industry-leading integration solutions.  Our consulting team has in-depth experience in developing successful enterprise-class solutions as well as valuable insight into the business information needs of customers in the largest 500 corporations worldwide (the “Global 500”).

Our focus is on the emerging desktop integration and business process automation market with our Cicero(R)Cicero® product. CiceroCicero® is a business application integration software productplatform that maximizesenhances end-user productivity, streamlines business operations and integrates systems and applications that would not otherwise work together.  CiceroCicero® software offers a proven, innovative departure from traditional, costly and labor-intensive approaches toenterprise application integration, thatwhich occurs at the server level.  Cicero® provides non-invasive application integration at the desktop level.  Desktop level integration provides the user with a single environment with a consistent look and feel for diverse applications across multiple operating environments, reduces enterprise integration implementation cost and time, and supports a Service-Oriented Architecture (“SOA”). Cicero®’s desktop level integration also enables clients to transform applications, business processes and human expertise into a seamless, cost effective business solution that provides a cohesive, task-oriented and role-centric interface that works the way people think.

By using Cicero,Cicero® software, we believe companies can decrease their customer management costs, increaseimprove their customer service level and more efficiently cross-sell the full range of their products and services resulting in an overall increase in return on their information technology investments.  In addition, Cicerowe believe Cicero® software enables organizations to reduce the business risks inherent in replacement or re-engineering of mission-critical applications and extend the productive life and functional reach of their application portfolio.

      Cicero

Cicero® software is engineered to harnessintegrate diverse business applications and shape them to more effectively serve the people who use them.  CiceroCicero® provides an intuitive integration and development environment, thatwhich simplifies the integration of complex multi-platform applications. CiceroCicero® provides a unique approach that allows companies to organize components of their existing applications to better align them with tasks and operational processes.  Cicero streamlines all activitiesIn addition, Cicero® can streamline end-user tasks by providing a single, seamless user interface for simple access to allmultiple systems associated
with a task. Ciceroor be configured to display one or more composite applications to enhance productivity.  Cicero® software enables automatic information sharing among line-of-business applications and tools. CiceroIt is ideal for deployment in contact centers where its highly productive, task-oriented user interface promotes user efficiency.  Until October 2002, weFinally, Cicero® software, by integrating diverse applications across multiple operating systems, is ideal for the financial services, for which Cicero® was initially developed, insurance, telecommunications, intelligence, security, law enforcement, governmental and other industries requiring a cost-effective, proven application integration solution.  Cicero® is also offered products underan integration solution for merger and acquisition events where the sharing of data and combining of systems is imperative.

Some of the companies and other users that have implemented or are implementing our Geneva brand name
to provide organizations with systems integration. Our systems integration
products included Geneva Enterprise IntegratorCicero® software product include Merrill Lynch Pierce Fenner & Smith Incorporated, Nationwide Financial Services, IBM and Geneva Business Process
Automator. These products wereN.E.W. Customer Service Companies. We have also sold to EM Software Solutionsintelligence, security, law enforcement and other government users.

In addition to our Cicero® product, our Ensuredmail email encryption products address information and security compliance requirements from the individual to the enterprise.  The Ensuredmail suite of products includes the Enterprise Email Encryption Server, and Email Encryption Desktop for individual use.  All of the Ensuredmail products use 3-DES or AES encryption technology and are tested and federally certified FIPS 140-1.  Ensuredmail products are easy to install, use and administer. They also use rules and other utilities that allow users to flag messages including attachments for encryption.  Unlike other secure email encryption software applications, Ensuredmail products do not require the recipient to install software or use special secure keys to open and read messages and attachments.  In conjunction with Cicero® software, Ensuredmail email encryption technology has been used to secure information shared in Cicero® integration projects.
15
Table of Contents

Some of the companies using Ensuredmail server products include the United Postal Service, ITX, Physicians Plus, the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, UFCW, Select Benefit, Delta Dental, Truog-Ryding Company, and hundreds of individual users with the Ensuredmail Email Desktop product.  Ensuredmail customers use email encryption primarily to secure outbound messages with confidential information for compliance (e.g., HIPAA) and security purposes.

Cicero Inc. in October
2002.

      We werewas incorporated in New York in 1988 as Level 8 Systems, Inc. and re-incorporated in Delaware in 1999. Effective August 2004, ourOur principal executive offices were relocated
to 1433 State Highway 34, Farmingdale, New Jersey 07727. Ourare located at 8000 Regency Parkway, Suite 542, Cary, NC 27518 and our telephone number is (732) 919-3150 and our(919) 380-5000. Our web site is located at WWW.LEVEL8.COM.

STRATEGIC REALIGNMENT

      www.ciceroinc.com.  Information contained on our website is not part of this prospectus.

Strategic Realignment

Historically, we have been a global provider of software solutions designed to help companies integrate new and existing applications as well as extend those applications to the Internet. This market segment is commonly known as "EnterpriseEnterprise Application Integration"Integration or "EAI."EAI. Historically, EAI solutions work directly at the server or back-office level allowing disparate applications to communicate with each other.

Until early 2001, we focused primarily on the development, sale and support of EAI solutions through our Geneva product suite. After extensive strategic consultation with outside advisors and an internal analysis of our products and services, we recognized that a new market opportunity had emerged.  This opportunity was represented by the increasing need to integrate applications that are physically resident on different hardware platforms, a typical situation in larger companies.  In most cases, companies with large customer bases utilize numerous different, or "disparate," applications that were not designed to effectively communicate and pass information.  In addition, traditional EAI is often times too costly and time-consuming to implement.  It also requires a group of programmers with the necessary skills and ongoing invasive changes to application software code throughout the enterprise. With Cicero,Cicero® software, which non-invasively integrates the functionality of these disparate applications at the desktop, we believe that we have found a novelunique solution to this disparate application problem. We believe that our existing experience in and understanding of the EAI marketplace coupled with the unique CiceroCicero® software solution, which approaches traditional EAI needs in a more effective manner, position us to be a competitive provider of business integration solutions to the financial services industry and other industries with large deployed call centers.


                                       21
contact centers, as well as our other target markets.

We originally licensed the CiceroCicero® technology and related patents on a worldwide basis from Merrill Lynch, Pierce, Fenner & Smith Incorporated in August of 2000 under a license agreement containing standard provisions and a two-year exclusivity period. On January 3, 2002, the license agreement was amended to extend our exclusive worldwide marketing, sales and development rights to CiceroCicero® in perpetuity (subject to Merrill Lynch's rights to terminate in the event of bankruptcy or a change in control of Level 8)the Company) and to grant ownership rights in the CiceroCicero® trademark. We are indemnified by Merrill Lynch indemnifies us with regard to the rights granted to us by them. Consideration for the original CiceroCicero® license we issued to Merrill Lynch consisted of 1,000,00010,000 shares of our common stock. In exchangeconsideration for the amendment, we grantedissued an additional 250,0002,500 shares of common stock to MLBC, Inc., a Merrill Lynch affiliate and entered into a royalty sharing agreement. Under the royalty sharing agreement, we pay a royalty of 3% of the sales price for each sale of CiceroCicero® or related maintenance services. The royalties over the life of the agreement are not payable in excess of $20,000,000.

      In connection with executing our strategic realignment and focusing on
Cicero, we have restructured our business, reduced our number of employees and,
in the fourth quarter of 2002, sold the remaining assets associated with Geneva
Enterprise Integrator and Geneva Business Process Automator. In April 2001,
management reassessed the methodology by which the Company would make operating
decisions and allocate resources. Operating decisions and performance
assessments were based on the following reportable segments: (1) Desktop
Integration (Cicero), (2) System Integration (Geneva Enterprise Integrator and
Geneva Business Process Automator) and (3) Messaging and Application Engineering
(Geneva Integration Broker, Geneva Message Queuing, Geneva XIPC and Geneva
AppBuilder).$20 million. We have sold most ofcompletely re-engineered the assets comprising the MessagingCicero® software to provide increased functionality and Application Engineering Products segment and all of the assets in the Systems
Integration Segment. The Company has recognized the Systems Integration segment
as a discontinued business and accordingly, has reclassified those assets and
liabilities on the accompanying balance sheets for 2002 and 2003 and segregated
the results of operations under gain or loss from a discontinued business on the
accompanying statement of operations. As such, the Systems Integration segment
has been eliminated. Geneva Integration Broker is the only current software
product represented in the Messaging and Application Engineering segment.

      much more powerful integration capabilities.

Our future revenues are entirely dependent on acceptance of a newly
developed and marketed product, Cicero,Cicero® which has had limited success in commercial markets to date. We have experienced negative cash flows from operations for the past three years. AtAs of December 31, 2003,2007, we had a working capital deficiency of approximately $6,555.$6,132,000.  Accordingly, there is substantial doubt that the Companywe can continue as a going concern.concern, as is expressed in the independent auditor’s report accompanying our financial statements.  In order to address these issues and to obtain adequate financing for our operations for the next twelve months, we are actively promoting and expanding itsour product line and continuescontinue to negotiate with significant customers thatwho have begun or finalizeddemonstrated interest in the "proof of concept"
stage with the CiceroCicero® technology. We believe that we are experiencing difficulty increasing sales revenue largely because of the inimitable nature of the product as well as customer concerns about our financial viability. Cicero® software is a new “category defining” product in that most EAI projects are performed at the financial viabilityserver level and Cicero®’s integration occurs at the desktop level without the need to open and modify the underlying code for those applications being integrated. Many companies are not aware of the Company.this new technology or tend to look toward more traditional and accepted approaches. We are attempting to solve the former problem by improving the market'smarket’s knowledge and understanding of CiceroCicero® through increased marketing and leveraging its limited number of reference accounts.accounts while enhancing its list of resellers and system integrators to assist in the sales and marketing process. In addition, emerging competition in the marketplace has aided in the awareness of this new technology. Additionally, we are continuously seeking additional equity capital or other strategic transactions in the near term to provide additional liquidity.

      We closed the strategic acquisition

16
Table of an encryption technology asset in
January 2004 and a private placement of our common stock wherein we raised
approximately $1,247. Contents

We expect that increased revenues will reduce our operating losses in future periods,periods; however, there can be no assurance that managementwe will be successful in executing as anticipated or in a timely manner.  If these strategies are unsuccessful, we may have to pursue other means of financing that may not be on terms favorable to usthe Company or ourits stockholders.  If we are unable to increase cash flow or obtain financing, itwe may not be able to generate enough capital to fund operations for the next twelve months.  MARKET OPPORTUNITY

DESKTOP INTEGRATION SEGMENT PRODUCTS - CICERO

      At our current rates of expense and assuming we will be able to generate revenues in the next twelve months at an annualized rate of revenue generated in the first three months of 2008, we will be able to fund planned operations with existing capital resources for a minimum of four months and experience negative cash flow of approximately $1,000,000 during the next twelve months to maintain planned operations. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements presented herein do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Market Opportunity

Contact Centers Market

Our target markets for Cicero are® software include the customer contact centers of large consumer orientedconsumer-oriented businesses, such as in the financial services, insurance and telecommunications industries.  Large-scale customer contact centers are characterized by large numbers of customer service agents that process phone calls, faxes, e-mailsemails and other incoming customer inquiries and requests.  In today’s highly competitive markets, companies increasingly focus on the provision of customer service as a means of increasing customer satisfaction, customer retention rates and cross-selling opportunities.  For most companies, the key organization involved in this effort is the company’s customer contact center, or call center, whose personnel are directly customer-facing.

To provide quality customer service, customer service representatives (“CSR”) must be able to answer a customer’s questions quickly, handle any request the customer may have, and do so in an efficient and pleasant manner.  One of the significant challenges in the provision of quality customer service is the complexity of the CSR desktop.  This is due to the number of software applications on the CSR’s computer desktop, to the complexity of the applications used on the desktop, and changes in business processed within the organization.  Most CSRs must manage three or more applications on their desktop, including billing, inventory, delivery tracking, call tracking and customer relationship management software. In many instances, CSRs have six, eight, or ten or more applications they must learn and manage in order to provide service.

The number of applications on the typical CSR desktop is increasing due to the broader range of services that organizations are demanding of contact centers, the desire for CSRs to resolve calls during the first contact with the customer, and the need to sell additional products.  These applications are often a combination of Windows, web and host centric applications that are not integrated, requiring the CSR to learn and master them to perform their jobs.

Our goal is to greatly increase the efficiency of customer service agentsCSRs in our target markets, thereby lowering operating costs and increasing customer
retention and customer satisfaction.markets. This increased efficiency is attained in a non-invasive manner, allowing companies to continue using their existing applications in a more productive manner.


                                       22

Generally, managers of customer contact centers are under pressure to provide increased customer service at the lowest possible cost while dealing
withaddressing high employee turnover and training costs. Some of the primary challenges faced by customer contact centers include:

      o     CUSTOMER SERVICE. Currently, most customer contact centers require
            multiple transfers to different agents to deal with diverse customer
            service issues. A one-call, one-contact system enhances customer
            service by avoiding these multiple transfers. Ideally, the customer
            service agent provides the call-in customer with multi-channel
            customer interfaces with timely access to all information that the
            customer needs. Increasing customer service and customer intimacy is
            one

·
Long Average Call Handling Time. Currently, most customer contact centers use several applications requiring the CSR to ask customers for account and telephone information, navigate between applications, and to retype customer information in several screens.  This increases the overall call handling time and decreases customer satisfaction.  In addition, many contact centers require multiple transfers to different agents to deal with diverse customer service issues.  A one-call, one-contact system reduces average call handling time and enhances customer service by avoiding these multiple transfers. Ideally, the customer service representative provides the call-in customer with multi-channel customer interfaces with timely access to all information that the customer needs. Reducing average call handling time and increasing customer service and customer intimacy are some of the primary metrics on which contact centers are evaluated by management. Improving customer service through simplified processes and having access to additional information in an integrated environment also provides opportunities to cross-sell other products.

17
Table of the primary metrics on which contact centers are evaluated by
            management.

      o     CONTACT CENTER STAFFING. The contact center industry is
            characterized by high training costs, operational complexity,
            continuous turnover and increasing costs per call. These
            difficulties stem from increased customer expectations, the
            ever-increasing complexity and diversity of the business
            applications used by customer service agents, and pressure to
            decrease training time and increase the return on investment in
            customer service agents.

      o     INDUSTRY CONSOLIDATION. Many industries in our target market,
            including the financial services industry, are in a constant state
            of consolidation. When companies consolidate, the customer contact
            centers are generally merged to lower overall costs and to reduce
            redundancies. This consolidation generally leads to re-training and
            the use of multiple applications handling similar functions that can
            be quite difficult to integrate successfully.

OUR SOLUTION

      We were previously a provider of software that integrates an enterprise's
applications at the server level so that disparate applications can communicate
with each other, or the EAI industry. Based on our experience in the EAI
industry, we determined that a compelling product would be one that integrates
disparate applications at a visual level in addition to at the server level. As
a result, we proceeded to procure an exclusive license to develop and market
Cicero. Cicero was developed internally by Merrill Lynch to increase the
efficiency of 30,000 employees that have daily contact with Merrill Lynch
customers. When coupled with solutions from other EAI vendors, Cicero becomes a
comprehensive business solution and provides our customers with a front-to-back
integrated system that appears as a single application to the end-user.

      CiceroContents

·
Training and Turnover of Contact Center Staff. The contact center industry is characterized by high training costs, operational complexity, continuous turnover and increasing costs per call.  These difficulties stem from increased customer expectations, the ever-increasing complexity and diversity of the business applications used by customer service representatives, and pressure to decrease training time and increase the return on investment in customer service representatives.

·
Industry Consolidation. Many industries in our target market, including the financial services industry, are in a constant state of consolidation. When companies consolidate through mergers and acquisitions, the customer contact centers are generally merged to lower overall costs and to reduce redundancies. This consolidation generally leads to re-training and the use of multiple applications handling similar functions that can be quite difficult to integrate successfully.


Our Solution

Cicero® is a software product that allows companies to integrate their existing applications into a seamless integrated desktop. Cicero subordinates
and controls most Windows-based applications and provides a seamless environment
with a consistent look and feel. The end-user can navigate any number of
applications whether local, client-server, mainframe legacy or web-browser in a
consistent and intuitive way that is completely customizable by their firm.

      The CiceroCicero® software solution provides the following key features:

      o     INTEGRATED END-USER ENVIRONMENT. The end-user can use

·
Integrated End-User Environment. The end-user can navigate any number of applications, whether local, client-server, mainframe legacy or web-browser, from a single environment with a consistent look and feel. Cicero® software integrates the execution and functionality of a variety of custom or packaged Windows-based applications. If a software product is designed to provide output into a Windows environment, Cicero® can subordinate its presentation and control it through the Cicero environment. Cicero® software can guide the user by providing assistance in tasks consisting of multiple steps, and make additional information accessible without any extra effort on the user’s part.

·
Information Center. The optional Information Center is a customizable hub of critical information that facilitates the effective execution of processes and minimizes the need to enter frequently accessed information repeatedly.  The Information Center is a composite application and a subset of the Cicero Graphical User Interface Manager, and provides a configurable information hub to enable end-users to interact with selected applications on a continuous basis and access real-time information.  The Information Center is frequently used to support incoming message alerts, scrolling headlines, key operational statistics, interaction with integrated voice response systems and real-time video. Any information that is time-sensitive or actionable can be displayed side-by-side with the currently selected application page and information can be readily exchanged between the optional Information Center and other applications.

·
Context Sharing. Cicero® software’s unique, patented technology enables the right information in any workstation application to be shared with the other applications that need it.  Cicero® software’s Context-Sharing Manager within the Cicero Application Bus largely eliminates the need for re-keying customer data, simplifies customer information updates, and reduces errors and re-work. It also allows one subordinated application to perform processing based on a change in another application, thus causing applications to work together without end-user intervention.

·
Advanced Integration Architecture. Cicero® software is a sophisticated application integration platform that subordinates and controls and non-invasively integrates any applications with a light “footprint” in the Windows environment.  The Cicero® software’s publish and subscribe bus architecture provides for efficient inter-application communication.  Its event management capabilities allow applications to respond to events that occur within unrelated applications, making the integration more responsive. Cicero® software extends the usefulness and life span of legacy architectures and provides a common architecture for events across all platforms. Applications are integrated using Cicero Studio, a visual integration tool within the Cicero® software product which allows applications to be quickly integrated. Integrators are not required to understand the details of the underlying technology when integrating an application. Cicero® software also supports open platform architecture for communication and interoperability, native scripting languages and XML. Cicero® software is designed to be extendible, allowing extensions to new environments by using well-defined plug-ins or connectors. Cicero® software can also present components or elements of integration as web services and incoming web services requests can initiate Cicero® software processes without requiring any action by a user.

18
Table of Contents

·
Management Tools. Comprehensive tools are built into the system for version management, automatic component updates and user preference configuration.  Remote control and diagnostic tools are integrated to provide off-site help desk and troubleshooting personnel with access to assist them in their support duties. In addition, built-in trace and history mechanisms allow user’s management to obtain operational information that can detail users’ activities or point out operational problems.  Furthermore, Cicero® software can enforce steps to be performed in a particular order, if needed, so as to enforce conformance with regulations, such as HIPAA, across multiple applications, or when an older, non-conformant application needs to be used in such an environment.

We believe that deployment of the applications necessary for his or her job function from a single
            environment with a consistent look and feel. Cicero integrates the
            execution and functionality of a variety of custom or packaged
            Windows-based applications. If aCicero® software product is designed to
            provide output into a Windows environment, Cicero can subordinate
            its presentation and control it through the Cicero environment. The
            Cicero desktop is constructed at run-time, so selected applications
            and user interface components are dynamically created and
            initialized. This makes the desktop environment very flexible and
            easily adapted and maintained as business conditions change.

      o     INFORMATION CENTER. The Information Center is a customizable hub of
            critical information that facilitates the effective execution of
            processes and minimizes the need to enter frequently accessed
            information repeatedly. The Cicero Information Center provides a
            configurable information hub to enable end users to interact with
            selected applications on a continuous basis. The information center
            is frequently used to support incoming message alerts, scrolling
            headlines, key operational statistics, interaction with Integrated
            Voice Response systems, and real-time video. Any information that is
            time-sensitive or actionable can be displayed side-by-side with the
            currently selected application page and information can be readily
            exchanged between the Information Center and other applications.


                                       23



      o     CONTEXT SHARING. Cicero's unique, patented architecture enables just
            the right information in any workstation application to be shared
            with the other applications that need it. Cicero's context-sharing
            Application Bus largely eliminates the need for re-keying customer
            data, simplifies customer information updates, and reduces errors
            and re-work. Context is visually integrated into the Cicero desktop
            through the Information Center, enabling more efficient customer
            service.

      o     ADVANCED INTEGRATION ARCHITECTURE. Cicero is a sophisticated
            application integration platform that subordinates and controls and
            non-invasively integrates any applications with a "footprint" in the
            Windows environment. Cicero's publish and subscribe bus architecture
            provides for efficient inter-application communication. Its event
            management capabilities extend the usefulness and life span of
            legacy architectures and provide a common architecture for events
            across all platforms. Cicero also supports an open platform
            architecture for communication and interoperability, native
            scripting languages and XML, and facilities to enable single sign-on
            solutions while respecting security standards and directory
            services.

      o     MANAGEMENT TOOLS. Comprehensive tools are built into the system for
            version management, automatic component updates and user preference
            configuration. Remote control and diagnostic tools are integrated to
            provide off-site help desk and troubleshooting personnel with access
            to assist them in their support duties.

            Deployment of the Cicero solution can provide our customers with the following key benefits:

      o     LOWER AVERAGE COST PER CALL AND AVERAGE CALL TIME. Cicero increases
            the efficiency of the customer service agent by placing all
            productivity applications within a few mouse clicks and
            consolidating all standard applications into a single integrated
            desktop. Cost per call is lowered because the customer service agent
            is more productive in moving between disparate applications and is
            able to handle different requests without having to transfer the
            customer to another customer service agent.

      o     REDUCE STAFF COST. Cicero reduces staff cost in two ways. First, by
            increasing the efficiency of each customer service agent, a contact
            center can handle the same volume of customer service requests with
            a smaller staff. Secondly, because Cicero simplifies the use of all
            contact center applications, training costs and time can be reduced,
            placing newly hired staff into productive positions faster than
            other contract center applications.

      o     INCREASE CROSS-SELLING EFFICIENCY. The consolidation of all customer
            data and customer specific applications can increase the efficiency
            of cross selling of products and services. For instance, a Cicero
            enabled contact center might be configured to inform the customer
            service agent that the customer, while a brokerage services
            customer, does not use bill paying or other offered services. On the
            other hand, Cicero can help prevent customer service agents from
            selling a product that is inappropriate for that customer or a
            product or service that the customer already has through the
            company. Increasing the efficiency of cross selling can both
            increase revenues and avoid customer dissatisfaction.

      o     DELIVER BEST IN CLASS CUSTOMER SERVICE. Increasing customer service
            is one of the primary methods by which a company in highly
            competitive customer focused industries such as financial services
            can differentiate itself from its competition. By increasing the
            efficiency and training level of its agents, decreasing average time
            per call and increasing effective cross-selling, the Cicero enabled
            contact center presents its customers with a more intimate and
            satisfying customer service experience that can aid in both customer
            retention and as a differentiator for customer acquisition.

      o     PRESERVE EXISTING INFORMATION TECHNOLOGY INVESTMENT. Cicero
            integrates applications at the presentation level, which allows
            better use of existing custom designed applications and divergent
            computing platforms (e.g., midrange, client/server, LAN and Web),
            which are not readily compatible with each other or with legacy
            mainframe systems. Linking together the newer computing applications
            to existing systems helps preserve and increase the return on the
            investments made by organizations in their information technology
            systems.


                                       24

·
Lower Average Cost Per Call and Average Call Time.  Because Cicero® presents users with a single interface through which applications are accessed, it eliminates the need to navigate through and between applications.  Therefore, it eliminates redundant data entry, cuts keystrokes and streamlines or even eliminates process steps, including time consuming call wrap-up processes, thereby generating greater efficiency.  This enables increased first call resolution and significant reduction in average call times. Cost per call is lowered because the customer service representative is more productive.

·
Reduce Staff Cost. Cicero® software can reduce staff cost in two ways. First, by increasing the efficiency of each customer service representative, a contact center can handle the same volume of customer service requests with a smaller staff. Secondly, training costs and time can be reduced, placing newly hired staff into productive positions faster than other contract center applications.

·
Increase Cross-Selling Efficiency. The consolidation of all customer data and customer specific applications can increase the efficiency of cross-selling of products and services. For instance, a Cicero® enabled contact center might be configured to inform the customer service representatives that the customer does not use bill paying or other offered services. On the other hand, Cicero® software can help prevent customer service representatives from selling a product that is inappropriate for that customer or a product or service that the customer already has. Increasing the efficiency of cross-selling can both increase revenues and avoid customer dissatisfaction.

·
Deliver Best in Class Customer Service. Increasing customer service is one of the primary methods by which a company in highly competitive customer focused industries such as financial services can differentiate itself from its competition. By increasing the efficiency of its customer service representatives, decreasing average time per call and increasing effective cross-selling, the Cicero-enabled contact center presents its customers with a more intimate and satisfying customer service experience that can aid in both customer retention and as a differentiator for customer acquisition.  The access to multiple platforms through one user-friendly interface also improves the experience of the customer service representative, leading to improved customer service representative morale and productivity.

·
Preserve Existing Information Technology Investment. Cicero® software integrates applications at the desktop level, which allows better use of existing custom designed applications and divergent computing platforms (e.g., midrange, client/server, LAN and Web), which are not readily compatible with each other or with legacy mainframe systems. Linking together the newer computing applications to existing systems helps preserve and increase the return on the investments made by organizations in their information technology systems.

Additionally, by visually and structurally linking the flexibility and innovations available on newer computing platforms and applications to the rich databases and functions that are typically maintained on the larger mainframe computers, organizations can utilize this information in new ways. The CiceroCicero® software solution helps organizations bridge the gap between legacy systems and newer platforms and the result is the extension of existing capabilities to a modern streamlined interface in which the underlying system architectures, such as the Web, mainframe, mid-range or client-server, are transparent to the end-user customer service agent, thereby preserving the existing information technology investments and increasing efficiency between applications.

      o     SUPPORT A BROAD RANGE OF APPLICATIONS, PLATFORMS AND STANDARDS. The
            IT departments

19
Table of larger enterprises need solutions to integrate a
            broad array of applications and platforms using a wide variety of
            industry standards to ensure ease of implementation The Cicero
            solution provides visual application integration solutions that
            support common industry standards and can handle a wide array of
            disparate applications and data types while operating on a Windows
            NT, Windows XP or Windows 2000 platform. The CiceroContents

·
Support a Broad Range of Applications, Platforms and Standards. The IT departments of larger enterprises need solutions to integrate a broad array of applications and platforms using a wide variety of industry standards such as BPEL and Service-Oriented Architecture.  The Cicero® software solution provides visual application integration solutions that support common industry standards and can handle a wide array of disparate applications and data types while operating on a Windows NT, Windows XP or Windows 2000 platforms. The Cicero® software solution can be used to link custom or packaged applications together regardless of the tools or programming language used to create the application by integrating those applications at the desktop level.

·
Ease of Implementation and Enhanced Information Technology Productivity. The Cicero® software solution allows customers to create comprehensive data transformation and information exchange solutions without the need for custom or packaged applications together regardless of
            the tools or programming language used to create the application by
            integrating those applications at the presentation level.

      o     EASE OF IMPLEMENTATION AND ENHANCED INFORMATION TECHNOLOGY
            PRODUCTIVITY. The Cicero solution allows contact center and
            financial services managers to create comprehensive data
            transformation and information exchange solutions without the need
            for non-standard coding. Our products provide pre-built adapters for a wide variety of systems that are pre-programmed for transforming data into the format required by that system and transporting it using the appropriate transport mechanism. This greatly simplifies and speeds implementation of new solutions into the deployed Cicero framework. For instance, while in operation at Merrill Lynch, Cicero® was updated to include software for Siebel Systems over a period of only two days when Merrill Lynch decided to implement the Siebel Systems solution. The Cicero® software solution allows users to rapidly integrate new and existing applications with little or no customization required.

Our products provide pre-built adapters for
            a wide variety of different systems that are pre-programmed for
            transforming data into the format required by that system and
            transporting it using the appropriate transport mechanism. This
            greatly simplifies and speeds implementation of new solutions into
            the deployed Cicero framework. For instance, while in operation at
            Merrill Lynch, Cicero was updated to include software for Siebel
            Systems over a period of only two days when Merrill Lynch decided to
            implement the Siebel Systems solution. The Cicero solution allows
            our target markets to rapidly integrate new and existing
            applications with little or no customization required.

OUR STRATEGY

      Strategy

Our goal is to be thea recognized global leader in providing complete desktop level application integration to the financial services industry. The
following are the keyour target markets.  Key elements of our strategy:

      o     LEVERAGE OUR EXISTING CUSTOMERS AND EXPERIENCE IN THE FINANCIAL
            SERVICES INDUSTRY. We have had success instrategy include the past with our Geneva
            products in the financial services industry. We intend to utilize
            these long-term relationships and our understandingfollowing:

·
Expand into Our Target Markets.  Our short-term goal is to gain a presence in contact centers, such as in the financial services industry with the Cicero® software solution. We believe the financial services industry is ideal for Cicero® because each entity has a large base of installed users that use the same general groups of applications. However, Cicero® software can be used in any industry that needs to integrate applications and processes, such as the telecommunications and insurance industries. Additionally, we believe that state and local governments, first responders, intelligence and defense agencies are excellent target markets for integration of legacy applications.  Since the beginning of 2005, we entered into an agreement to install Cicero software throughout N.E.W. Customer Service Companies, a contact center outsourcing company, to shorten call times, improve agent efficiency and improve customer satisfaction.  We have recently deployed our software to Merrill Lynch’s International Wealth Management brokers. In addition, we have licensed Cicero software to the U.S. Department of Agriculture and the West Windsor Township, New Jersey Police Department.  The latter agency is deploying Cicero in their Public Safety Answering Point.  In this environment, Cicero® software will allow for fast and accurate retrieval of National Crime Information Center (NCIC) wanted person and related information, Interstate Identification Index, and National Law Enforcement Telecommunications systems, as well as various state criminal history and warrant data bases, motor vehicle records, and local arrest records.

·
Develop Strategic Partnerships. The critical success factor for customers implementing Customer Relationship Management (CRM) solutions in their contact centers is to have the right balance of technology and service provision. Similarly, penetration into the government market requires alliances with proven government system integrators and suppliers.  To supplement our direct sales efforts, we are implementing a tightly focused strategic teaming approach with a selected group of well-known consultancy and systems integration firms that specialize in financial services, government and eCRM integrated solutions. Since announcing the general availability of Cicero® 6.0 in May 2004, we have entered into strategic partnerships with the following system integrators/resellers, for integrated business solutions: ThinkCentric, Hewlett Packard and House of Code.  In addition, we have entered into strategic partnerships with Silent Systems, Inc. (a consultancy and reselling organization), ADPI LLC (a consultancy and reseller organization), and Pilar Services, Inc. (a government focused integrator and reseller).  The Company has no material dependency on any of these organizations, but rather looks to build upon these relationships as additional outlets for its products. Leveraging these organizations, who will provide such integration services as architecture planning, technology integration and business workflow improvement, allows us to focus on core application system needs and how Cicero® best addresses them, while our partners will surround the technology with appropriate industry and business knowledge.

20
Table of Contents

·
Leverage Our In-House Expertise in the Cicero® Software. Merrill Lynch originally developed Cicero® internally for use by approximately 30,000 professionals worldwide.  To approach the market from a position of strength, we have added members of the Merrill Lynch development team to our Cicero® development team. We recruited and hired Anthony Pizi, First Vice President and Chief Technology Officer of Merrill Lynch’s Private Technology’s Architecture and Service Quality Group, and the Cicero® project director as our Chief Executive Officer and Chief Technology Officer as well as several of the primary Cicero® engineers from Merrill Lynch to support our ongoing Cicero® development efforts.

·
Utilize Market Analyses to Demonstrate Tangible Return-On-Investment results. Most contact centers benchmark their operational and services levels against established industry norms. Metrics such as average waiting time in the call queue, call abandonment rates, after call service work and percentage of one-call completion are typically measured against norms and trends. We believe that use of Cicero® will provide tangible, demonstrable improvements to these metrics. In addition, Cicero® technology can integrate applications and processes more efficiently than other competing solutions. This reduces costs to customers and provides a faster return on investment than competing products.

·
Augment our product line with complementary product offerings. In this area, we use three strategies. The first is to acquire, when possible, complementary products that can be sold on their own and can also complement the Cicero® software product offering. In furtherance of such strategy, we have acquired the Ensuredmail product, which has been licensed both on its own, as well as in conjunction with and as an integrated feature of Cicero® software, adding additional functionality in the nature of encrypted email capability. When we bought the Ensuredmail assets in January 2004, purchased solely for shares our common stock, Ensuredmail customers included the U.S. Air Force, UPS, leading financial services companies and other multinational corporations.  We announced the general availability of a significant upgrade to Ensuredmail for the desktop in March 2004 and small business version in July 2005. Our first major customer for Ensuredmail after the acquisition was Science Applications International Corporation.  In August 2005, we entered into a license of our Ensuredmail product, to ITX Corp., a business consulting and technology solutions company, as an enhancement to ITX’s existing hosted email solution.  In addition, we agreed to co-market with ITX a new hosted secure email service to customers who want to outsource their email services. The second strategy is to develop Cicero® connectors that facilitate the integration of existing products under Cicero® technology. Some of these connectors may be delivered along with Cicero®, while others may be licensed under separate product codes. The third strategy is to develop Cicero-powered solutions that address specific business challenges. These solutions such as our CTI Integrator not only addresses specific integration problems but also provides us with an opportunity to cross sell Cicero® software for future integration.

Products

Desktop Integration Segment
Cicero®. Cicero® software integrates disparate applications regardless of the platform, enables rapid development of effective, simple-to-maintain composite applications, accelerates time to value and deploys cost-effective, "best-of-breed" business to create opportunitiessolutions by leveraging existing IT investments.  Cicero® software helps the architect maintain consistent integration project design and implementation by providing extensible, standardized software methods for sales ofinteracting with Windows applications, COM objects, web pages, commercial software packages, legacy applications, and Java applications among others. Cicero® software can integrate applications running on the Cicero solution.

      o     BUILD ON OUR SUCCESSES TO EXPAND INTO NEW MARKETS. Our short-term
            goal is to gain a significant presenceserver or desktop, giving the architect complete flexibility in the financial services
            industry with the Cicero solution. The financial services industry
            is ideal for Cicero because each entity has a large base of
            installed users that use the same general groups of applications.
            Cicero, however,determining where, when, and how application integration occurs. Cicero® software can also be used in any industry that has large contact
            centers,to capture and aggregate data from many different applications, apply business rules as needed, such as telecommunicationsdata transformation rules, and insurance.

      o     DEVELOP STRATEGIC PARTNERSHIPS. share that data bi-directionally via a composite view. An event in one application can cause processing in another unrelated application, even if these were implemented using differing technologies, such as Windows and Java.

The critical success factor for
            customers implementing Customer Relationship Management (CRM)
            solutions in their contact centers is to have the right balance ofpatented Cicero® software technology, and service provision. We are implementing a tightly
            focused strategic teaming approach with a selected group of
            well-known consultancy and systems integration firms that specialize
            in financial services as well as eCRM integrated solutions.
            Leveraging these organizations, who will provide such integration
            services as architecture planning, technology integration and
            business workflow improvement, allows us to focus on core
            application system needs and how Cicero best addresses them, while
            our partners will surround the technology with appropriate industry
            and business knowledge.

      o     LEVERAGE OUR IN-HOUSE EXPERTISE IN THE CICERO SOFTWARE. Merrill
            Lynch originally developed Cicero internally for use by
            approximately 30,000 professionals worldwide. To approach the market
            from a position of strength, we have added members of the Merrill
            Lynch development team to our Cicero development team. We recruited
            and hired Anthony Pizi, First Vice President and Chief Technology
            Officer of Merrill Lynch's Private Technology's Architecture and
            Service Quality Group, and the Cicero project director as our
            Chairman, Chief Executive Officer and Chief Technology Officer as
            well as several of the primary Cicero engineersexclusively licensed from Merrill Lynch, consists of several components, including the following: The Resource Manager, which manages the starting, stopping, and status of applications; the Event Manager, a Component Object Model (COM)-based messaging service; the Context Manager which administers the “publish and subscribe” protocols; and a Graphical User Interface (GUI) manager which allows applications to supportbe presented to the user in one or more flexible formats selected by the user organization.  In 2004, we released a version of the Cicero® product which included our ongoing Cicero development efforts.

      o     UTILIZE MARKET ANALYSES TO DEMONSTRATE TANGIBLE RETURN-ON-INVESTMENT
            RESULTS. Most contact centers benchmarknewly developed Cicero® Studio integration tool, to allow applications to be integrated using point-and-click methods. Cicero® software incorporates an Application Bus with code modules to handle the inter-application connections. There are additional tools that provide ancillary functions for the integrator including toolset to debug, view history and trace logs.

21
Table of Contents

Cicero® Studio provides a nontraditional approach to application integration. By providing a high level of object-oriented integration, Cicero® Studio eliminates the need for source code modification. It includes high-level integration objects called genes (which translate disparate application interface protocols to one common interface used by Cicero® software), an event processor, a context manager and a publish-subscribe information bus that enables applications to share data. It also includes a set of integration wizards that greatly simplify the task of application integration.

Cicero® Studio is a powerful integration tool that eliminates most of the technical complexity associated with application integration. Integrators avoid the high cost and complexity of invasive code modifications and extend the scope of their operationalintegration capabilities into new and services levels against established industry norms. Metrics suchlegacy environments. Cicero® Studio provides an open architecture that can be extended to incorporate new behaviors by adding genes and communicating with COM objects. This enables Cicero® software to be extended to accommodate new platforms and interface requirements as average waiting timeneeded and provides a rich paradigm for evolving integration behaviors over time. It also means that Cicero® software can be implemented in both the call queue, call abandonment rates,
            after call service workdesktop and percentagen-tier server of one-call completion are
            typically measured against norms and trends. We believe that use of
            Cicero will provide tangible, demonstrable improvements to these
            metrics.


                                       25



PRODUCTS

DESKTOP INTEGRATION SEGMENT PRODUCTS - CICERO

      Ciceroa service-oriented architecture.

Cicero® software runs on Windows NT,Vista, Windows XP, and Windows 2000 to organize applications underin a book-chapter-section metaphorflexible graphical configuration that keeps all the application functionality that the user needs within easy reach. For instance, selecting the "memo"“memo” tab might cause a Microsoft Word memo-template to be created within the CiceroCicero® desktop. The end-user need not even know that they are using Microsoft Word.  Moreover, a customer-tracking database can be linked with a customer relationship management software package. Virtually any application
that is used in a customer contact center can be integrated under the Cicero
book-chapter metaphor and be used in conjunction with other contact center
applications.

      The patented Cicero

Cicero® technology as exclusively licensed from Merrill
Lynch, consists of several components: The Event Manager, a Component Object
Model (COM)-based messaging service; The Context Manager, which administers the
"publish and subscribe" protocols; The Shell Script Interpreter, which supports
communication with applications that do not support the required COM interfaces;
and The Resource Manager, which starts and shuts down applications and ensures
recovery from system errors. The system incorporates an application bus with
underlying mechanisms to handle the inter-application connections.

      Cicero provides non-intrusive integration of desktop and web applications, portals, third-party business tools, and even legacy mainframe and client server applications, so all co-exist and share their information seamlessly.  Cicero'sCicero®’s non-invasive technology means that clients don'tdo not risk modifying either fragile source code or sensitive application program interfaces - and they can easily integrate off-the-shelf products and emerging technologies.

      Cicero

Cicero® software allows end-users to access applications in the most efficient way possible, by only allowing them to use the relevant portions of that application. For instance, a contact center customer service representative doesmay not use 90% of the functionality of Microsoft Word, but might need access to a memorandum and other custom designed forms as well as basic editing functionality. CiceroCicero® can be set to control access to only those templates and, in a sense, turn-off the unused functionality by not allowing the end-user direct access to the underlying application. Under the same CiceroCicero® implementation, however, a different CiceroCicero® configuration could allow the employees in the Marketing department full access to Word because they have need of the full functionality.  The functionality of the applications that CiceroCicero® integrates can be modulated by the business goals of the ultimate client, the parent company.  This ability to limit user access to certain functions within applications enables companies to reduce their training burden by limiting the portions of the applications on which they are required to train their customer service representatives.

      Cicero

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Table of Contents

Messaging

Ensuredmail. Our Ensuredmail products provide encrypted email capabilities such as security, proof-of-delivery and non-repudiation of origination. The recipient of an Ensuredmail message does not need to be an Ensuredmail licensee or install software. When an Ensuredmail user sends a message to another user, the recipient receives an email message with an attached encrypted message.  The recipient opens the attached, which starts their web browser, enters a password, and can read the message and attachments.  If the recipient replies to the message, the message is an ideal product for large customer contact centers. We believe
that Cicero, by combining ease offully encrypted and sent back securely to the original sender. Organizations typically use our server-based Ensuredmail products, whereas individuals can use a shorter learning curveperson-to-person desktop variation.

Ensuredmail is FIPS140-1 certified, and consistent
presentation of information will allow our clients to leverage their exiting
investments in Customer Relationship Management or CRM applications and further
increase customer services, productivity, return on investment and decrease cost
both per seat and across the contact center.

MESSAGING AND APPLICATION ENGINEERING SEGMENT PRODUCTS - GENEVA INTEGRATION
BROKER

      Geneva Integration Broker is a transport independent message broker that
enables an organization to rapidly integrate diverse business systems regardless
of platform, transport, format or protocol. The key feature of Geneva
Integration Broker is its support for XML and other standards for open data
exchange on the Internet. The product provides a robust platform for building
eBusiness applications that integrate with existing back-office systems. Geneva
Integration Broker's support for open data exchange and secure Internet
transports make it an excellent platform for building Internet-based
business-to-business solutions. Geneva Integration Broker does not represent a
significant portionuse by agencies of the Company's current business or prospects.


                                       26



SERVICES

      Federal Government, in addition to private sector organizations.

Services

We provide a full spectrum of technical support, training and consulting services across all of our operating segments as part of our commitment to providing our customers industry-leading business integration solutions.  Our
services organization is staffed by expertsExperts in the field of systems integration with backgrounds in development, consulting, and business process reengineering.reengineering staff our services organization.  In addition, our services professionals have substantial industry specific backgrounds with extraordinary depth in our focus marketplace of financial services.

MAINTENANCE AND SUPPORT

      

Maintenance and Support

We offer customers varying levels of technical support tailored to their needs, including periodic software upgrades, and telephone support and twenty-four
hour, seven days a week access to support-related information via the Internet.
Cicerosupport.  Cicero® is frequently used in mission-critical business situations, and our maintenance and support services are accustomed to the critical demands that must be meetmet to deliver world-class service to our clients.  Many of the members of our staff have expertise in lights-out mission critical environments and are ready to deliver service commensurate with those unique client needs.

TRAINING SERVICES

      

Training Services

Our training organization offers a full curriculum of courses and labs designed to help customers become proficient in the use of our products and related technology as well as enabling customers to take full advantage of our field-tested best practices and methodologies.  Our training organization seeks to enable client organizations to gain the proficiency needed in our products for full client self-sufficiency but retains the flexibility to tailor their curriculum to meet specific needs of our clients.

CONSULTING SERVICES

      

Consulting Services

We offer consulting services around our product offerings in project management, applications and platform integration, application design and development and application renewal, along with expertise in a wide variety of development environments and programming languages. We also have an active partner program in which we recruit leading IT consulting and system integration firms to provide services for the design, implementation and deployment of our customer contact center solutions. Our consulting organization supports third party consultants by providing architectural and enabling services.

CUSTOMERS

      Approximately 30,000
Customers

Our customers include both end-users to whom we sell our products and services directly and distributors and other intermediaries who either resell our products to end-users or incorporate our products into their own product offerings. Typical end-users of our products and services are large businesses with sophisticated technology requirements for contact centers, in the financial services, insurance and telecommunications industries, and intelligence, security, law enforcement and other governmental organizations.

23
Table of Contents

Our customers are using our solutions to rapidly deploy applications. Some examples of customers' uses of our products include:

·
Business Process Outsourcers - use our Cicero® solution in contact centers to provide real time integration among existing back-office systems, eliminate redundant data entry, shorten call times, provide real-time data access and enhance customer service and service levels.

·
A financial institution - uses our Cicero® solution to provide real-time integration among market data, customer account information, existing back-office systems and other legacy applications, eliminate redundant data entry, provide real-time data access and processing, and enhance customer service and service levels.

·
An insurance company - uses our Cicero® solution to integrate their customer information systems with over thirty software applications including a CRM application.

·
A law enforcement organization - uses our Cicero® solution to streamline and automate support for arrests and investigations while merging federal, state and local systems within a unified process.

Other customers are systems integrators, which use our Cicero® product to develop integration solutions for their customers.

In 2007, Merrill Lynch personnel are currently using the
Cicero technology. We licensed the Cicero technology from Merrill Lynch during
2000 and have developed it to initially sell to the contact center industry. Our
significant customers include Nationwide Financial Services, Arvato Services, a
division of Bertelsmann A.G., Bank of America and Gateway Electronic Medical
Management Systems (GEMMS).

      Merrill Lynch holds approximately three percent (3%) of the outstanding
shares of our common stock. No one customer accounted for more thanthen ten percent (10%) of our operating revenues in 2001. Bank of Americarevenues.  Merrill Lynch, N.E.W. Customer Service Companies, IBM, and Nationwide FinancialPilar Services, individuallyInc. each accounted for more than ten percent (10%) of our operating revenues in 2002.2006. In 2003, Bank of America, Nationwide Financial Services,2005, N.E.W. Customer Service Companies and Gateway Electronic Medical Management Systems (GEMMS) eachInnovative System Solutions Corporation accounted for more than ten percent (10%) of our operating revenues

SALES AND MARKETING

SALES

      revenue.

Sales and Marketing

Sales

An important element of our sales strategy is to expandsupplement our direct sales force by expanding our relationships with third parties to increase market awareness and acceptance of our business integration software solutions. As part of these relationships, we willcontinue to jointly sell and implement CiceroCicero® software solutions with strategic partners such as systems integrators and embed CiceroCicero® along with other products through OEMreseller relationships.  We will provide training and other support necessary to systems integrators and OEMsresellers to aid in the promotion of our products.  To date we have signed partner agreementsentered into strategic partnerships with the following resellers, for integrated business solutions: BluePhoenix Solutions, ThinkCentric, Hewlett Packard and House of Code,
Titan Systems Corporation,Code.  In addition, we have entered into strategic partnerships with TrySynergy Consulting, Innovative Solutions Group, Piercetech, Silent Systems, Inc., ArvatoADPI LLC, and Pilar Services, Inc.  These organizations have relationships with existing customers or have access to organizations requiring top secret or classified access.  In addition, several of these partners can bundle Cicero® with other software to provide a divisioncomprehensive solution to customers.  We are not materially dependent on any of Bertelsmann A.G, GEMMS, Genesis Technology Group Inc., Plan B Technologies Inc,
FI Systems Italia S.r.L. and Centrix Communications Services S.p.A.


                                       27



MARKETING

      these organizations. Generally, our agreements with such partners provide for price discounts based on their sales volume, with no minimum required volume.

Marketing

The target market for our products and services are large companies providingoperating contact centers in the financial services, insurance and or customer relationship management to a large
existing customer base.telecommunications industries, as well as users in the intelligence, security and law enforcement communities and other governmental organizations. Increasing competitiveness and consolidation is driving companies in such businesses to increase the efficiency and quality of their customer contact centers. As a result, customer contact centers are compelled by both economic necessity and internal mandates to find ways to increase internal efficiency, increase customer satisfaction, increase effective cross-selling, decrease staff turnover cost and leverage their investment in current information technology.

Our marketing staff has an in-depth understanding of the financial
services customer contact center software marketplace and the needs of these customers,
in that marketplace, as well as experience in all of the key marketing disciplines.  The staffThey also has broadhave knowledge of our productsthe financial services industry and servicesgovernment organizations that have focused on application integration solutions to address needs in mergers and how they can meet customer needs.

      acquisitions and homeland security.

24
Table of Contents

Core marketing functions include product marketing, marketing communications and strategic alliances.  We utilize focused marketing programs that are intended to attract potential customers in our target vertical industries and to promote Level 8our company and our brands. Our marketing programs are specifically directed at our target market such asmarkets, and include speaking engagements, public relations campaigns, focused trade shows and web site marketing, while devoting substantial resources to supporting the field sales team with high quality sales tools and collateral.ancillary material.  As product acceptance grows and our target markets increase, we will shift to broader marketing programs.

The marketing department also produces collateralancillary material for presentation or distribution to prospects, including demonstrations, presentation materials, white papers, case studies, articles, brochures, and data sheets. We also intend
to implement a high level strategic partnership program to educate

Research and support
our partners with a variety of programs, incentives and support plans.

      As part of our increased focus on the Cicero product line and initially
the financial services customer contact center market, we have significantly
decreased our marketing costs while increasing our marketing focus. We intend to
continue to fine-tune our sales and marketing staff through continued training
to meet our revised needs. We have decreased the marketing and sales budget to
conserve financial resources and appropriately direct expenditures in line with
our revised business strategy

RESEARCH AND PRODUCT DEVELOPMENT

      Product Development

In connection with the narrowing of our strategic focus, and in light of
the sale of our Systems Integration products, we have experienced an overall reduction in research and development costs. Since CiceroCicero® is a new product in a relatively untapped market, it is imperative to constantly enhance the feature sets and functionality of the product.

We incurred research and development expense of approximately $1,000,
$1,900,$155,000 for the three months ended March 31, 2008 and $5,400,approximately $569,000, $533,000, and $891,000 in 2003, 2002,2007, 2006, and 2001,2005, respectively. The increase in costs in 2007 as compared to 2006 reflects a charge for stock compensation expense of approximately $103,000 offset by general decreases in overhead costs and employee benefits. The decrease in research and development costs in 20032006 as compared with 2002 isto 2005 reflects the resultreduction in the number of the impact of the closing of the Berkeley, California facilityemployees by two plus associated overheads in June 2002. The
decrease in research and development costs in 2002 is related to the sale of the
Geneva AppBuilder line of business in October 2001. Approximately 100 employees,
including the Geneva AppBuilder software development group, were transferred to
the purchaser at that time.

      The markets for our products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. Our future success will depend to a substantial
degree upon our ability to enhance our existing products and to develop and
introduce, on a timely and cost-effective basis, new products and features that
meet changing customer requirements and emerging and evolving industry
standards.

      2006.

Our budgets for research and development are based on planned product introductions and enhancements. Actual expenditures, however, may significantly differ from budgeted expenditures. Inherent in the product development process are a number of risks. The development of new, technologically advanced software products is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends.

Competition

The introduction of new or enhanced products also requires us to manage
the transition from older productsmarkets in order to minimize disruption in customer
ordering patterns, as well as ensure that adequate supplies of new products can
be delivered to meet customer demand. There can be no assurance thatwhich we will
successfully develop, introduce or manage the transition to new products.


                                       28



      We have in the past,compete are highly competitive and may in the future, experience delays in the
introduction of our products, due to factors internal and external to our
business. Any future delays in the introduction or shipment of new or enhanced
products, the inability of such products to gain market acceptance or problems
associated with new product transitions could adversely affect our results of
operations, particularly on a quarterly basis.

COMPETITION

      The provision of custom contact center integration software includes a
large number of participants in various segments, is subject to rapid changes,
and is highly competitive.change. These markets are highly fragmented and served by numerous firms,firms. We believe that the competitive factors affecting the markets for our products and services include:

·
Product functionality and features;

·
Availability and quality of support services;

·
Ease of product implementation;

·
Price;

·
Product reputation; and

·
Our financial stability.

The relative importance of each of these factors depends upon the specific customer environment. Although we believe that our products and services can compete favorably, we may not be able to increase our competitive position against current and potential competitors. In addition, many companies choose to deploy their own information technology personnel or utilize system integrators to write new code or rewrite existing applications in an effort to develop integration solutions. As a result, prospective customers may decide against purchasing and implementing externally developed and produced solutions such as ours.

We compete with companies that utilize varying approaches to modernize, web-enable and integrate existing software applications:

25
Table of which address onlyContents

·
Portal software offers the ability to aggregate information at a single point, but not the ability to integrate transactions from a myriad of information systems on the desktop.  Plumtree is a representative company in the market.

·
Middleware software provides integration of applications through messages and data exchange implemented typically in the middle tier of the application architecture.  This approach requires modification of the application source code and substantial infrastructure investments and operational expense.  Reuters, TIBCO and IBM MQSeries are competitors in the middleware market.

·
CRM software offers application tools that allow developers to build product specific interfaces and custom applications.  This approach is not designed to be product neutral and is often dependent on deep integration with our technology.  Siebel is a representative product in the CRM software category.

·
Recently, there have been several companies that offer capabilities similar to our Cicero® software in that these companies advertise that they integrate applications without modifying the underlying code for those applications. OpenSpan is one company who advertises that they can non-invasively integrate at the point of contact or on the desktop.

Other competitors include Above All Software, Attachmate Corporation, Seagull Software Ltd. and Oracle. Our Cicero® product competes directly with other contact center problems and
solutions. Clients may elect to use their internal information systems resources
to satisfy their needs, rather than using thosesolutions offered by Level 8.

      The rapid growthMicrosoft, Corizon and long-term potential of the market for business
integration solutions to the contact centers of the financial services industry
make it an attractive market for new competition.Jacada. We expect additional competition from other established and emerging companies. Furthermore, our competitors may combine with each other, or other companies may enter our markets by acquiring or entering into strategic relationships with our competitors. Many of our current and possible future competitors have greater name recognition, a larger installed customer base and greater financial, technical, marketing and other resources than we have.

REPRESENTATIVE COMPETITORS FOR CICERO

o     Portal software offers the ability to aggregate information at a single
      point, but not the ability to integrate transactions from a myriad of
      information systems on the desktop. Plumtree is a representative company
      in the Portal market.

o     Middleware software provides integration of applications through messages
      and data exchange implemented typically in the middle tier of the
      application architecture. This approach requires modification of the
      application source code and substantial infrastructure investments and
      operational expense. Reuters, TIBCO and IBM MQSeries are representative
      products in the middleware market.

o     CRM software offers application tools that allow developers to build
      product specific interfaces and custom applications. This approach is not
      designed to be product neutral and is often dependent on deep integration
      with the company's CRM technology. Siebel is a representative product in
      the CRM software category.

      We believe that our ability to compete depends in part on a number of
competitive factors outside our control, including the ability of our
competitors to hire, retain and motivate senior project managers, the ownership
by competitors of software used by potential clients, the development by others
of software that is competitive with our products and services, the price at
which others offer comparable services and the extent of our competitors'
responsiveness to customer needs.

INTELLECTUAL PROPERTY

      


Intellectual Property

Our success is dependent upon developing, protecting and maintaining our intellectual property assets. We rely upon combinations of copyright, trademark and trade secrecy protections, along with contractual provisions, to protect our intellectual property rights in software, documentation, data models, methodologies, data processing systems and related written materials in the international marketplace. In addition, Merrill Lynch holds a patent with respect to the CiceroCicero® technology. Copyright protection is generally available under United States laws and international treaties for our software and printed materials. The effectiveness of these various types of protection can be limited, however, by variations in laws and enforcement procedures from country to country.  We use the registered trademarks "Level 8 Systems"“Cicero®” and  "Cicero", and
the trademarks "Level 8", "Level 8 Technologies", and "Geneva Integration
Broker".

      “Ensuredmail”

All other product and company names mentioned herein are for identification purposes only and are the property of, and may be trademarks of, their respective owners.

      There can be no assurance that the steps we have taken will prevent
misappropriation of our technology, and such protections do not preclude
competitors from developing products with functionality or features similar to
our products. Furthermore, there can be no assurance that third parties will not
independently develop competing technologies that are substantially equivalent
or superior to our technologies. Additionally, with respect to the Cicero line
of products, there can be no assurance that Merrill Lynch will protect its
patents or that we will have the resources to successfully pursue infringers.


                                       29



      Although we do not believe that our products infringe the proprietary
rights of any third parties, there can be no assurance that infringement claims
will not be asserted against our customers or us in the future. In addition, we
may be required to indemnify our distribution partners and end users for similar
claims made against them. Furthermore, we may initiate claims or litigation
against third parties for infringement of our proprietary rights or to establish
the validity of our proprietary rights. Litigation, either as a plaintiff or
defendant, would cause us to incur substantial costs and divert management
resources from productive tasks whether or not said litigation is resolved in
our favor, which could have a material adverse effect on our business operating
results and financial condition.

      As the number of software products in the industry increases and the
functionality of these products further overlaps, we believe that software
developers and licensors may become increasingly subject to infringement claims.
Any such claims, with or without merit, could be time consuming and expensive to
defend and could adversely affect our business, operating results and financial
condition.

EMPLOYEES

      


Employees

As of June 30, 2004,May 31, 2008 we employed 3021 employees, of which 17 are full time employees.  Our employees are not represented by a union or a collective bargaining agreement.

We believe that to fully implement our business plan we will be required to enhance our ability to work with the Microsoft Windows NT,Vista, Windows XP, and Windows 2000 operating systems as well as the Linux operating system by adding additional development personnel as well as additional direct sales personnel to complement our sales plan. Although we believe that we will be successful in attracting and retaining qualified employees to fill these positions, no assurance can be given that we will be successful in attracting and retaining these employees now or in the future.

26
Table of Contents
PROPERTIES

Our corporate headquarters are located in approximately 1,300 feet in
Farmingdale, New Jersey, pursuant to a six-month lease that will expire in 2005
with an option to renew for an additional six months. Theand United States operations group and administrative functions are based in offices of approximately 2,9565,038 square feet in our Cary, North Carolina office pursuant to a lease expiring in 2006. The research and development and customer support
groups are located in the Farmingdale, New Jersey, and Cary, North Carolina,
facilities.

                                2010.
LEGAL PROCEEDINGS

Various lawsuits and claims have been brought against us in the normal course of our business. In January 2003, an action was brought against us in the
Circuit Court of Loudon County, Virginia, for a breach of a real estate lease.
The case was settled in August 2003. Under the terms of the settlement
agreement, we agreed to assign a note receivable with recourse equal to the
unpaid portion of the note should the note obligor default on future payments.
The unpaid balance of the note was $545 and it matures in December 2007. We
assessed the probability of liability under the recourse provisions using a
weighted probability cash flow analysis and have recognized a long-term
liability in the amount of $131.

      In October 2003, we were served with a summons and complaint in the Superior Court of North Carolina regarding unpaid invoices for services rendered by one of our subcontractors.  The amount in dispute was approximately $200$200,000 and is included inrecorded as part of our accounts payable. Subsequent to March 31, 2004, we settled this litigation.  Under the terms of the settlement agreement, we agreed to pay a total of $189$189,000 plus interest over a 19-month period ending November 15, 2005. In March 2004, we were served with a summons and complaint in Superior
Court of North Carolina regarding a security deposit for a sublease in Virginia.
The amount in dispute is approximately $247. We disagree with this allegation
although we have reserved for this contingency.

      On August 5, 2004, we were notified that we were in default under an
existing lease agreement for office facilities in Princeton, New Jersey. The
amount of the default is approximately $65. We do not plan on curing the default
and will vacate the premises. We have estimated our liability for future lease
payments and recorded a chargeare in the amountprocess of $98 innegotiating a series of payments for the accompanying
Statementremaining liability of Operations. We have secured approximately 1,300 square feet of new
office space located at 1433 State Highway 34, Farmingdale, New Jersey, under a
short term lease.

      $80,000.

Under the indemnification clause of the Company'sour standard reseller agreements and software license agreements, the Company agreeswe agree to defend the reseller/licensee against third party claims asserting infringement by the
Company'sour products of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/licensee.


                                       30



           MANAGEMENT'S 

27
Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL INFORMATION

      Level 8 Systems
This prospectus contains certain forward-looking statements, that address our future results, including certain projections and business trends. Assumptions relating to forward-looking statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. When used in this prospectus, the words “estimate,” “project,” “intend,” “believe,” “expect” and similar expressions are intended to identify forward- looking statements. Although we believe that assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate, and we may not realize the results contemplated by the forward-looking statement. Management decisions are subjective in many respects and susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our business strategy or capital expenditure plans that may, in turn, affect our results of operations. In light of the significant uncertainties inherent in the forward-looking information included in this prospectus, you should not regard the inclusion of such information as our representation that we will achieve any strategy, objective or other plans, and are cautioned not to place undue reliance on these forward looking statements. The forward-looking statements contained in this prospectus speak only as of the date of this prospectus as stated on the front cover, and we have no obligation to update publicly or revise any of these forward-looking statements. These and other statements, which are not historical facts are based largely on management’s current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those contemplate by such forward-looking statements. These risk and uncertainties include, among others, the risks and uncertainties described in “Risk Factors” and the following:
·
There is substantial doubt as to whether we can continue as a going concern;

·
We have a history of losses and expect that we will continue to experience losses at least through the third quarter of 2008;

·
We develop new and unproven technology and products;

·
We depend on an unproven strategy for ongoing revenue;

·
Economic conditions could adversely affect our revenue growth and cause us not to achieve desired revenue;
·
The “penny stock” rule will limit  brokers and dealers trading in our common stock, making the market for our common stock less liquid which could cause the price of our stock to decline;

·
Because we cannot accurately predict the amount and timing of individual sales, our quarterly operating results may vary significantly, which could adversely impact our stock price;

·
Loss of key personnel associated with Cicero® development could adversely affect our business;

·
Different competitive approaches or internally developed solutions to the same business problem could delay or prevent adoption of Cicero®;

·
Our ability to compete may be subject to factors outside our control;

·
The markets for our products are characterized by rapidly changing technologies, evolving industry standards, and frequent new product introductions;

·
We may face damage to the reputation of our software and a loss of revenue if our software products fail to perform as intended or contain significant defects;
·
We may be unable to enforce or defend our ownership and use of proprietary and licensed technology;

·
Our business may be adversely impacted if we do not provide professional services to implement our solutions;
·
Because our software could interfere with the operations of customers, we may be subject to potential product liability and warranty claims by these customers;
28
Table of Contents

·
We have not paid any cash dividends on our common stock and it is likely that no cash dividends will be paid in the future; and

Provisions of our charter and bylaws could deter takeover attempts.

General Information

Cicero is a global provider of business integration software that enables organizations to integrate new and existing information and processes at the desktop with our CiceroCicero® software product.  Business integration software addresses the emerging need for a company's information systems to deliver enterprise-wide views of the company's business information processes. We also provide email encryption products that address information and security compliance from the individual to the enterprise.

In addition to software products, Level 8we also providesprovide technical support, training and consulting services as part of itsour commitment to providing itsour customers industry-leading integration solutions.  Level 8'sOur consulting team has in-depth experience in developing successful enterprise-class solutions as well as valuable insight into the business information needs of customers in the Global 5000.  Level 8 offersWe offer services around itsour integration  and encryption software products.

This discussion contains forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities, liquidity and capital resources and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company noteswe note that a variety of factors could cause its actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements

Business Strategy

Based upon the Company's forward-looking
statements. See "Forward Lookingcurrent business environment in which we operate, the economic characteristics of its operating segment and Cautionary Statements."

      The Company's results of operations include the operationsmanagement’s view of the Company
andbusiness, a revision in terms of aggregation of its subsidiaries fromsegments was appropriate. Therefore the date of acquisition. During 2002,segment discussion outlined below clarifies the Company
identified the assets of the Systems Integrationadjusted segment structure as being held for sale
and thus a discontinued operation. Accordingly, the assets and liabilitiesdetermined by management under SFAS No. 131. All prior year amounts have been reclassifiedrestated to assets held for sale and the results of operations of that
segment are now reclassified as loss from discontinued operations.

      In August 2000, the Company acquired the rights to Cicero, a comprehensive
integrated desktop computer environment from Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") in exchange for 1,000,000 shares of its
common stock valued at $22,750. The cost of the technology acquired had been
capitalized and amortized over a three-year period. In January 2002, the Company
extended the exclusive perpetual license to develop and sell the Cicero
application integration software from Merrill Lynch.

      Dueconform to the Company's acquisition and divestiture activities, year-to-year
comparisons of results of operations are not necessarily meaningful.
Additionally, as a result of the Company's pursuit of a growth strategy focusing
on its software product sales and synergies gained as a result of eliminating
duplicative functions, the results of operations are significantly different
than the result of combining the previous operations of each acquired company
into Level 8. Pro forma comparisons are therefore not necessarily meaningful. In
2001, the Company began to shift its primary focus from selling multiple
Enterprise Application Integration ("EAI") products to selling Cicero, a desktop
integration package, to the financial services industry with a decreased focus
on services. During the last two fiscal quarters of 2001, the Company sold most
of the products that comprised its Messaging and Application Engineering
segment.

      In 2002, the Company continued to reorganize and concentrate on the
emerging desktop integration market and continued to dispose of non-strategic
assets with the sale of the Star SQL and CTRC products from the Messaging and
Application Engineeringnew reporting segment and the Geneva Enterprise Integrator and
Business Process Automator from what was formerly the Systems Integration
segment.

BUSINESS STRATEGY

      During the second quarter of 2001, management reassessed how the Company
would be managed and how resources would be allocated. At that time management
then madestructure.

Management makes operating decisions and assessedassesses performance of the Company'sour operations based on one reportable segment, the following reportableSoftware product segment.  Prior to this change we had two separate segments: (1) Desktop Integration (2) System Integration and (3)Messaging. The Messaging and Application Engineering. Previous
reportable segments were: (1) software, (2) maintenance, (3) services, and (4)
research and development. As noted above, the assets comprising the System
Integration segment were identified as being held for resale and accordingly,
the resultsbusiness has always been an immaterial part of operations have been reclassified to gain or loss from a
discontinuedour overall business and no segment information is presented.


                                       31
generally all its sales efforts are focused on the Cicero product. As such, we have elected to combine the two products into one reportable segment.

The principalSoftware product in the Desktop Integration segment is Cicero. Cicerocomprised of the Cicero® product and the Ensuredmail product.  Cicero® is a business integration software product that maximizes end-user productivity, streamlines business operations and integrates disparate systems and applications.

      The products that compriseapplications, while renovating or rejuvenating older legacy systems by making them usable in the Messaging and Application Engineering
segment were Geneva Integration Broker, Geneva Message Queuing, Geneva XIPC and
Geneva AppBuilder. Geneva Integration Broker is a transport independent message
broker that enables an organization to rapidly integrate diverse business systems regardless of platform, transport, format or protocol. Geneva Message
Queuingprocesses. Ensuredmail is an enterprise connectivity product for Microsoft and non-Microsoft
applications. The primary use is for transactional, once and only once
connectivityencrypted email technology that can reside on either the server or the desktop.

29
Table of Window-based Web applications to back-office information
resources like mainframes and other legacy systems. Geneva XIPC provides similar
deliveryContents

Results of information between applications. While Geneva Message Queuing is
based around a Microsoft standard, Geneva XIPC is for use with Linux and other
brands of UNIX operating systems. Geneva AppBuilder is a set of application
engineering tools that assists customers in developing, adapting and managing
enterprise-wide computer applications for the Internet/intranets and
client/server networks.

      On October 1, 2001, the Company completed the sale of its Geneva
AppBuilder product. Under the terms of the agreement, the Company sold the
rights, title and interest in the Geneva AppBuilder product along with all
receivables, unbilled and deferred revenues as well as all maintenance
contracts. The Geneva AppBuilder product accounted for approximately 85% of
total revenue within the Messaging and Application Engineering segment and
approximately 99% of total revenue for all segments. As more fully described in
Note 2 to the Consolidated Financial Statements, the Company received
approximately $19 million in cash plus a note receivable for $1 million due
February 2002. The Company subsequently liquidated $22 million of its short-term
debt using the proceeds received and cash on hand. As part of the sale
transaction, approximately 100 employees were transferred over to the acquiring
company who also assumed certain facility and operating leases and entered into
a sublease arrangement at the Cary, North Carolina facility. While future
revenues have been negatively impacted by the sale of Geneva AppBuilder, the
associated costs of doing business have been positively impacted by the overall
reduction in operating costs.

      During the quarter ended September 30, 2001, the Company sold two of its
messaging products - Geneva Message Queuing and Geneva XIPC to Envoy
Technologies, Inc. for $50 in cash and a note receivable for $400. Under the
terms of the agreement, Envoy acquired all rights, title and interest to the
products along with all customer and maintenance contracts.

RESULTS OF OPERATIONS

      Operations

The following table sets forth, for the years indicated, the Company'sour results of continuing operations expressed as a percentage of revenue and presents information for the three categories of revenue.


                                       32

                                                                                      SIX MONTHS ENDED
                                               YEAR ENDED DECEMBER 31,                    JUNE 30,
                                               -----------------------                    --------
                                            2003          2002          2001         2004           2003
                                          -------       -------       -------       -------       -------

Revenue:
    Software ........................        19.3%         48.1%          9.6%         32.4%         24.7%
    Maintenance .....................        59.6%         18.4%         53.3%         43.9%         52.2%
    Services ........................        21.1%         33.5%         37.1%         23.7%         23.1%
                                          -------       -------       -------       -------       -------
            Total ...................       100.0%        100.0%        100.0%        100.0%        100.0%

Cost of revenue:
    Software ........................       783.4%        238.5%         85.3%      1,323.7%        525.6%
    Maintenance .....................        70.4%          5.8%         18.7%         59.5%         61.0%
    Services ........................       171.3%         29.0%         31.6%        170.0%        140.0%
                                          -------       -------       -------       -------       -------
            Total ...................     1,025.1%        273.3%        135.6%      1,553.2%        726.6%

Gross margin (loss) .................      (925.1)%      (173.3)%       (35.6)%     (1,453.2)%     (626.6)%

Operating expenses:
    Sales and marketing .............       317.0%         90.6%         63.6%        204.8%        330.9%
    Research and product development        191.9%         61.3%         30.9%        179.9%        158.8%
    General and administrative ......       482.6%        126.9%         55.5%        275.0%        410.0%
    Amortization of intangible assets         0.0%          0.0%         36.1%          0.0%          0.0%
    Impairment of intangible assets .         0.0%          0.0%         45.7%        176.3%          0.0%
    (Gain)/loss on disposal of assets        78.3%         14.9%        (36.6)%         0.0%         (4.1)%
    Restructuring, net ..............      (157.4)%        41.9%         49.8%          0.0%          0.0%
                                          -------       -------       -------       -------       -------
            Total ...................       912.4%        335.6%        245.0%        836.0%        895.6%

    Loss from operations ............     (1,837.5)%     (508.9)%      (280.6)%     (2,289.2)%   (1,522.2)%
    Other income (expense), net .....       (25.5)%        80.1%        (51.0)%        62.8%         (8.7)%
                                          -------       -------       -------       -------       -------
    Loss before taxes ...............     (1,863.0)%     (428.8)%      (331.6)%     (2,226.4)%   (1,530.9)%
    Income tax provision (benefit) ..         0.0%         (5.0)%         2.9%          0.0%          0.0%
                                          -------       -------       -------       -------       -------

Loss from continuing operations .....     (1,863.0)%     (423.8)%      (334.5)%     (2,226.4)%   (1,530.9)%
Loss from discontinued operations ...       (24.9)%      (162.5)%      (271.2)%        (4.8)%       (20.6)%
                                          -------       -------       -------       -------       -------
    Net loss ........................     (1,887.9)%     (586.3)%      (605.7)%     (2,231.2)%   (1,551.5)%
                                          =======       =======       =======       =======       =======
 
 
Three Months ended,
March 31,
 
 
Year Ended December 31,
 
 
 
2008
 
 
2007
 
 
2007
 
 
2006
 
 
2005
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Software
 
 
42.6
%
 
 
0.0
%
 
 
27.7
%
 
 
21.4
%
 
 
51.9
%
Maintenance
 
 
28.3
%
 
 
17.7
%
 
 
16.6
%
 
 
12.3
%
 
 
18.7
%
Services
 
 
29.1
%
 
 
82.3
%
 
 
55.7
%
 
 
66.3
%
 
 
29.4
%
Total
 
 
100.0
%
 
 
100.0
%
 
 
100.0
%
 
 
100.0
%
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Software
 
 
1.5
%
 
 
0.0
%
 
 
1.0
%
 
 
0.9
%
 
 
2.0
%
Maintenance
 
 
15.1
%
 
 
22.8
%
 
 
14.6
%
 
 
21.8
%
 
 
44.6
%
Services
 
 
34.5
%
 
 
48.2
%
 
 
36.2
%
 
 
56.2
%
 
 
104.7
%
Total
 
 
51.1
%
 
 
72.0
%
 
 
51.8
%
 
 
78.9
%
 
 
151.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin (loss)
 
 
48.9
%
 
 
28.0
%
 
 
48.2
%
 
 
21.1
%
 
 
(51.3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
 
 
53.8
%
 
 
59.0
%
 
 
43.5
%
 
 
35.6
%
 
 
79.9
%
Research and product development
 
 
33.0
%
 
 
59.5
%
 
 
31.5
%
 
 
54.8
%
 
 
113.5
%
General and administrative
 
 
63.4
%
 
 
111.2
%
 
 
75.0
%
 
 
124.1
%
 
 
144.8
%
(Gain) on disposal of assets
 
 
0.0
%
 
 
0.0
%
 
 
0.0
%
 
 
(2.5
)%
 
 
0.0
%
Total
 
 
150.2
%
 
 
229.7
%
 
 
150.0
%
 
 
212.0
%
 
 
338.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from operations
 
 
(101.3
)%
 
 
(207.7
)%
 
 
(101.8
)%
 
 
(190.9
)%
 
 
(389.5
)%
Other  (expense), net
 
 
(1.9
)%
 
 
(26.6
)%
 
 
(7.5
)%
 
 
(117.5
)%
 
 
(79.4
)%
Loss before taxes
 
 
(103.2
)%
 
 
(228.0
)%
 
 
(109.3
)%
 
 
(308.4
)%
 
 
(468.9
)%
Income tax provision (benefit)
 
 
0.0
%
 
 
0.0
%
 
 
0.0
%
 
 
0.0
%
 
 
0.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
 
(103.2
)%
 
 
(228.0
)%
 
 
(109.3
)%
 
 
(308.4
)%
 
 
(468.9
)%


 The following table sets forth data for total revenue for continuing operations by geographic origin as a percentage of total revenue for the periods indicated:

                                  YEAR ENDED DECEMBER 31,    SIX MONTHS ENDED JUNE 30,
                                  -----------------------    -------------------------
                                2003       2002       2001       2004       2003
                                ----       ----       ----       ----       ----

United States ...........        90%        96%        36%        98%        87%
Europe ..................         9%         4%        55%         2%        12%
Asia Pacific ............        --         --          3%        --         --
Middle East .............        --         --          4%        --         --
Other ...................         1%        --          2%        --          1%
                                           ---        ---        ---        ---
                                           ---        ---        ---        ---
    Total ...............       100%       100%       100%       100%       100%
                                           ===        ===        ===        ===



                                       33

 
 
2007
 
 
2006
 
 
2005
 
United States
 
 
100
%
 
 
100
%
 
 
100
%

The table below presents information about reported segments for the twelve
monthsyears ended December 31, 2003, 20022007, 2006, and 2001:


                                                         MESSAGING/
                                            DESKTOP     APPLICATION
                                         INTEGRATION    ENGINEERING     TOTAL
                                         -----------     -----------     -----
2003:
Total revenue .....................      $    466       $     64       $    530
Total cost2005 (in thousands):

 
 
Three Months ended,
March 31,
 
 
For the year ended December 31,
 
 
 
2008
 
 
2007
 
 
2007
 
 
2006
 
 
2005
 
Total revenue
 
$
470
 
 
$
232
 
 
$
1,808
 
 
$
972
 
 
$
785
 
Total cost of revenue
 
 
240
 
 
 
167
 
 
 
937
 
 
 
767
 
 
 
1,188
 
Gross margin (loss)
 
 
230
 
 
 
65
 
 
 
871
 
 
 
205
 
 
 
(403
)
Total operating expenses
 
 
706
 
 
 
533
 
 
 
2,711
 
 
 
2,085
 
 
 
2,655
 
Segment loss
 
$
(476
)
 
$
(468
)
 
$
(1,840
)
 
$
(1,880
)
 
$
(3,058
)

30
Table of revenue .............         5,371             62          5,433
Gross margin (loss) ...............        (4,905)             2         (4,903)
Total operating expenses ..........         4,999            256          5,255
Segment profitability (loss) ......      $ (9,904)      $   (254)      $(10,158)

2002:
Total revenue .....................      $  2,148       $    953       $  3,101
Total cost of revenue .............         6,527          1,950          8,477
Gross margin (loss) ...............        (4,379)          (997)        (5,376)
Total operating expenses ..........         8,211            434          8,645
Segment profitability (loss) ......      $(12,590)      $ (1,431)      $(14,021)

2001:
Total revenue .....................      $    134       $ 17,223       $ 17,357
Total cost of revenue .............         9,427         14,109         23,536
Gross margin (loss) ...............        (9,293)         3,114         (6,179)
Total operating expenses ..........        18,858          7,179         26,037
Segment profitability (loss) ......      $(28,151)      $ (4,065)      $(32,216)


The table below presents information about reported segments for the six months
ended June 30, 2004 and 2003:


                                                        MESSAGING AND
                                         DESKTOP         APPLICATION
                                        INTEGRATION      ENGINEERING      TOTAL
                                        -----------      -----------      -----

2004:
Total revenue .....................       $   305        $    28        $   333
Total cost of revenue .............           214          5,172          4,958
Gross margin (loss) ...............        (4,653)          (186)        (4,839)
Total operating expenses ..........         1,959            238          2,197
Segment profitability (loss) ......       $(6,612)       $  (424)       $(7,036)

2003:
Total revenue .....................       $   275        $    45        $   320
Total cost of revenue .............         2,252             73          2,325
Gross margin (loss) ...............        (1,977)           (28)        (2,005)
Total operating expenses ..........         2,736            143          2,879
Segment profitability (loss) ......       $(4,713)       $  (171)       $(4,884)



                                       34
Contents

A reconciliation of segment operating expenses to total operating expense follows:


                                          YEAR ENDED DECEMBER 31,             SIX MONTHS ENDED JUNE 30,
                                          -----------------------             -------------------------
                                        2003          2002         2001          2004         2003
                                      --------      --------     --------      --------     --------
                                                                                    (unaudited)

Segment operating expenses ......     $  5,255      $  8,645     $ 26,037      $  2,197     $  2,879
Amortization of intangible assets           --            --        6,259            --           --
Write-off of intangible assets ..           --            --        7,929           587           --
(Gain)/loss on disposal of assets          415           461       (6,345)           --          (13)
Restructuring, net ..............         (834)        1,300        8,650            --           --
                                      --------      --------     --------      --------     --------
Total operating expenses ........     $  4,836      $ 10,406     $ 42,530      $  2,784  $     2,866
                                      ========      ========     ========      ========     ========
follows (in thousands):

 
 
Three Months ended,
March 31,
 
 
For the year ended December 31,
 
 
 
2008
 
 
2007
 
 
2007
 
 
2006
 
 
2005
 
Segment operating expenses
 
$
706
 
 
$
533
 
 
$
2,711
 
 
$
2,085
 
 
$
2,655
 
(Gain) on disposal of assets
 
 
--
 
 
 
--
 
 
 
--
 
 
 
(24
)
 
 
--
 
Total operating expenses
 
$
706
 
 
$
533
 
 
$
2,711
 
 
$
2,061
 
 
$
2,655
 

A reconciliation of total segment profitability to net loss as follows:


                                                    YEAR ENDED DECEMBER 31,             SIX MONTHS ENDED JUNE 30,
                                                    -----------------------             -------------------------
                                                 2003          2002          2001          2004          2003
                                               --------      --------      --------      --------      --------
                                                                                              (unaudited)

Total segment profitability (loss) .......     $(10,158)     $(14,021)     $(32,216)     $ (7,036)     $ (4,884)
Amortization of intangible assets ........           --            --        (6,259)           --            --
Impairment of intangible assets ..........           --            --        (7,929)         (587)           --
Gain/(loss) on disposal of assets ........         (415)         (461)        6,345            --           486
Restructuring ............................          834        (1,300)       (8,650)           --            --
Interest and other income/(expense), net .         (135)        2,485        (8,850)          209           (28)
                                               --------      --------      --------      --------      --------
Net loss before provision for income taxes     $ (9,874)     $(13,297)     $(57,559)     $ (7,414)     $ (5,398)
                                               ========      ========      ========      ========      ========



      COMPARISON OF SIX MONTHS ENDED JUNE 30, 2004 TO JUNE 30, 2003

      REVENUE AND GROSS MARGIN. follows for the fiscal years ended December 31 (in thousands):

 
 
Three Months ended,
March 31,
 
 
For the year ended December 31,
 
 
 
2008
 
 
2007
 
 
2007
 
 
2006
 
 
2005
 
Total segment profitability (loss)
 
$
(476
)
 
$
(468
)
 
$
(1,840
)
 
$
(1,880
)
 
$
(3,058
)
Gain on disposal of assets
 
 
--
 
 
 
--
 
 
 
--
 
 
 
24
 
 
 
--
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest and other income/(expense), net
 
 
(9
)
 
 
(61
)
 
 
(135
)
 
 
(1,141
)
 
 
(623
)
Net loss
 
$
(485
)
 
$
(529
)
 
$
(1,975
)
 
$
(2,997
)
 
$
(3,681
)


Three Months Ended March 31, 2008 and 2007

We have three categories of revenue: software products, maintenance, and services. Software products revenue is comprised primarily of fees from licensing our proprietary software products. Maintenance revenue is comprised of fees for maintaining, supporting, and providing periodic upgrades to our software products. Services revenue is comprised of fees for consulting and training services related to our software products.

Our revenues vary from quarter to quarter, due to market conditions, the budgeting and purchasing cycles of customers and the effectiveness of our sales force.  We do not typically have any material backlog of unfilled software orders
and product revenue in any quarter is substantially dependent upon orders
received in that quarter. Because our operating expenses are based on
anticipated revenue levels and are relatively fixed over the short term,
variations in the timing of the recognition of revenue can cause significant
variations in operating results from quarter to quarter. Fluctuations in
operating results may result in volatility of the price of our common stock.

      Total revenues increased 4%, or $13, for the six months ended June 30,
2004 from the same period in 2003. The increase in revenues, although
insignificant in terms of overall dollars, was primarily the result of two new
installations of pilot programs. We believe that these programs will lead to
future deployment of our Cicero software. Despite these two engagements, we
continue to struggle for market acceptance. We believe that there is a number of
factors that contribute to this development, including, but not limited to, the
relatively new category for the product, the environment for IT spending, and
the fragility of our financial condition. While we are actively pursuing
strategic partners to resell the product and we have made significant progress
on displaying the products capabilities to targeted customers, there is no
assurance that we will be successful in this endeavor. Gross margin/(losses)
were (1,453)% for the six months ended June 30, 2004 and (626)% for the six
months ended June 30, 2003.


                                       35



      SOFTWARE PRODUCTS. Software product revenue increased approximately 37%,
or $29, for the six months ended June 2004 from those results achieved in 2003
and is primarily attributable to two active projects.

      The gross margin (loss) on software products was (3,981)% for the six
months ended June 30, 2004 and reflects the amortization and impairment of
acquired software not offset by revenues. In the similar period in 2003, gross
margin (loss) on software products was (2,029)%. Cost of software is composed
primarily of amortization of software product technology, amortization of
capitalized software costs for internally developed software and royalties to
third parties, and to a lesser extent, production and distribution costs. The
increase in cost of software was primarily due to the impairment to the Cicero
technology of approximately $2,844.

      We expect to see significant increases in software sales related to the
Desktop Integration segment coupled with improving margins on software products
as Cicero gains acceptance in the marketplace. Our expectations are based on a
review of the sales cycle that has developed around the Cicero product since its
release, a review of the pipeline of prospective customers and their anticipated
capital expenditure commitments and budgeting cycles, as well as the status of
in-process proof of concepts or beta sites with select corporations. The
Messaging and Application Engineering segment revenue is expected to increase
marginally with on-line sales of its products.

      MAINTENANCE. Maintenance revenue for the six months ended June 30, 2004
decreased by approximately 13%, or $21, as compared to the similar period for
2003. The decline in overall maintenance revenues is primarily due to the
termination of one maintenance contract for the Geneva Integration Broker
product within the Messaging and Application Engineering segment.

      The Desktop Integration segment accounted for approximately 95% of total
maintenance revenue for the six months ended June 30, 2004. The Messaging and
Application Engineering segment accounted for approximately 5% of total
maintenance revenues. By comparison, the Desktop Integration segment accounted
for 74% of total maintenance revenue for the six months ended June 30, 2003. The
increase in the Desktop Integration maintenance as a percentage of the total is
primarily due to amortization of deferred maintenance revenues that resulted
from 2003 maintenance contracts.

      Cost of maintenance is comprised of personnel costs and related overhead
and the cost of third-party contracts for the maintenance and support of our
software products. Gross margin (loss) on maintenance products for the six
months ended June 30, 2004 and June 30, 2003 was (36)%, and (17)%, respectively.

      The Desktop Integration segment had a negative gross margin on maintenance
revenues of 43% for the six months ended June 30, 2004. The Messaging and
Application Engineering segment incurred no cost of maintenance resulting in a
gross margin of approximately 100% for the quarter.

      Maintenance revenues are expected to increase in the Desktop Integration
segment and increase slightly in the Messaging and Application Engineering
segment. The cost of maintenance should remain constant for the Desktop
Integration segment and the Messaging and Application Engineering segment.

      SERVICES. We recognized $79 services revenue for the six months ended June
30, 2004. Services revenues are expected to increase for the Desktop Integration
segment as the Cicero product gains acceptance. The Messaging and Application
Engineering segment service revenues should be insignificant as the majority of
the relevant products are commercial off-the-shelf applications.

      Cost of services primarily includes personnel and travel costs related to
the delivery of services. Services gross margins (losses) were (616)% for the
six months ended June 30, 2004 and (505)% for the six months ended June 30,
2003.

      SALES AND MARKETING. Sales and marketing expenses primarily include
personnel costs for salespeople, marketing personnel, travel and related
overhead, as well as trade show participation and promotional expenses. Sales
and marketing expenses decreased by 36%, or approximately $377, for the six
months ended June 30, 2004 due to a reduction in our sales and marketing
workforce and sales compensation structure. Specifically, we reduced our
headcount within sales and marketing by two employees and changed the
compensation structure to lower fixed costs and increase variable success-based
costs.

      Our emphasis for the sales and marketing groups will be the Desktop
Integration segment.


                                       36



      RESEARCH AND DEVELOPMENT. Research and development expenses primarily
include personnel costs for product authors, product developers and product
documentation and related overhead. Research and development expense increased
by 18%, or approximately $91, in the six months ended June 30, 2004 as compared
to the same period in 2003. The increase in costs in 2004 reflects the
additional costs of encryption technology development personnel as well as
certain other costs being reclassified for overhead purposes.

      We intend to continue to make a significant investment in research and
development of our Cicero product while enhancing efficiencies in this area.

      GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
personnel costs for the legal, financial, human resources and administrative
staff, related overhead, and all non-allocable corporate costs of operating our
company. General and administrative expenses for the six months ended June 30,
2004 decreased by 30%, or $396, over the same period in the prior year. The
reason for the decrease in costs is the reduction of IT service staff who have
been moved to add resources for customer maintenance support and an overall
reduction in the costs of business fees.

      General and administrative expenses are expected to decrease slightly
going forward as we continue to create certain efficiencies and consolidations.

      RESTRUCTURING. At June 30, 2003, our accrual for restructuring was $515,
which was primarily comprised of excess facility costs and which we believed
represented our remaining cash obligations for the restructuring changes. In
August 2003, we settled litigation relating to these excess facilities.
Accordingly, we reversed the restructuring balance during the fourth quarter of
2003. Under the terms of the settlement agreement, we agreed to assign the note
receivable from the sale of Geneva to EM Software Solutions, Inc., with recourse
equal to the unpaid portion of the note receivable should the note obligor, EM
Software Solutions, Inc., default on future payments. The current unpaid
principal portion of the note receivable assigned is approximately $432 and
matures in December 2007. We assessed the probability of liability under the
recourse provisions using a probability weighted cash flow analysis and we have
recognized a long-term liability in the amount of $131.

      CHANGE IN FAIR VALUE OF WARRANT LIABILITY. We have recorded a warrant
liability for derivatives in accordance with EITF 00-19 for warrants exercisable
into shares of our common stock with redemption features outside of our control.
The fair value of the warrants as of June 30, 2004 has been determined using
valuation techniques consistent with the valuation performed as of December 31,
2003 and recorded as a warrant liability. As a result of the valuation, we have
recorded a reduction in the fair value of the warrant liability of $198.

      PROVISION FOR TAXES. Our effective income tax rate for continuing
operations differs from the statutory rate primarily because an income tax
benefit was not recorded for the net loss incurred in the first and second
quarters of 2004 or 2003. Because of our recurring losses, the deferred tax
assets have been fully offset by a valuation allowance.

      SEGMENT PROFITABILITY. Segment profitability represents loss before income
taxes, interest and other income (expense), amortization of goodwill,
restructuring charges, gain (loss) on sale of assets, and impairment charges.
Segment profitability (loss) for the six months ended June 30, 2004 was
approximately ($7,036), as compared to ($4,884) for the six months ended June
30, 2003. The increase in the loss before income taxes, interest and other
income and expense, restructuring charges, and gain or loss on sale of assets is
primarily attributable to the impairment charges to the software technology
taken in 2004.

      Segment profitability is not a measure of performance under accounting
principles generally accepted in the United States of America, and should not be
considered as a substitute for net income, cash flows from operating activities
and other income or cash flow statement data prepared in accordance with
accounting principles generally accepted in the United States of America, or as
a measure of profitability or liquidity. We have included information concerning
segment profitability as one measure of our cash flow and historical ability to
service debt and because we believe investors find this information useful.
Segment profitability as defined herein may not be comparable to similarly
titled measures reported by other companies.

      IMPACT OF INFLATION. Inflation has not had a significant effect on our
operating results during the periods presented.


                                       37


      COMPARISON OF QUARTER ENDED JUNE 30, 2004 TO JUNE 30, 2003

      REVENUE AND GROSS MARGIN. We have three categories of revenue: software
products, maintenance, and services. Software products revenue is comprised
primarily of fees from licensing our proprietary software products. Maintenance
revenue is comprised of fees for maintaining, supporting, and providing periodic
upgrades to our software products. Services revenue is comprised of fees for
consulting and training services related to our software products.

      Our revenues vary from quarter to quarter, due to market conditions, the
budgeting and purchasing cycles of customers and the effectiveness of our sales
force. We do not typically have any material backlog of unfilled software orders
and product revenue in any quarter is substantially dependent upon orders
received in that quarter. Because our operating expenses are based on
anticipated revenue levels and are relatively fixed over the short term,
variations in the timing of the recognition of revenue can cause significant
variations in operating results from quarter to quarter. Fluctuations in
operating results may result in volatility of the price of our common stock.

      Total revenues increased 41% for the quarter ended June 30, 2004 from the
same period in 2003. The increase in revenues, was primarily the result of a
pilot program that we are currently undergoing with one major company and an
initial installation with another major company. We believe that these programs
will lead to future deployment of our Cicero software. Despite these two
engagements, we continue to struggle for market acceptance. We believe that
there is a number of factors that contribute to this development, including, but
not limited to, the relatively new category for the product, the environment for
IT spending, and the fragility of our financial condition. While we are actively
pursuing strategic partners to resell the product and we have made significant
progress on displaying the products capabilities to targeted customers, there is
no assurance that we will be successful in this endeavor. Gross margin/(losses)
were (1,528)% for the quarter ended June 30, 2004 and (547)% for the quarter
ended June 30, 2003.

      SOFTWARE PRODUCTS. Software product revenue increased approximately 128%,
or $55, in 2004 from those results achieved in 2003 and is primarily
attributable to two active projects.

      The gross margin (loss) on software products was (3,664)% for the quarter
ended June 30, 2004 and reflects the amortization and impairment of acquired
software not offset by revenues. In the similar quarter in 2003, gross margin
(loss) on software products was (1,865)%. Cost of software is composed primarily
of amortization of software product technology, amortization of capitalized
software costs for internally developed software and royalties to third parties,
and to a lesser extent, production and distribution costs. The increase in cost
of software was primarily due to the impairment to the Cicero technology of
approximately $2,844.

      We expect to see significant increases in software sales related to the
Desktop Integration segment coupled with improving margins on software products
as Cicero gains acceptance in the marketplace. Our expectations are based on a
review of the sales cycle that has developed around the Cicero product since its
release, a review of the pipeline of prospective customers and their anticipated
capital expenditure commitments and budgeting cycles, as well as the status of
in-process proof of concepts or beta sites with select corporations. The
Messaging and Application Engineering segment revenue is expected to increase
marginally with on-line sales of its products.

      MAINTENANCE. Maintenance revenue for the quarter ended June 30, 2004
decreased by approximately 13%, or $11, as compared to the similar quarter for
2003. The decline in overall maintenance revenues is primarily due to the
termination of one maintenance contract for the Geneva Integration Broker
product within the Messaging and Application Engineering segment.

      The Desktop Integration segment accounted for approximately 96% of total
maintenance revenue for the quarter. The Messaging and Application Engineering
segment accounted for approximately 4% of total maintenance revenues. The
increase in the Desktop Integration maintenance as a percentage of the total is
primarily due to amortization of deferred maintenance revenues that resulted
from 2003 maintenance contracts.

      Cost of maintenance is comprised of personnel costs and related overhead
and the cost of third-party contracts for the maintenance and support of our
software products. Gross margin (loss) on maintenance products for the quarters
ended June 30, 2004 and June 30, 2003 was (29)%, and (23)%, respectively.

      The Desktop Integration segment had a negative gross margin on maintenance
revenues of 34% for the quarter ended June 30, 2004. The Messaging and
Application Engineering segment incurred no cost of maintenance resulting in a
gross margin of approximately 100% for the quarter.


                                       38



      Maintenance revenues are expected to increase in the Desktop Integration
segment and increase slightly in the Messaging and Application Engineering
segment. The cost of maintenance should remain constant for the Desktop
Integration segment and the Messaging and Application Engineering segment.

      SERVICES. We recognized services revenue of $79 for the quarter ended June
30, 2004. Services revenues are expected to increase for the Desktop Integration
segment as the Cicero product gains acceptance. The Messaging and Application
Engineering segment service revenues should be insignificant as the majority of
the relevant products are commercial off-the-shelf applications.

      Cost of services primarily includes personnel and travel costs related to
the delivery of services. Services gross margins (losses) were (262)% for the
quarter ended June 30, 2004 and (294)% June 30, 2003.

      SALES AND MARKETING. Sales and marketing expenses primarily include
personnel costs for salespeople, marketing personnel, travel and related
overhead, as well as trade show participation and promotional expenses. Sales
and marketing expenses decreased by 32%, or approximately $161, due to a
reduction in our sales and marketing workforce and sales compensation structure.
Specifically, we reduced our headcount within sales and marketing by two
employees and changed the compensation structure to lower fixed costs and
increase variable success-based costs.

      Our emphasis for the sales and marketing groups will be the Desktop
Integration segment.

      RESEARCH AND DEVELOPMENT. Research and development expenses primarily
include personnel costs for product authors, product developers and product
documentation and related overhead. Research and development expense increased
by 13%, or approximately $32, in the period ended June 30, 2004 as compared to
the same period in 2003. The increase in costs in 2004 reflects the additional
costs of encryption technology development personnel as well as certain other
costs being reclassified for overhead purposes.

      We intend to continue to make a significant investment in research and
development of our Cicero product while enhancing efficiencies in this area.

      GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
personnel costs for the legal, financial, human resources and administrative
staff, related overhead, and all non-allocable corporate costs of operating our
company. General and administrative expenses for the quarter ended June 30, 2004
decreased by 16%, or $83, over the same period in the prior year. The reason for
the decrease in costs is the reduction of IT service staff which has been moved
to add resources for customer maintenance support and an overall reduction in
the costs of business fees.

      General and administrative expenses are expected to decrease slightly
going forward as we continue to create certain efficiencies and consolidations.

      RESTRUCTURING. At June 30, 2003, our accrual for restructuring was $515,
which was primarily comprised of excess facility costs and which we believed
represented our remaining cash obligations for the restructuring changes. In
August 2003, we settled litigation relating to these excess facilities.
Accordingly, we reversed the restructuring balance during the fourth quarter of
2003. Under the terms of the settlement agreement, we agreed to assign the note
receivable from the sale of Geneva to EM Software Solutions, Inc., with recourse
equal to the unpaid portion of the note receivable should the note obligor, EM
Software Solutions, Inc., default on future payments. The current unpaid
principal portion of the note receivable assigned is approximately $432 and
matures in December 2007. We assessed the probability of liability under the
recourse provisions using a probability weighted cash flow analysis and we have
recognized a long-term liability in the amount of $131.

      CHANGE IN FAIR VALUE OF WARRANT LIABILITY. We have recorded a warrant
liability for derivatives in accordance with EITF 00-19 for warrants exercisable
into shares of our common stock with redemption features outside of our control.
The fair value of the warrants as of June 30, 2004 has been determined using
valuation techniques consistent with the valuation performed as of December 31,
2003 and recorded as a warrant liability. As a result of the valuation, we have
recorded a reduction in the fair value of the warrant liability of $198.

      PROVISION FOR TAXES. The Company's effective income tax rate for
continuing operations differs from the statutory rate primarily because an
income tax benefit was not recorded for the net loss incurred in the first and
second quarters of 2004 or 2003. Because of the Company's recurring losses, the
deferred tax assets have been fully offset by a valuation allowance.


                                       39



      SEGMENT PROFITABILITY. Segment profitability represents loss before income
taxes, interest and other income (expense), amortization of goodwill,
restructuring charges, gain (loss) on sale of assets, and impairment charges.
Segment profitability (loss) for the three and six months ended June 30, 2004
was approximately ($4,898) and ($7,036) respectively, as compared to ($2,259)
and ($4,884) respectively for the three and six months ended June 30, 2003. The
increase in the loss before income taxes, interest and other income and expense,
restructuring charges, and gain or loss on sale of assets is primarily
attributable to the impairment charges to the software technology taken in 2004.

      Segment profitability is not a measure of performance under accounting
principles generally accepted in the United States of America, and should not be
considered as a substitute for net income, cash flows from operating activities
and other income or cash flow statement data prepared in accordance with
accounting principles generally accepted in the United States of America, or as
a measure of profitability or liquidity. We have included information concerning
segment profitability as one measure of our cash flow and historical ability to
service debt and because we believe investors find this information useful.
Segment profitability as defined herein may not be comparable to similarly
titled measures reported by other companies.

      IMPACT OF INFLATION. Inflation has not had a significant effect on the
Company's operating results during the periods presented.


           COMPARISON OF YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001

      REVENUE AND GROSS MARGIN. The Company has three categories of revenue:
software products, maintenance, and services. Software products revenue is
comprised primarily of fees from licensing the Company's proprietary software
products. Maintenance revenue is comprised of fees for maintaining, supporting,
and providing periodic upgrades to the Company's software products. Services
revenue is comprised of fees for consulting and training services related to the
Company's software products.

      The Company's revenues vary from quarter to quarter, due to market
conditions, the budgeting and purchasing cycles of customers and the
effectiveness of the Company's sales force. The Company typically does not have any material backlog of unfilled software orders and product revenue in any period is substantially dependent upon orders received in that quarter. Because the Company'sour operating expenses are based on anticipated revenue levels and are relatively fixed over the short term, variations in the timing of the recognition of revenue can cause significant variations in operating results from period to period. Fluctuations in operating results may result in volatility of the price of the Company'sour common stock.

      Total revenues decreased 83% from $3,101 in 2002 to $530 in 2003 and
decreased 82% from $17,357 in 2001 to $3,101 in 2002. During 2002, the

Software Products.
Software Product Revenue.  The Company executedearned $200,000 for software contracts with two major companies that totaled more than
$1,200 in license revenues as well as significant integration services revenues.
During 2003, no such contracts were executed. The decline in revenues may also
be affected by the Company's financial condition as well as the overall economy
as certain prospective customers have deferred purchasing activity. The
significant decrease in revenues from 2001 to 2002 is primarily the result of
the sale of substantially all of the Messaging and Application Engineering
segment products (approximately $17,200 of total revenues) at the start of the
fourth quarter of 2001. Gross profit margin (loss) was (925)%, (173)%, and (36)%
for 2003, 2002 and 2001, respectively.

      The Desktop Integration segment had a gross margin (loss) of (1,053)%product revenue for the yearthree months ended DecemberMarch 31, 2003 and a gross margin (loss) of (204)% for the
year ended December 31, 2002. Cicero is still a relatively new product and the
software amortization expense was being recognized over a three-year period. In
July 2002, the Company reassessed the life of the Cicero technology in light of
the extension of the license and exclusivity provisions in perpetuity. As a
result, the Company changed the estimated useful life to be 5 years, which
resulted in a reduction in 2002 amortization expense by $2,407. At each balance
sheet date, the Company reassesses the recoverability of the Cicero technology
in accordance with FASB 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed". This assessment was completed due to the
Company's continued operating losses and the limited software revenue generated
by the Cicero technology over the past twelve to eighteen months. Currently, the
Company is in negotiations with numerous customers to purchase licenses, which
would have a significant impact on the cash flows from the Cicero technology and
the Company. Since the negotiations have been in process for several months and
expected completion of the transactions has been delayed, the Company has
reduced its cash flow projections. Historical cash flows generated by the Cicero
technology do not support the long-lived asset and accordingly the Company has
impaired the excess of the unamortized book value of the technology in excess of
the expected net realizable value as of September 30, 2003 and at December 31,
2003. These charges, in the amount of $745 and $248 respectively, have been
recorded as cost of software revenue.


                                       40



      The Messaging and Application Engineering segment gross margin for the
year ended December 31, 2003 was insignificant. No future revenues are
anticipated in that segment as all the products have been either sold or
discontinued. For the year ended December 31, 2002, the Messaging and
Application Engineering segment had a gross margin (loss) of (105%).

      SOFTWARE PRODUCTS. Software product revenue decreased approximately 93% in
2003 from those results achieved in 2002 and decreased 10% in 20022008 as compared to 2001. no software revenue for the three months ended March 31, 2007.

Software revenues in 2003 and 2002 are from the new Cicero product as
the Company changed its strategic focus to the Desktop Integration segment. In
2001, software revenues primarily resulted from the Messaging and Application
Engineering products, which were sold in the beginning of the fourth quarter of
that year.

      Product Gross Margins.  The gross margin on software products for the three months ended March 31, 2008 was (3,971)%, (396)96.5 % and (793)% forreflects the 2003, 2002 and 2001 years ended, respectively.accrual of royalty payments offset by revenues.  Cost of software is composed primarily of amortization of software product technology, amortization of
capitalized software costs for internally developed software, impairment of
software product technology, and royalties to third parties, and to a lesser extent, production and distribution costs. The decrease in cost of software

Maintenance.
Maintenance Revenue.  Maintenance revenue for 2003the three months ended March 31, 2008 increased by approximately $92,000, or 224.4%, from $41,000 to $133,000 as compared with 2002 is due to the change in the amortization period from
three years to five years, offset by impairment charges totaling $993. The
decrease in cost of software from 2001 to 2002 reflects the impact of the sale
of the AppBuilder product in the fourth quarter of 2001 of approximately $1,760,
an impairment of $3,070 in the net realizable value of the CTRC technology in
third quarter of 2001 and the impact of the change in the amortization period
for the Cicero technology in July 2002 of $2,407.

      The software product gross margin (loss) for the Desktop Integration
segment was (3,971)% in 2003 and (309)% in 2002. The software product grossmonths ended March 31, 2007.

Maintenance Gross Margin.  Gross margin (loss) on the Messaging and Application Engineering segment was zero for
2003 and (1,162)% in 2002.

      The Company expects to see significant increases in software sales related
to the Desktop Integration segment coupled with improving margins on softwaremaintenance products as Cicero gains acceptance in the marketplace. The Company's
expectations are based on its review of the sales cycle that has developed
around the Cicero product since being released by the Company, its review of the
pipeline of prospective customers and their anticipated capital expenditure
commitments and budgeting cycles, as well as the establishment of viable
reference points in terms of an installed customer base with Fortune 500
Companies. The Messaging and Application Engineering segment revenue is expected
to be de minimis as the majority of the products comprising this segment have
been sold.

      MAINTENANCE. Maintenance revenues for the yearthree months ended DecemberMarch 31, 2003
decreased by approximately 45% or $255 from 2002. The decline in maintenance
revenues in 2003 as2008 was 46.6% compared to 2002 iswith (29.3%) for the result of the sale of the CTRC and
Star SQL products in June 2002. Maintenance revenues declined by approximately
$8,691 or 94% in 2002 as compared to 2001. The decline in maintenance revenue is
directly related to the sale of the Messaging and Application Engineering
segment products in the fourth quarter of 2001.

      The Desktop Integration segment accounted for approximately 80% of total
maintenance revenue and the Messaging and Application Engineering segment
accounted for approximately 20% of total maintenance revenues in 2003.three months ended March 31, 2007.  Cost of maintenance is comprised of personnel costs and related overhead and the cost of third-party contracts for the maintenance and support of the Company'sCompany’s software products. The Company experienced aproducts and the increase of gross margin (loss) onis due to the increase in maintenance productsrevenue partially offset by increase in expenses due to the expensing of (18)% for 2003. Gross margins on maintenance products
for 2002 and 2001 were 68% and 65% respectively.

      Maintenance revenues are expectedemployee stock options.

Services.
Services Revenue.  Services revenue decreased $54,000, or 28.3%, from $191,000 to increase, primarily in the Desktop
Integration segment. The majority of the products comprising the Messaging and
Application Engineering segment have been sold and thus future revenues will be
significantly lower as will the cost of maintenance associated with this
segment. The cost of maintenance should increase slightly$137,000 for the Desktop
Integration segment.


                                       41



      SERVICES. Services revenue forthree months ended March 31, 2008 as compared with the yearthree months ended DecemberMarch 31, 2003 decreased
by approximately 89% or $927 from 2002.2007. The declinedecrease in serviceservices revenues is directly attributeddue to the lacka smaller integration project relating to Cicero® software.

31
Table of software license revenues in 2003. Service
revenues for 2002 as compared to 2001 declined by 84% or $5,398. This decline is
attributed to the sale of the Messaging and Application Engineering segment
products in 2001. The principal product within the Messaging and Application
Engineering segment products was AppBuilder. This product enabled companies to
build new applications and typically, those customers utilized the Company's
consultants to assist in the application development.

      Cost of services primarily includes personnel and travel costs related to
the delivery of services.Contents

Services Gross Margin.  Services gross margin (loss) was (711)%, 13% and 15%(18.2%) for the yearsthree months ended 2003, 2002 and 2001 respectively.

      Services revenues are expected to increaseMarch 31, 2008 compared with gross margin of 40.3% for the Desktop Integration
segment asthree months ended March 31, 2007.  The decrease in gross margin was primarily attributable to the Cicero product gains acceptance. The Messagingdecrease in service billings noted above.

Sales and Application
Engineering segment service revenues will continue to be deminimis as the
majority of the relevant products have been sold.

      SALES AND MARKETING. Marketing.  Sales and marketing expenses primarily include personnel costs for salespeople, marketing personnel, travel and related overhead, as well as trade show participation and promotional expenses. Sales and marketing expenses decreased by 40% or approximately $1,128 in 2003 due to a
reduction in the Company's sales and marketing workforce, decreased promotional
activities and a reduction in the sales compensation structure. Sales and
marketing expenses decreased by 75% or approximately $8,234 in 2002 as a result
of the Company's restructuring activities and the sale of most of the Messaging
and Application Engineering segment products in the fourth quarter of 2001.

      Sales and marketing expenses are expected to increase slightly as the
Company adds additional direct sales personnel and supports the sales function
with collateral marketing materials. The Company's emphasis for the salesthree months ended March 31, 2008 increased by approximately $116,000, or 84.7%, from $137,000 to $253,000 as compared with the three months ended March 31, 2007.  The increase is primarily attributable the recording of employee stock option expense, increased travel, and marketing groups will be the Desktop Integration segment.

      RESEARCH AND DEVELOPMENT. greater trade show participation.

Research and Development.  Research and product development expenses primarily include personnel costs for product authors, product developers and product documentation and related overhead. Research and development expense decreasedexpenses increased by 47%approximately $17,000, or $885 in 2003 over12.3%, from $138,000 to $155,000 for the same period in 2002 and decreased by 65% or
$3,463 in 2002three months ended March 31, 2008 as compared to the same periodthree months ended March 31, 2007. The increase in 2001. The decline in both
periodscosts for the quarter is attributedprimarily due to operational restructuringsthe recording of employee stock option expense.

General and reduction in workforce.

      The Company intends to continue to make a significant investment in
research and development on its Cicero product while enhancing efficiencies in
this area.

      GENERAL AND ADMINISTRATIVE. Administrative. General and administrative expenses consist of personnel costs for the executive, legal, financial, human resources, IT and administrative staff, related overhead, and all non-allocable corporate costs of operating the Company. Our office is located in Cary, North Carolina.  General and administrative expenses for the yearthree months ended DecemberMarch 31, 2003 decreased2008 increased by 35%approximately $40,000, or $1,37715.5%, from $258,000 to $298,000 over the same period in the prior year.  In fiscal
2002, general and administrative expenses decreased by 59% or $5,695. The sharp
decline in general and administrative costs in 2003 and 2002 reflect the
restructuring program conducted by the Company during 2001 and 2002. In
addition, during 2001, the Company recognized a charge of approximately $3,800
from a significant customer who filed for Chapter 11 Bankruptcy.

      General and administrative expenses are expected to decrease going forward
as the Company experiences the synergies of its smaller size and the cost
reductions associated with previous office closings.

      AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of
goodwill was $0 for 2003 and 2002. Amortization of goodwill and other intangible
assets during 2001 amounted to $6,259. The reduction in amortization expense in
2002increase is primarily attributable to the sale of Geneva AppBuilder productsan increase in October 2001 as well as the effect of impairment on the intangible assets
acquired from StarQuest. At December 31, 2003, 2002 and 2001, there was no
remaining goodwill on the Company's balance sheet.

      RESTRUCTURING. As part of the Company's plan to focus on the emerging
desktop integration marketplace with its new Cicero product, the Company has
completed substantial restructurings in 2002 and 2001. As of December 31, 2002,
the Company's accrual for restructuring was $772, which was primarily comprised
of excess facility costs. As more fully discussed in Note 20 Contingencies, in
2003 the Company settled litigation relating to these excess facilities.
Accordingly, the Company has reversed the restructuring balance. Under the terms
of the settlement agreement, the Company agreed to assign the note receivable
from the sale of Geneva to EM Software Solutions, Inc., (see Note 2
Dispositions), with recourse equal to the unpaid portion of the note receivable
should the note obligor, EM Software Solutions, Inc., default on future
payments. The current unpaid principal portion of the note receivable assigned
is approximately $545 and matures December 2007. The Company assessed the
probability of liability under the recourse provisions using a probability
weighted cash flow analysis and has recognized a long-term liabilitycosts in the amount of $131.


                                       42



      Duringfinance area due to employee turnover and the second quarter of 2002, the Company announced an additional
round of restructurings to further reduce its operating costs and streamline its
operations. The Company recorded a restructuring charge in the amount of $1,300,
which encompassed the cost associated with the closure of the Company's
Berkeley, California facility as well as a significant reduction in the
Company's European personnel.

      During the first quarter of 2001, the Company announced and began
implementation of an initial operational restructuring. The Company recorded
restructuring charges of $6,650 during the quarter ended March 31, 2001 and an
additional charge of $2,000 for the quarter ended June 30, 2001. Restructuring
charges have been classified in "Restructuring" on the consolidated statements
of operations. These operational restructurings involved the reductionrecording of employee staff throughout the Company in all geographical regions in sales,
marketing, services, development and all administrative functions.

      stock option expense.

Provision for Taxes. The overall restructuring plan included the termination of 236 employees.
The plan included a reduction of 107 personnel in the European operations and
129 personnel in the US operations. Employee termination costs comprised
severance-related payments for all employees terminated in connection with the
operational restructuring. Termination benefits did not include any amounts for
employment-related services prior to termination.

      IMPAIRMENT OF INTANGIBLE ASSETS. In May 2001, management reevaluated and
modified its approach to managing the business and opted to conduct business and
assess the efficiency of operations under a line-of-business approach. As such,
the Company performed an assessment of the recoverability of its long-lived
assets under a line-of-business approach, representing a change in accounting
principle inseparate from the effect of the change in accounting estimates. This
represents an accounting change from the Company's previous policy of assessing
impairment of intangible assets at the enterprise level, which is accounted for
as a change in estimate. The change reflects management's changed approach to
managing the business.

      During the third quarter of 2001, the Company was notified by one of its
resellers that they would no longer engage in re-sales of the Company's CTRC
product, a component of the Messaging and Application Engineering segment. This
reseller accounted for substantially all of the CTRC product sales. As a result,
the Company performed an assessment of the recoverability of the Messaging and
Application Engineering segment. The results of the Company's analysis of
undiscounted cash flows indicated that an impairment charge would be
appropriate. The Company estimated the fair market value of the related assets
through a discounted future cash flow valuation technique. The results of this
analysis indicated the carrying value of these intangible assets exceeded their
fair market values. The Company reduced the carrying value of the intangible
assets and software product technology by approximately $7,929 and $3,070,
respectively, as of September 30, 2001.

      CHANGE IN FAIR VALUE OF WARRANT LIABILITY. The Company has issued warrants
to Series A3 and Series B3 preferred stockholders which contain provisions that
allow the warrant holders to force a cash redemption for events outside the
control of the Company. The fair value of the warrants is accounted for as a
liability and is re-measured at each balance sheet date. As of December 31,
2003, the warrant liability had a fair value of $198 and the Company had
recorded the change in the fair value of the warrant liability of $133 for the
year ended December 31, 2003 in the consolidated statements of operations.

      PROVISION FOR TAXES. The Company'sCompany’s effective income tax rate for continuing operations differs from the statutory rate primarily because an income tax benefit was not recorded for the net loss incurred in 2003, 2002the first quarter of 2008 or 2001.2007. Because of the Company'sCompany’s recurring losses, the deferred tax assets have been fully offset by a valuation allowance.

Impact of Inflation.  Inflation has not had a significant effect on the Company’s operating results during the periods presented.

Years Ended December 31, 2007, 2006, and 2005

Total revenues increased 86% from $972,000 in 2006 to $1,808,000 in 2007. Revenues increased 24% from $785,000 in 2005 to $972,000 in 2006.   The increase in revenues in 2007 is primarily due to increased labor billings from integration contracts with our professional services staff (approximately $366,000) and software license revenue generated under an OEM contract with Merrill Lynch in December 2007 ($500,000). The increase in revenues in 2006 over 2005 reflects a change in the mix of revenues, wherein license revenues decreased and professional service revenues from consulting contracts increased. Gross profit margin (loss) was 48%, 21% and (51%) for 2007, 2006, and 2005, respectively.  Under the terms of the OEM agreement with Merrill Lynch, we will recognize two components of software revenue. The first component will be runtime licenses, and once those licenses are deployed by Merrill Lynch; the second component will be a monthly subscription fee for each license deployed. We may or may not incur additional license revenues under this OEM agreement.
Software Products. Software product revenue increased from $208,000 in 2006 to $501,000 in 2007 or approximately 141%. Software product revenue decreased approximately 49% in 2006 from those results achieved in 2005. The increase in software revenues in 2007 was attributed to us entering into an OEM agreement with Merrill Lynch in December 2007.  In 2005, we were able to successfully deploy its software to several smaller integration engagements.

The gross margin on software products was 96% for each of the years ended December 31, 2007, 2006 and 2005.  Cost of software is composed primarily of royalties to third parties, and to a lesser extent, production and distribution costs. The Cicero® software technology and related patents were licensed by us on a worldwide basis from Merrill Lynch in August of 2000 under a license agreement containing standard provisions and a two-year exclusivity period. On January 3, 2002, the license agreement was amended to extend our exclusive worldwide marketing, sales and development rights to Cicero® in perpetuity (subject to Merrill Lynch’s rights to terminate in the event of bankruptcy or a change in control of the Company) and to grant ownership rights in the Cicero® trademark. We are indemnified by Merrill Lynch with regard to the rights granted to Cicero® by them. In consideration for the original Cicero® license we issued to Merrill Lynch 10,000 shares of the Company’s common stock. In consideration for the amendment, we issued an additional 250,000 shares of common stock to MLBC, Inc., a Merrill Lynch affiliate and entered into a royalty sharing agreement pursuant to which, we pay a royalty of 3% of the sales price for each sale of Cicero® software or related maintenance services. The royalties over the life of the agreement are not payable in excess of $20,000,000.

32
Table of Contents

We expect to see significant increases in software sales coupled with improving margins on software products as Cicero® gains acceptance in the marketplace. Our expectations are based on management’s review of the sales cycle that has developed around the Cicero® product since being released by us, their review of the pipeline of prospective customers and their anticipated capital expenditure commitments and budgeting cycles, as well as the status of in-process proof of concepts or beta sites with select corporations.

Maintenance.  Maintenance revenues for the year ended December 31, 2007 increased by approximately 150% or $180,000 from 2006. Maintenance revenues for the year ended December 31, 2006 decreased by approximately 18% or $27,000 from 2005. The increase in maintenance revenues for 2007 is primarily attributed to one significant new maintenance customer during the year. The decline in maintenance revenues in 2006 reflects the non-renewal of one maintenance contract for the Cicero® product.

Cost of maintenance is comprised of personnel costs and related overhead and the cost of third-party contracts for the maintenance and support of our software products. We experienced a gross margin on maintenance products of 12% for 2007. Gross margin (loss) on maintenance products for 2006 and 2005 were (76%) and (138%), respectively.

Maintenance revenues are expected to increase as a result of our expected increase in sales of the Cicero® product. The cost of maintenance should increase slightly.

Services.  Services revenue for the year ended December 31, 2007 increased by approximately 56% or $363,000 over the same period in 2006. Services revenue for the year ended December 31, 2006 increased by approximately 178% or $413,000 over the same period in 2005.  The increase in service revenues in each of the past two years are attributable to consulting engagements that were earned during the past two years.

Cost of services primarily includes personnel and travel costs related to the delivery of services. Services gross margin (loss) was 35%, 15%, and  (256%) for the years ended 2007, 2006, and 2005 respectively.

Services revenues are expected to increase as the Cicero® product gains acceptance.

Sales and Marketing.  Sales and marketing expenses primarily include personnel costs for salespeople, marketing personnel, travel and related overhead, as well as trade show participation and promotional expenses. Sales and marketing expenses increased 127% or approximately $440,000 to $786,000 in 2007 as compared to $346,000 in 2006 and decreased by 45% or approximately $281,000 in 2006 as compared to $627,000 in 2005. The increase in sales and marketing expenses in 2007 is attributable to the establishment of a sales team and several marketing campaigns as well as a charge for stock compensation expense of approximately $97,000. In 2006, we had reduced its sales and marketing workforce, decreased promotional activities and  changed  the sales compensation structure. Specifically, we changed the compensation structure to lower fixed costs and increase variable success-based costs.

Sales and marketing expenses are expected to increase as we add additional direct sales personnel and support the sales function with collateral marketing materials and marketing events. .

Research and Development.  Research and development expenses primarily include personnel costs for product authors, product developers and product documentation and related overhead.  Research and development expense increased by 7% or $36,000 to $569,000 in 2007 as compared to $533,000 in 2006 and decreased by 40% or $358,000 in 2006 as compared to $891,000 in 2005. The increase in costs in 2007 as compared to 2006 reflects a charge for stock compensation expense of approximately $103,000 offset by general decreases in overhead costs and employee benefits. The decrease in costs in 2006 as compared to 2005 reflects the reduction in the number of employees by two plus associated overheads in 2006.

The Company intends to continue to make a significant investment in research and development while enhancing efficiencies in this area.

33
Table of Contents

General and Administrative. General and administrative expenses consist of personnel costs for the executive, legal, financial, human resources, investor relations and administrative staff, related overhead, and all non-allocable corporate costs of operating the Company. General and administrative expenses for the year ended December 31, 2007 increased by 12% or $150,000 to $1,356,000 from $1,206,000 in the prior year. The increase in general administrative costs reflects a charge for stock based compensation of approximately $363,000, net of reductions in general overheads and salary from its former Chief Information Officer who left the company in July 2007. In fiscal 2006, general and administrative expenses increased by 6% or $69,000 as compared to $1,137,000 in 2005. The increase in general administrative costs is primarily due to costs associated with the Company’s recapitalization plan in 2006.

General and administrative expenses are expected to slightly increase going forward as the Company’s revenues increase.

Provision for Taxes. The Company’s effective income tax rate for continuing operations differs from the statutory rate primarily because an income tax benefit was not recorded for the net loss incurred in 2007, 2006, or 2005. Because of the Company’s inconsistent earnings history, the deferred tax assets have been fully offset by a valuation allowance. The income tax provision
(credit) for the years ended December 31, 2002 and 2001 is primarily related to
income taxes associated with foreign operations and foreign withholding taxes.

      IMPACT OF INFLATION. 

Impact of Inflation.  Inflation has not had a significant effect on the Company'sCompany’s operating results during the periods presented.


                                       43



LIQUIDITY AND CAPITAL RESOURCES

OPERATING AND INVESTING ACTIVITIES

      We generated $10

Liquidity and Capital Resources for the Three Months Ended March 31, 2007 and 2006
Operating and Investing Activities

Cash and cash equivalents decreased to $68,000 at March 31, 2008 from $250,000 at December 31, 2007.
The Company used $182,000 of cash for the sixthree months ended June 30, 2004.

      Operating activities utilized approximately $1,700 of cash, whichMarch 31, 2008.

Cash provided by operations for the three months ended March 31, 2008 was $451,000 compared with $385,000 used by operations for the three months ended March 31, 2007.  Cash provided by operations for the three months ended March 31, 2008 was primarily comprised of the loss from operations of approximately $7,400, offset
by non-cash charges for depreciation and amortizationstock compensation of approximately $4,300,
an impairment of goodwill from$3,000 and $129,000, respectively.  Additionally, the acquisition of the Ensuredmail technology in
the amount of approximately $600, offset by a non-cash adjustment to the fair
value of a warrant liability in the amount of $200. In addition, ourCompany’s cash increased by approximately $300 from the reductiondue to a decrease in prepaid expensesaccounts receivable of $409,000 and other
assets, approximately $200 for an increase in deferred revenues from maintenance contracts of $624,000.  These cash inflows were offset by the loss from operations of approximately $485,000 and the decrease of approximately $400 for the increase$266,000 in accounts payable and accrued expenses from vendors for services rendered.

      We generated approximately $1,700 in cash during

The Company bought $2,000 worth of equipment for the first six months of
2004 fromquarter ended March 31, 2008.

Financing Activities

Cash used by financing activities fromfor the proceeds of an additional round of
investment from several new investors totaling $1,200, an increase in net
short-term borrowings of $800, offset by repayments of our short-term debt in
the amount of $300.

      By comparison, we utilized approximately $200 in cash during the sixthree months ended June 30, 2003.

      March 31, 2008 was approximately $628,000 as compared with approximately $500,000 provided by financing activities for the three months ended March 31, 2007.  Cash used by financing activities for the three months ended March 31, 2008 was comprised primarily of repayment of short and long term debt.
Liquidity and Capital Resources for the Years 2007 and 2006

Operating and Investing Activities

We utilized $60,000 of cash for the year ended December 31, 2007

Operating activities utilized approximately $2,600 of cash, which was
primarily comprised of the loss from operations of $5,500, offset by non-cash
charges for depreciation and amortization of approximately $1,600. In addition,
we generated $1,300 in cash through a reduction in accounts receivable, $600 in
cash through a reduction of assets and liabilities from discontinued operations
and used approximately $500 in fulfillment of our obligations to our creditors
through accounts payable and other accrued liabilities. The significant
reduction in accounts receivable is the result of the reduction in overall
revenues in the Desktop Integration segment from the last quarter of 2002.

      We generated approximately $1,600 in cash during the first six months of
2003 from financing activities from the proceeds of the sale of Series D
Preferred Stock of approximately $3,500 offset by cash held in escrow of $1,400
and a reduction in our short term debt in the amount of $513.

      For the twelve months ended December 31, 2003, we utilized $180 of cash.

      Operating activities utilized approximately $4,800$1,384,000 in cash, which was primarily comprised of the loss from operations of $10,000,$1,975,000, offset by non-cash charges for depreciation and amortization of approximately $3,100, an impairment$10,000, and stock compensation expense of software technology of $1,000$720,000 and a non-cash decrease in the fair valueprovision for doubtful accounts of its warrant liability of $100.$50,000. In addition, the Companywe had a reductionan increase in accounts receivable of $1,400, a reduction in assets$622,000, and liabilities of
discontinued operations of $100 and a reduction of prepaid expenses and other assets of $400.

      The Company$136,000. We generated approximately $800$478,000 in cash from investing
activities, which was primarilythrough an increase in the resultamount owing its creditors.

We utilized approximately $17,000 in cash in the purchase of the collectionupdating our network equipment.

34
Table of various notes
receivable.

      The CompanyContents

We generated approximately $3,800$1,347,000 of cash during the year from financing activities as a resultfrom increases in issuance of proceeds from acommon stock in private placement of common
stock$1,040,000 and warrants in the amount of $800, cash proceeds from warrant exercises
of $400 and cash proceedsapproximately $307,000 resulting from the sale of Series D Preferred Stock of
approximately $3,500 offset by cash held in escrow of $776. In addition, the
Company incurred grossnet borrowings of $1,000 and repaid $1,200 against those
borrowings.

      By comparison, the Company utilized approximately $311 innotes payable.

We generated $281,000 of cash duringfor the year ended December 31, 2002.

      2006.

Operating activities utilized approximately $7,200 of$2,224,000 in cash, which was primarily comprised of the loss from operations of $18,200,$2,997,000, offset by non-cash charges for depreciation and amortization of approximately $8,000$12,000, and stock compensation expense of $614,000 and a non-cash
decreaseprovision for doubtful accounts of $60,000. In addition, we had an increase in accounts receivable of $212,000, offset by a reduction of prepaid expenses and other assets of $31,000. We generated approximately $311,000 in cash through an increase in the fair valueamount owing its creditors.

We utilized approximately $17,000 in cash in the purchase of its warrant liability of $2,900. In addition, the
Company had a reduction in assets held for sale of approximately $6,400 and used
approximately $2,100 in fulfillment of its obligations to its creditors through
its accounts payable.

      The Companyupdating our network equipment.

We generated approximately $3,900 of cash from investing
activities, which was primarily comprised of approximately $2,500 in proceeds
from the collection of various notes receivable and approximately $1,000 in
proceeds from the sale of a line of business.

      The Company generated approximately $3,200$2,528,000 of cash during the year from financing activities as a resultfrom increases in Convertible Bridge notes of proceeds$2,148,000 and from a private placementapproximately $380,000 resulting from the issuance of common stock and warrants in the amount of $2,000 and cash proceeds of a Preferred
Stock offering in the amount of $1,400.


                                       44



FINANCING ACTIVITIES

      stock.


Financing Activities

We funded our cash needs during the quarteryear ended June 30, 2004December 31, 2007 with cash on hand from MarchDecember 31, 2004, cash2006, as well as through the use of proceeds from operations, cash realized from athe private placementsale of our common stock and cash received from short-term convertible
note obligations.

      short term borrowings.

In March 2004,February 2007, we entered intocompleted a convertible loan agreement with Mark and
Carolyn Landis, whoprivate sale of shares of common stock to a group of investors, three of which are related by marriage to Anthony Pizi, the Company's
Chairman and Chief Executive Officer, or Mr. Pizi, in the amountmembers of $125.our Board of Directors.  Under the terms of thethat agreement, the loan bears interest at 1% per month and is
convertible into 446,429we sold 3,723,007 shares of our common stock for $0.1343 per share for a total of $500,000.  Participating in this offering were Mr. Mark Landis, who was the Company’s Chairman at that time and warrantsMr. Bruce Miller, who is a Board member.  Mr. Landis acquired 74,460 shares for a $10,000 investment and Mr. Miller acquired 148,920 shares for a $20,000 investment.  In May 2007, Mr. John L. (Launny) Steffens was elected Chairman of the Board of Directors.  Prior to his election, Mr. Steffens had participated in the private purchase 446,429of shares acquiring 1,006,379 shares for an investment of $135,157.

We had a term loan in the principal amount of $1,971,000 from Bank Hapoalim bearing interest at LIBOR plus 1.5%). In October 2007, we agreed to restructure the note payable to Bank Hapoalim and guaranty by BluePhoenix Solutions (formerly Liraz Systems Ltd.). Under a new agreement with BluePhoenix, we made a principal reduction payment to Bank Hapoalim in the amount of $300,000. Simultaneously, BluePhoenix paid $1,671,000 to Bank Hapoalim, thereby discharging that indebtedness. The Company and BluePhoenix entered into a new note in the amount of $1,021,000, bearing interest at LIBOR plus 1.0% and maturing on December 31, 2011. In addition, BluePhoenix acquired 2,546,149 shares of our common stock exercisable at $0.28. The warrants expire in three years fromexchange for $650,000 paid to Bank Hapoalim to retire that indebtedness.  Of the datenew note payable to BluePhoenix, approximately $350,000 is due on January 31, 2009 and the balance is due on December 31, 2011.

In October 2007, we completed a private sale of grant. We also entered into convertible loan
agreements with two other individualshares of our common stock to a group of investors, each in the face amountfour of $50.which are members of our Board of Directors. Under the terms of these agreements, each loan is convertible into 135,135that agreement, we sold 2,169,311 shares of our common stock for $0.2457 per share for a total of $533,000. Participating in this consortium were Mr. John L. (Launny) Steffens, the Company’s Chairman, and Messrs. Bruce Miller, Don Peppers, and Bruce Percelay, members of the Board.  Mr. Steffens converted the principal amount of his short term notes with the Company of $250,000 for 1,017,501 shares of common stock.  Mr. Miller invested $20,000 for 81,400 shares of common stock, Mr. Peppers acquired 101,750 shares for a $25,000 investment and warrants to purchase 135,135Mr. Bruce Percelay acquired 40,700 shares of common stock
at $0.37 per share. The warrants expire in three years from the date of grant.
for a $10,000 investment.

In May 2004, one of the note holders elected to convert its noteOctober 2007, we entered into our common
stock.

      In May 2004, we settled litigation with respect to a vendor services
complaint. We executed a note payableLong Term Promissory Note in the amount of $189 plus interest over a
20-month period ending December 15, 2005. This amount has been reclassified from
accounts payable in the accompanying balance sheet.

      In April, 2004, we entered into a convertible promissory note$300,000 with Mr. Pizi in the principal amount of $100.John L Steffens, our chairman. The note bears interest at 1%3% per monthannum and is convertible into our common stock at a conversionmatures on October 30, 2009. In order to bring the interest rate of $0.37 per
share. In addition, Mr. Pizi was granted 270,270on the note in compliance with arm’s length regulations, we also issued 188,285 warrants to purchase our common stock at $0.37 per share. These$0.18 each. The warrants expire three years fromwere valued using the dateBlack Scholes method and a fair value of grant.

      In May 2004, we entered into convertible loans aggregating $185 from
several investors including a member$34,230 was charged to stock compensation expense in the fourth quarter of the Company's Board of Directors. Under
the terms of these agreements, the loans bear interest at 1% per month and are
convertible into an aggregate of 578,125 shares of our common stock and warrants
to purchase an aggregate of 578,125 shares of our common stock exercisable at
$0.32.2007. The warrants expire in three years10 years. We used the proceeds from that loan to pay down the datedebt to Bank Hapoalim as noted above.

35
Table of grant.

      Also in May 2004, we pledged certain accounts receivables with an investorContents

We incurred a net loss of approximately $1,975,000 for the face amount of $135, which bear interest at 1% per month and warrantsyear ended December 31, 2007 in addition to purchase 211,214 shares of our common stock at an exercise price of $0.32 per
share.

      In June 2004, we entered into a convertible promissory note with Mr. Pizi
in the principal amount of $112. The note bears interest at 1% per month and is
convertible into 560,000 shares of our common stock and warrants to purchase
560,000 shares of our common stock at $0.20 per share. Also in June 2004, Mr.
Pizi entered into a second convertible promissory note in the face amount of $15
which is convertible into 90,118 shares of our common stock and warrants to
purchase 90,118 shares of our common stock at $0.17 per share. These warrants
expire three years from the date of grant.

      Also in June 2004, we entered into a convertible loan agreement with Mark
and Carolyn Landis, who are related by marriage to Mr. Pizi, in the amount of
$125. Under the terms of the agreement, the loan bears interest at 1% per month
and is convertible into 781,250 shares of our common stock and warrants to
purchase 781,250 shares of our common stock exercisable at $0.16. The warrants
expire in three years from the date of grant.

      We have a $1,971 term loan bearing interest at LIBOR plus 1%
(approximately 2.2% at June 30, 2004), interest on which is payable quarterly.
There are no financial covenants. On November 15, 2003, we reached an agreement
with Bank Hapoalim, the holder of the term loan and Liraz Systems Ltd.
("Liraz"), the guarantor of the term loan, to extend the maturity date of the
term loan until November 14, 2004. In consideration for the extension of the
guaranty, we issued 150,000 shares of our common stock to Liraz at the time of
the extension and subsequently issued an additional 150,000 shares of our common
stock on March 31, 2004.


                                       45



      We have incurrednet losses of approximately $10,000 and $18,000 in$6,678,000 for the pastprevious two fiscal years andAnd a net loss of $485,000 for the three months ended March 31, 2008.  We have experienced negative cash flows from operations for each of
the past three years. For the quarter ended June 30, 2004,At March 31, 2008, we incurred an
additional loss of approximately $7,300 and havehad a working capital deficiency of approximately $7,700.$6.3 million.  Our future revenues largely dependare entirely dependent on the acceptance of a
newly developed and marketed product - Cicero.Cicero®, which has had limited success in commercial markets to date. Accordingly, there is substantial doubt that we can continue as a going concern and the independent auditor’s report accompanying our financial statements raises doubts about our ability to continue as a going concern. In order to address these issues and to obtain adequate financing for our operations for the next twelve months, we are actively promoting and expanding our product line and have entered into
preliminary sales negotiations with customers that have begun the "proof of
concept" stage. We are experiencing difficulty increasing sales revenue largely
because of the inimitable nature of the product as well as customer concerns
about our financial viability. We are attempting to solve the former problem by
improving the market's knowledge and understanding of Cicero through increased
marketing and leveraging our limited number of reference accounts. We are
attempting to address the financial concerns of potential customers by pursuing
strategic partnerships with companies that have significant financial resources
although we have not experienced significant success to date with this approach.
Additionally, we are seeking additional equity capital or other strategic
transactions in the near term to provide additional liquidity and we have
recently completed a round of private financing in which we raised approximately
$1,200 of new funds from several investors. There can be no assurance that our
management will be successful in executing these strategies as anticipated or in
a timely manner or that increased revenues will reduce further operating losses.
If we are unable to significantly increase cash flow or obtain additional
financing, we will likely be unable to generate sufficient capital to fund
operations for the next twelve months and may be required to pursue other means
of financing that may not be on terms favorable to our company or its
stockholders.

      The Company funded its cash needs during the year ended December 31, 2003
with cash on hand from December 31, 2002, through the use of proceeds from a
private placement of common stock and warrants, a private placement of preferred
stock and warrants, and with cash from operations.

      On March 19, 2003, the Company completed a $3,500 private placement of
Series D Convertible Redeemable Preferred Stock ("Series D Preferred Stock"),
convertible at a conversion ratio of $0.32 per share of common stock into an
aggregate of 11,031,250 shares of common stock. As part of the financing, the
Company has also issued warrants to purchase an aggregate of 4,158,780 shares of
common stock at an exercise price of $0.07 per share ("Series D-1 Warrants"). On
October 10, 2003, the Company, consistent with its obligations, also issued
warrants to purchase an aggregate of 1,665,720 shares of common stock at an
exercise price the lesser of $0.20 per share or market price at the time of
exercise ("Series D-2 Warrants"). The Series D-2 Warrants became exercisable on
November 1, 2003, because the Company failed to report $6,000 in gross revenues
for the nine-month period ended September 30, 2003. Both existing and new
investors participated in the financing. The Company also agreed to register the
common stock issuable upon conversion of the Series D Preferred Stock and
exercise of the warrants for resale under the Securities Act of 1933, as
amended. Under the terms of the financing agreement, a redemption event may
occur if any one person, entity or group shall control more than 35% of the
voting power of the Company's capital stock. The Company allocated the proceeds
received from the sale of the Series D Preferred Stock and warrants to the
preferred stock and detachable warrants on a relative fair value basis,
resulting in the allocation of $2,890 to the Series D Preferred Stock and $640
to the detachable warrants. Based upon the allocation of the proceeds, the
Company determined that the effective conversion price of the Series D Preferred
Stock was less than the fair value of the Company's common stock on the date of
issuance. The beneficial conversion feature was recorded as a discount on the
value of the Series D Preferred Stock and an increase in additional paid-in
capital. Because the Series D Preferred Stock was convertible immediately upon
issuance, the Company fully amortized such beneficial conversion feature on the
date of issuance.

      As part of the financing, the Company and the lead investors have agreed
to form a joint venture to exploit the Cicero technology in the Asian market.
The terms of the agreement required that the Company deposit $1,000 of the gross
proceeds from the financing into escrow to fund the joint venture. The escrow
agreement allows for the immediate release of funds to cover organizational
costs of the joint venture. During the quarter ended March 31, 2003, $225 of
escrowed funds were released. Since the joint venture was not formed and
operational on or by July 17, 2003, the lead investors have the right, but not
the obligation, to require the Company to purchase $1,000 in liquidation value
of the Series D Preferred Stock at a 5% per annum premium, less their pro-rata
share of expenses. The Company and the lead investor have mutually agreed to
extend the escrow release provisions until September 30, 2004.

      Another condition of the financing required the Company to place an
additional $1,000 of the gross proceeds into escrow, pending the execution of a
definitive agreement with Merrill Lynch providing for the sale of all right,
title and interest to the Cicero technology. Since a transaction with Merrill
Lynch for the sale of Cicero was not consummated by May 18, 2003, the lead
investors have the right, but not the obligation, to require the Company to
purchase $1,000 in liquidation value of the Series D Preferred Stock at a 5% per
annum premium. During the second quarter, $390 of escrowed funds was released.
In addition, the Company and the lead investor agreed to extend the escrow
release provisions until the end of July 2003 when all remaining escrow monies
were released to the Company.


                                       46



      In connection with the sale of Series D Preferred Stock, the holders of
the Company's Series A3 Preferred Stock and Series B3 Preferred Stock
(collectively, the "Existing Preferred Stockholders"), entered into an agreement
whereby the Existing Preferred Stockholders have agreed to waive certain
applicable price protection anti-dilution provisions. Under the terms of the
waiver agreement, the Company is also permitted to issue equity securities
representing aggregate proceeds of up to an additional $4,900 following the sale
of the Series D Preferred Stock. Additionally, the Existing Preferred
Stockholders have also agreed to a limited lock-up restricting their ability to
sell common stock issuable upon conversion of their preferred stock and warrants
and to waive the accrual of any dividends that may otherwise be payable as a
result of the Company's delisting from Nasdaq. As consideration for the waiver
agreement, the Company has agreed to issue on a pro rata basis up to 1,000,000
warrants to all the Existing Preferred Stockholders on a pro rata basis at such
time and from time to time as the Company closes financing transactions that
represent proceeds in excess of $2,900, excluding the proceeds from the Series D
Preferred Stock transaction and any investments made by a strategic investor in
the software business. Such warrants will have an exercise price that is the
greater of $0.40 or the same exercise price as the exercise price of the
warrant, or equity security, that the Company issues in connection with the
Company's financing or loan transaction that exceeds the $2,900 threshold.

      In October 2003, the Company completed a common stock financing round
wherein it raised $853 of capital. The offering closed on October 15, 2003. The
Company sold 1,894,444 shares of common stock at a price of $0.45 per share for
a total of $853 in proceeds and issued warrants to purchase 473,611 shares of
the Company's common stock at an exercise price of $0.45. The warrants expire
three years from the date of grant. As part of an agreement with Liraz Systems
Ltd, the guarantor of the Company's term loan, the Company used $200 of the
proceeds to reduce the principal outstanding on the term loan to $1,971.

      In January 2004, the Company acquired substantially all of the assets and
assumed certain liabilities of Critical Mass Mail, Inc., d/b/a Ensuredmail, a
federally certified encryption software company. Under the terms of the purchase
agreement, Level 8 issued 2,027,027 shares of common stock at a price of $0.37.
The total purchase price of the assets acquired plus the assumption of certain
liabilities acquired was $750 and has been accounted for by the purchase method
of accounting. The Company agreed to register the common stock for resale under
the Securities Act of 1933, as amended.

      Also in January 2004, and simultaneously with the asset purchase of
Critical Mass Mail, Inc., the Company completed a common stock financing round
wherein it raised $1,247 of capital from several new investors as well as
certain investors of Critical Mass Mail, Inc. The Company sold 3,369,192 shares
of common stock at a price of $0.37 per share. As part of the financing, the
Company has also issued warrants to purchase 3,369,192 shares of the Company's
common stock at an exercise price of $0.37. The warrants expire three years from
the date of grant. The Company also agreed to register the common stock and the
warrants for resale under the Securities Act of 1933, as amended.

      The Company has incurred losses of approximately $10,000 and $18,000 in
the past two years and has experienced negative cash flows from operations for
each of the past three years. For the six months ended June 30, 2004 the Company
incurred an additional loss of approximately $7,430 and has a working capital
deficiency of approximately $7,835. The Company's future revenues are entirely
dependent on acceptance of a newly developed and marketed product, Cicero, which
has limited success in commercial markets to date. Accordingly, there is
substantial doubt that the Company can continue as a going concern. In order to
address these issues and to obtain adequate financing for the Company's
operations for the next twelve months, the Company is actively promoting and
expanding its product line and continues to negotiate with significant customers that have begun or finalizedexpressed interest in the "proof of concept" stage with the CiceroCicero® technology. The Company isWe are experiencing difficulty increasing sales revenue largely because of the inimitable nature of the product as well as customer concerns about the financial viability of the Company. The CompanyCicero® software is a new “category defining” product in that most Enterprise Application Integration (EAI) projects are performed at the server level and Cicero®’s integration occurs at the desktop level without the need to open and modify the underlying code for those applications being integrated. Many companies are not aware of this new technology or tend to look toward more traditional and accepted approaches. We are attempting to solve the former problem by improving the market'smarket’s knowledge and understanding of CiceroCicero® software through increased marketing and leveraging itsour limited number of reference accounts.accounts, while enhancing our list of resellers and systems integrators to assist in the sales and marketing process. The emergence of competing technologies has also increased the awareness of this new technology. Additionally, the Company is seekingwe must seek additional equity capital or other strategic transactions in the near term to provide additional liquidity.

      The Company closed a strategic acquisition of an encryption technology
asset in January 2004 and a private placement of its common stock wherein it has
raised approximately $1,247. The Company expects

We do not believe that increased revenueswe currently have sufficient cash on hand to finance our operations for the next twelve months. If we are unable to increase cash flow, we will reduce its operating losses in future periods, however, there can be no
assurance that management will be successful in executing as anticipated or in a
timely enough manner. If these strategies are unsuccessful, the Company may haveneed to pursue other means ofobtain financing, thatwhich may not be on terms favorable to us or our stockholders. At our current rates of expense and assuming the Company or its stockholders. Ifwill generate revenues in the Company is unable to increase cash flow or
obtain financing, it may notnext twelve months at the annualized rate of revenue generated in the first three months of 2008, we will be able to generate enoughfund planned operations with existing capital to fund
operationsresources for a minimum of four months and experience negative cash flow of approximately $1,000,000 during the next twelve months.months to maintain planned operations. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements presented herein do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should Level 8we be unable to continue as a going concern.


                                       47



CONTRACTUAL OBLIGATIONS

      


Contractual Obligations

Future minimum payments for all contractual obligations for years subsequent to December 31, 20032007 are as follows:


                                                           2004       2005       2006       2007      TOTAL
                                                          ------     ------     ------     ------     ------

Short and long-term debt, including interest payments     $2,625     $   --     $   --     $  131     $2,756
Service purchase commitments ........................        400         --         --         --        400
Operating leases ....................................        214        221         84         --        519
                                                          ------     ------     ------     ------     ------
Total ...............................................     $3,239     $  221     $   84     $  131     $3,675
                                                          ======     ======     ======     ======     ======



      At June 30, 2004,follows (in thousands):

 
 
2008
 
 
2009
 
 
2010
 
 
2011
 
 
Total
 
Short and long-term debt, including interest payments
 
$
1,647
 
 
$
699
 
 
$
40
 
 
$
711
 
 
$
3,097
 
Service purchase commitments
 
 
175
 
 
 
--
 
 
 
--
 
 
 
--
 
 
 
175
 
Operating leases
 
 
103
 
 
 
97
 
 
 
101
 
 
 
--
 
 
 
301
 
Capital leases
 
 
2
 
 
 
--
 
 
 
--
 
 
 
--
 
 
 
2
 
Total
 
$
1,927
 
 
$
796
 
 
$
141
 
 
$
711
 
 
$
3,575
 

Short and long-term debt, including interest payments, includes an outstanding indebtedness of approximately $1,021,000 term loan with BluePhoenix Solutions, a long term promissory note of $300,000 with the Company had $2,692 of Series D Convertible
Redeemable Preferred Stock outstanding. Under the terms of the agreement,Company’s Chairman, Mr. John L. Steffens, and a redemption event may occur if any one person, entity or group shall control more
than 35% of the voting power of the Company's capital stock.

      $250,000 short-term note with SDS Merchant Fund.
Under the employment agreement between the Company and Mr. PiziBroderick effective January 1, 2004, the Company is to2008, we will pay Mr. Pizi an annualBroderick a base salary of $200,$175,000 and a performance bonusbonuses in cash of up to $400$100,000 per annum based upon certain revenue goals and operating metrics as determined by the Compensation Committee of the Board of Directors of the Company, in its discretion.Company. In addition, Mr. Broderick is eligible for additional bonuses should the targeted pre tax income be exceeded by 150%. Upon termination of Mr. Pizi'sBroderick's employment by the Companyus without cause, the Company haswe have agreed to payprovide Mr. Pizi
(a)Broderick with a lump sum payment of one year of Mr. Pizi'sBroderick’s then current base salary within thirty
(30) daysand payment of terminationall deferred salaries and (b) two hundred thousand (200,000) shares of the
Company's common stock.

      Under the employment agreement between the Company and Mr. Broderick
effective January 1, 2004, the Company pays Mr. Broderick a base salary of $200,
and a performance bonus of cash up to $100 per annum based upon certain revenue
goals, as determined by the Compensation Committee of the Board of Directors of
the Company, in its discretion. Upon termination of Mr. Broderick's employment
by the Company without cause, the Company has agreed to pay Mr. Broderick a lump
sum payment equal to six months of Mr. Broderick's then base salarybonuses within thirty (30) days of termination. OFF BALANCE SHEET ARRANGEMENTS

      The Company doesIn addition, all then outstanding but unvested stock options shall vest one hundred percent (100%).

36
Table of Contents

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements. We have no subsidiaries or other unconsolidated limited purpose entities, and we have not guaranteed or otherwise supported the obligations of any other entity.

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

The policies discussed below are considered by us to be critical to an understanding of our financial statements because they require us to apply the most judgment and make estimates regarding matters that are inherently uncertain.  Specific risks for these critical accounting policies are described in the following paragraphs.  With respect to the policies discussed below, we note that because of the uncertainties inherent in forecasting, the estimates frequently require adjustment.

Our financial statements and related disclosures, which are prepared to conform withto accounting principles generally accepted in the United States of America, require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and accounts receivable and expenses during the period reported.  We are also required to disclose amounts of contingent assets and liabilities at the date of the financial statements.  Our actual results in future periods could differ from those estimates.  Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the Consolidated Financial Statements in the period they are determined to be necessary.

We consider the most significant accounting policies and estimates in our financial statements to be those surrounding: (1) revenue recognition; (2) allowance for doubtful trade accounts receivable; (3) valuation of notes
receivable; (4) capitalization and valuation of software product technology; (5)(3) valuation of deferred tax assets; and (6) restructuring reserves.assets.  These accounting policies, the basis for any estimates and potential impact to our Consolidated Financial Statements, should any of the estimates change, are further described as follows:


                                       48



      REVENUE RECOGNITION. 

Revenue Recognition.  Our revenues are derived principally from three sources:  (i) license fees for the use of our software products; (ii) fees for consulting services and training; and (iii) fees for maintenance and technical support.  We generally recognize revenue from software license fees when a license agreement has been signed by both parties, the fee is fixed or determinable, collection of the fee is probable, delivery of our products has occurred and no other significant obligations remain.  For multiple-element arrangements, we apply the "residual method".“residual method.”  According to the residual method, revenue allocated to the undelivered elements is allocated based on vendor specific objective evidence ("VSOE"(“VSOE”) of fair value of those elements.  VSOE is determined by reference to the price the customer would be required to pay when the element is sold separately.  Revenue applicable to the delivered elements is deemed equal to the remainder of the contract price.  The revenue recognition rules pertaining to software arrangements are complicated and certain assumptions are made in determining whether the fee is fixed and determinable and whether collectability is probable.  For instance, in our license arrangements with resellers, estimates are made regarding the reseller'sreseller’s ability and intent to pay the license fee.  Our estimates may prove incorrect if, for instance, subsequent sales by the reseller do not materialize.  Should our actual experience with respect to collections differ from our initial assessment, there could be adjustments to future results.

Revenues from services include fees for consulting services and training.  Revenues from services are recognized on either a time and materials or percentage of completion basis as the services are performed and amounts due from customers are deemed collectible and non-refundable.  Revenues from fixed price service agreements are recognized on a percentage of completion basis in direct proportion to the services provided.  To the extent the actual time to complete such services varies from the estimates made at any reporting date, our revenue and the related gross margins may be impacted in the following period.

      ALLOWANCE FOR DOUBTFUL TRADE ACCOUNTS RECEIVABLE.period.

Allowance for Doubtful Trade Accounts Receivable.  In addition to assessing the probability of collection in conjunction with revenue arrangements, we continually assess the collectability of outstanding invoices.  Assumptions are made regarding the customer'scustomer’s ability and intent to pay and are based on historical trends, general economic conditions, and current customer data.  Should our actual experience with respect to collections differ from our initial assessment, there could be adjustments to bad debt expense.

      VALUATION OF NOTES RECEIVABLE. We continually assess the collectability

Capitalization and Valuation of outstanding notes receivable. Assumptions are made regarding the counter party's
ability and intent to pay and are based on historical trends and general
economic conditions, and current financial data. As of June 30, 2004 the Company
had no notes receivable.

      CAPITALIZATION AND VALUATION OF SOFTWARE PRODUCT TECHNOLOGY. Software Product Technology. Our policy on capitalized software costs determines the timing of our recognition of certain development costs.  In addition, this policy determines whether the cost is classified as development expense or cost of software revenue.  Management is required to use professional judgment in determining whether development costs meet the criteria for immediate expense or capitalization.  Additionally, we review software product technology assets for net realizable value at each balance sheet date.  ForShould we experience reductions in revenues because our business or market conditions vary from our current expectations, we may not be able to realize the year ended December 31, 2003, the Company recordedcarrying value of these assets and will record a write down of software product technology totaling $993 and asat that time. As of December 31, 20032007 and 2006 the Company had $4,063$0 in capitalized software product technology. At June
30, 2004, in accordance with FASB 86, "Accounting for the Costs

37
Table of Computer
Software to Be Sold, Leased, or Otherwise Marketed", the Company completed an
assessmentContents

Valuation of the recoverability of the Cicero product technology. This
assessment was performed due to the Company's continued operating losses and the
limited software revenue generated by the Cicero technology over the past twelve
to eighteen months. Currently, the Company is in negotiations with customers to
purchase licenses, which would have a significant impact on the cash flows from
the Cicero technology and the Company. Since the negotiations have been in
process for several months and expected completion of the transactions has been
delayed, the Company has reduced its cash flow projections. Historical cash
flows generated by the Cicero technology do not support the long-lived asset
and, accordingly, the Company has impaired the excess of the unamortized book
value of the technology in excess of the expected net realizable value as of
June 30, 2004. This charge, in the amount of $2,844, has been recorded as
software amortization


                                       49



      VALUATION OF DEFERRED TAX ASSETS.Deferred Tax Assets.  Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.  Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is established to the extent that it is more likely than not, that we will be unable to utilize deferred income tax assets in the future.  At December 31, 2003,2007, we had a valuation allowance of $80,511$98,053,000 against $80,511$98,053,000 of gross deferred tax assets.  We considered all of the available evidence to arrive at our position on the net deferred tax asset; however, should circumstances change and alter our judgment in this regard, it may have an impact on future operating results.

At December 31, 2003,2007, the Company has net operating loss carryforwards of approximately $186,293,$230,847,000, which may be applied against future taxable income. These carryforwards will expire at various times between 20052008 and 2023.2027. A substantial portion of these carryforwards is restricted to future taxable income of certain of the Company'sCompany’s subsidiaries or limited by Internal Revenue Code Section 382. Thus, the utilization of these carryforwards cannot be assured.

      RESTRUCTURING RESERVES. At


Recent Accounting Pronouncements:

In December 31, 2002, the Company's restructuring
liabilities totaled $772, which represented estimated excess facilities costs.
In August 2003, the Company settled litigation relating to these excess
facilities. Accordingly, the Company has reversed the restructuring balance.
Under the terms of the settlement agreement, the Company agreed to assign the
note receivable from the sale of Geneva to EM Software Solutions, Inc., (see
Note 2 Dispositions), with recourse equal to the unpaid portion of the note
receivable should the note obligor, EM Software Solutions, Inc., default on
future payments. The current unpaid principal portion of the note receivable at
assignment is approximately $545 and matures December 2007. The Company assessed
the probability of liability under the recourse provisions using a probability
weighted cash flow analysis and has recognized a long-term liability in the
amount of $131.

RECENT ACCOUNTING PRONOUNCEMENTS:

      In January 2003,2007, the FASB issued InterpretationSFAS No. 46141 (Revised 2007), “Business Combinations” (“SFAS 141R”).  SFAS 141R will significantly change the accounting for business combinations in a number of areas, including the treatment of contingent consideration, contingencies, acquisition costs, research and development assets and restructuring costs.  In addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income taxes.  SFAS 141R is effective for fiscal years beginning after December 15, 2008.  The adoption of the provisions of SFAS 141R is not expected to have a material effect on the Company’s financial position, results of operations, or FIN 46
"Consolidation of Variable Interest Entities", an interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements". cash flows.

In October 2003,December 2007, the FASB issued FASB Staff Position FIN 46-6, "Effective DateSFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, An Amendment of FASB
InterpretationARB No. 46, Consolidation51.”  SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of Variable Interest Entities" deferringa subsidiary.  It also amends certain of ARB 51’s consolidation procedures for consistency with the requirements of SFAS 141R.  SFAS 160 is effective date for applyingfiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The statement shall be applied prospectively as of the beginning of the fiscal year in which the statement is initially adopted.  The adoption of the provisions of FIN 46SFAS 160 is not expected to have a material effect on the Company’s financial position, results of operations, or cash flows.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for public entities'
interestsFinancial Assets and Financial Liabilities – an amendment of FASB Statement 115.”  The statement permits entities to choose to measure many financial instruments and certain other items at fair value.  The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in variable interest entities or potential variable interest entities
created before February 1, 2003 for financial statementsreported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge provisions.  Most of interim or annual
periods that end after December 15, 2003. FIN 46 establishes accounting guidance
for consolidationthe provisions of variable interestthis statement apply only to entities that functionelect the fair value option; however, the amendment to supportFASB Statement 115, “Accounting for Certain Investment in Debt and Equity Services,” applies to all entities with available-for-sale and trading securities.  We do not believe adoption of this statement will have a material impact on the activities of the primary beneficiary. Company’s financial statements.

In December 2003,July 2006, the FASB issued FIN 46
(revisedNo. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of SFAS No. 109.”  FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.”  FIN No. 48 also prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  In addition, FIN No. 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The provisions of FIN No. 48 are to be applied to all tax positions upon initial adoption of this standard.  Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized as an adjustment to the opening balance of accumulated deficit (or other appropriate components of equity) for that fiscal year.  The provisions of FIN No. 48 are effective for fiscal years beginning after December 2003), "Consolidation15, 2006.  The adoption of Variable Interest Entities." This
revised interpretationthis new standard did not have a material impact on our financial position, results of operations, or cash flows.

38
Table of Contents

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 108, to address diversity in practice in quantifying financial statement misstatements.  SAB 108 requires that a company quantify misstatements based on their impact on each of its financial statements and related disclosures.  SAB 108 is effective for all entities no later than the end of
the first reporting period that endsfiscal years ending after MarchNovember 15, 2004.2006.  The Company has no
investmentadopted SAB 108 effective as of December 31, 2006.  The adoption of SAB 108 did not have a material impact on our financial position, results of operations, or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”.  SFAS No. 157 provides guidance for using fair value to measure assets and liabilities.  It also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings.  SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in or contractual relationship or other business relationship with a
variable interest entityany new circumstances.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and thereforeis required to be adopted by the Company in the first quarter of 2008.  We are currently evaluating the effect that the adoption of this interpretation did
notSFAS No. 157 will have any impact on its consolidatedour financial position, or results of
operations. However, if the Company enters into any such arrangement with a
variable interest entity in the future or an entity with which we have a
relationship is reconsidered based on guidance in FIN 46 to be a variable
interest entity, the Company's consolidated financial position or results of operations, might be materially impacted.

DISCLOSURES ABOUT MARKET RISK

      or cash flows.


Disclosures about Market Risk

As the Company has soldwe have disposed of or closed most of itsour European based businessoffices and has closed
several European sales offices,operations, the majority of revenues are generated from US
sources. The Company expectswithin the United States. We expect that trend to continue for the next year. As such, there is minimal foreign currency risk at present.  Should the Companywe continue to develop a reseller presence in Europe and Asia, that risk will be increased.


                                       50



                                   MANAGEMENT

      As

39
Table of Contents

MANAGEMENT

The following table sets forth certain information about our directors and executive officers:
Name
Age
Position(s)
John L Steffens
66
Director and Chairman
John Broderick
58
Director and Chief Executive Officer/Chief Financial Officer
Anthony C. Pizi
48
Director
Mark Landis
66
Director
Bruce W. Hasenyager
66
Director
Jay R. Kingley
46
Director
Charles B. Porciello
72
Director
Bruce D. Miller
57
Director
Bruce A. Percelay
52
Director
John W. Atherton
65
Director
Don Peppers
57
Director

John L. Steffens
Director since May, 2007.

Mr. Steffens was appointed to our Board of Directors on May 16, 2007 and is the dateFounder and Managing Director of this prospectus,Spring Mountain Capital, L. P.  Prior to establishing Spring Mountain Capital in July 2001, Mr. Steffens spent 38 years at Merrill Lynch & Co., where he held numerous senior management positions, including President of Merrill Lynch Consumer Markets, which was later named the Private Client Group, from July 1985 until April 1997, and both Vice Chairman of Merrill Lynch & Co., Inc. (the parent company) and Chairman of its U.S. Private Client Group from April 1997 until July 2001. Mr. Steffens was elected a member of the Board of Directors of Merrill Lynch & Co., Inc. in April 1986 and served on the board until July 2001. Mr. Steffens was Chairman of the Securities Industry Association during 1994 and 1995, and is currently a Trustee of the Committee for Economic Development. He is the National Chairman Emeritus of the Alliance for Aging Research and serves on the Board of Aozora Bank in Japan.  Mr. Steffens graduated from Dartmouth University in 1963 with a B.A. degree in Economics.  He also attended the Advanced Management Program of the Harvard Business School in 1979.

John P. Broderick
Director since July 2005.

Mr. Broderick was appointed to our Board of Directors in July 2005 and has served as our  Chief Executive Officer since July 2005 and as our Chief Financial Officer since April 2001. Mr. Broderick has served as the Chief Operating Officer of the Company consistedfrom June 2002 until present, and as Corporate Secretary from August 2001 to present. Prior to joining our Company, Mr. Broderick was Executive Vice President of Swell Inc., a sports media e-commerce company where he oversaw the development of all commerce operations and served as the organization's interim Chief Financial Officer. Previously, Mr. Broderick served as Chief Financial Officer and Senior Vice President of North American Operations for Programmer's Paradise, a publicly held (NASDAQ: PROG) international software marketer.  Mr. Broderick received his B.S. in accounting from Villanova University.

Anthony Pizi, Bruce Hasenyager, Nicholas Hatalski, Kenneth Neilsen
and Jay Kingley. All Directors were elected at the 2003 Annual Meeting of
Stockholders and will serve until the election and qualification of their
successors or until their earlier death, resignation or removal. Mr. Frank
Artale resigned from the Board in January 2004. Mr. Artale's resignation was not
the result of a disagreement with the Company or its management. Set forth below
with respect to each director is his name, age, principal occupation and
business experience for the past five years and length of service as a director
of the Company.

ANTHONY C. PIZI

Pizi
Director since August 2000.                     Age: 45

      

Mr. Pizi has been  the Chief Information Officer of the Asset Management Platform Services Group of Deutsche Bank AG since August 2007. Mr. Pizi was the Company’s Chief Information Officer from August 2005 until August 2007 and served as Chief Executive Officer and Chief Technology Officer from February 2001 to July 2005. Mr. Pizi also served as Chairman of the Board of Directors and as Chief
Technology Officer sincefrom December 1, 2000. He has served as Chief Executive
Officer since February2000 until March 7, 2005 and from June 1, 2001.2005 until July 22, 2005. Mr. Pizi has been a director since August 2000. Until December 2000, he was First Vice President and Chief Technology Officer of Merrill Lynch'sLynch’s Private Client Technology Architecture and Service Quality Group.  Mr. Pizi'sPizi’s 16 years with Merrill Lynch included assignments in Corporate MIS, Investment Banking and Private Client. Mr. Pizi earned his BSB.S. in Engineering from West Virginia University.

NICHOLAS HATALSKI


40
Table of Contents

Mark Landis
Director since September 2002.                  Age: 42

      July 2005.

Mr. HatalskiMark Landis has been the Senior Managing Member of the Security Growth Fund, a director of Level 8newly established private equity firm focused on the electronic security industry since September 2002. Since
January 2004,May 2005. Prior to joining the Security Growth Fund, Mr. Hatalski has served as the Vice President of Business
Development and Product Strategy at MedSeek, Inc., a company dedicated to
providing web-based solutions to the healthcare sector. Since December 2000, heLandis was the Senior ViceExecutive in Residence of The Jordan Company, a private equity firm based in New York from August 2003 until December 2004. Mr. Landis retired from being President of the iServices GroupNorth American Security Division of Park City Solutions,Siemens Building Technologies, Inc. Prior to joining PCS, he wasin July of 2003, having joined that company in 1988.  Mr. Landis earned his B.A. from Cornell University and his Juris Doctorate from the Practice ManagerUniversity of Pennsylvania.  Mr. Landis received his CPCU - Chartered Property and Casualty Underwriter from the American Institute for Technology Consulting
at Siemens Health Services. His tenure at Siemens (and their acquisition Shared
Medical Systems) was 1984-2000.

BRUCEProperty and Liability Underwriters.

Bruce W. HASENYAGER

Hasenyager
Director since October 2002.                    Age: 62

      

Mr. Hasenyager has been a director of Level 8the Company since October 2002.  Since April 2002,November 2004, Mr. Hasenyager has served as Principal of Bergen & Webster Executive Communications.  From April 2002 until December 2004, he served as Director of Business and Technology Development at the Hart eCenter at Southern Methodist University. PriorUniversity (SMU) and Chief Operating Officer of the Guildhall at SMU. From April 1996 to that,April 2002, Mr. Hasenyager was a founder and served as Senior Vice President and CTO of Technology and Operations and Chief Technology Officer at MobilStar Network Corporation since April 1996.

KENNETH W. NIELSEN

Director since October 2002.                    Age: 44

      Mr. Nielsen has been a director of Level 8 since October 2002. Since
December 1998, Mr. Nielsen has served as President and CEO of Nielsen Personnel
Services, inc., a personal staffing firm.Corporation. Prior to that,April 1996, Mr. Nielsen was
District Operations Manager for Outsource International, Inc.

JAYHasenyager held executive and senior management positions in information technology at Chemical Bank, Merrill Lynch, Kidder Peabody, and Citibank.

Jay R. KINGLEY

Kingley
Director since November 2002.                   Age: 42

      

Mr. Kingley has been a director of Level 8the Company since November 2002.  Since
2001,Mr. Kingley has been the Chief Executive Officer of Kingley Institute LLC, a medical wellness company, since January 2003.  From January 2002 until July 2003, Mr. Kingley has served as CEO of Warren Partners, LLC, a software development and consultancy company. Mr. Kingley is also currently the CEO of
Kingley Institute LLC, a medical wellness company. Prior to that, Mr. Kingley
was Managing Director of a business development function of Zurich Financial Services Group from 1999-2001.1999 until 2001.  Prior to joining Zurich Financial Services Group, Mr. Kingley was Vice President of Diamond Technology Partners, Inc., a management-consulting firm.


                                       51



COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      The Compensation Committee

Charles B. Porciello
Director since June 2005.

Mr. Porciello has been a director since June 6, 2005.  Since 2003, Mr. Porciello has been the Chief Executive Officer of Pilar Services, Inc. From 2001 until 2003, he served as Chief Operating Officer of Enterprise Integration Corporation, a minority-owned IT services company.  Prior to that Mr. Porciello worked for various IT companies, developing and facilitating in their growth.   Mr. Porciello retired from the U.S. Air Force in 1982 after serving his country for twenty five years. Mr. Porciello graduated from the U.S. Military Academy with a B.S. in Engineering and received his Masters Degree in Management from the University of Nebraska.

Bruce D. Miller
Director since July 2005.

Mr. Bruce D. Miller has been a General Partner of Delphi Partners, Ltd. a privately-owned investment partnership since 1989.  He is the treasurer and a director of American Season Corporation.  Mr. Miller is a board member of Cape Air/Nantucket Airlines, Inc.  Mr. Miller is a trustee of the Egan Maritime Foundation and is involved in other non-profit activities.  Mr. Miller received his B.S. in Finance from Lehigh University and subsequently earned an M.B.A. from Lehigh.

41
Table of Contents

Bruce A. Percelay
Director since January 2006.

Mr. Percelay has been a director since January 10, 2006.  Mr. Percelay is the Founder and Chairman of the Mount Vernon Company, a real estate investment company specializing in the acquisition and renovation of multi-family and commercial properties in Greater Boston communities. Since 2000, Mr. Percelay has been President of the Board of Habitat for Humanity in Greater Boston.  Mr. Percelay is currently comprisedChairman of Messrs. Hatalski,
Kingleythe Board of Make-A-Wish Foundation of Greater Boston and Neilsen.Eastern Massachusetts.  Since 2002, Mr. Artale alsoPercelay has been a Board Member of the Nantucket Historic Association. Mr. Percelay received his B.S. from Boston University School of Management, and a B.A. in Business and Economics from City of London Polytechnic, Special Studies in Economics.

John W. Atherton
Director since May 2006.

Mr. Atherton has been a director since May 12, 2006. Since 2005, Mr. Atherton has been the Vice President and Chief Financial Officer of CityFed Financial, a publicly held financial holding company, based in Nantucket, Massachusetts. He served onas Chairman of CityFed Financial from 1991 until 2005. Mr. Atherton received his B.A. degree from Wesleyan University (Middletown, Connecticut) and an M.B.A. with Distinction from Babson College (Wellesley, Massachusetts).

Don Peppers
Director since June 2007.

Mr. Peppers has been a director since June 20, 2007.  Mr. Peppers formed Marketing 1:1, Inc. in January 1992 which became Peppers & Rogers Group, a customer-centered management consulting firm with offices located in the Committee until his
resignationUnited States, Europe, Latin America and South Africa.  In August 2003, Peppers & Rogers Group joined Carlson Marketing. From October 1990 to January 1992, Mr. Peppers was the Chief Executive Officer of Perkins/Butler Direct Marketing, a top-20 U.S.-direct-marketing agency.  Prior to marketing and advertising, he worked as an economist in the oil business and as the director of accounting for a regional airline. Mr. Peppers holds a Bachelor's Degree in astronautical engineering from the BoardU.S. Air Force Academy, and a Master's Degree in January 2004. Nonepublic affairs from Princeton University's Woodrow Wilson School.

Director Independence

We undertook a review of the current membersindependence of our directors and, using the definitions and independence standards for directors provided in the rules of The Nasdaq Stock Market, considered whether any director has a material relationship with us that could interfere with his ability to exercise independent judgment in carrying out his responsibilities. As a result of this review, we determined that John L. Steffens, Mark Landis, Bruce W. Hasenyager, Jay R. Kingley, Charles B. Porciello, Bruce D. Miller, Bruce A. Percelay, John W. Atherton and Don Peppers are “independent directors” as defined under the rules of The Nasdaq Stock Market.

Board Meetings

The Board met eight (8) times during the year ended December 31, 2007.  The standing committees of the Board include the Compensation Committee, has served as an executive officerthe Audit Committee and the Nominating Committee. Stockholders are encouraged to communicate with Board members via our investor relations department, and such communications are either responded to immediately or referred to our Chief Executive Officer for a response. During fiscal 2007, each of the Company, and no
executive officerincumbent directors, during his period of service, attended at least 75% of the Companytotal number of meetings held by the Board.

Corporate Governance Guidelines

Our Board has served aslong believed that good corporate governance is important to ensure that we are managed for the long-term benefit of our stockholders. Our common stock is currently quoted on the OTC Bulletin Board. The OTC Bulletin Board currently does not have any corporate governance rules similar to the NASDAQ Stock Market, Inc. or any other national securities exchange or national securities association. However, our Board believes that the corporate governance rules of NASDAQ represent good governance standards and, accordingly, during the past year, our Board has continued to review our governance practices in light of the Sarbanes-Oxley Act of 2002, the new rules and regulations of the Securities and Exchange Commission and the new listing standards of NASDAQ and it has implemented certain of the foregoing rules and listing standards during this past fiscal year.

42
Table of Contents

Director Compensation

In 2007, the Board of Directors approved the 2007 Cicero Employee Stock Option Plan which permits the issuance of incentive and nonqualified stock options, stock appreciation rights, performance shares, and restricted and unrestricted stock to employees, officers, directors, consultants, and advisors. The aggregate number of shares of common stock which may be issued under this Plan shall not exceed 4,500,000 shares upon the exercise of awards and provide that the term of each award be determined by the Board of Directors. In August 2007, outside directors were each granted an option to purchase 5,000 shares of common stock at a price equal to the fair market value on the date of grant. The value of these awards was $2,609.  These options vest on the one year anniversary of the date of grant provided that the director is still an active member of the Board of Directors. In addition, each outside director who serves on either the Audit Committee, the Compensation Committee of any other entity of which Messrs. Hatalski, Kingley and Neilsen
have servedor as executive officers. There were no interlocking relationships
between the Company and other entities that might affect the determinationChairman of the compensationBoard, was granted an additional option to purchase 3,000 shares of common stock at a price equal to the fair value on the date of grant. The value of these awards was $1,565.  These options also vest on the one year anniversary of the directorsdate of grant and executive officers ofcarry the Company.

DIRECTOR COMPENSATION

      same service requirements.

In May 1999, stockholders of the Company approved the Outside Director Stock Incentive Plan of the Company. Under this plan,Plan, the outside directors may be granted an option to purchase 12,000120 shares of common stock at a price equal to the fair market value of the common stock as of the grant date. In January 2002, the Board of Directors approved an amendment to the Outside Director Stock Incentive Plan to provide an increase in the number of options to be granted to outside directors to 24,000.240.  These options vest over a three-year period in equal increments upon the eligible Director'sdirector’s election to the Board, with the initial increment vesting on the date of grant.  The Outside Director Stock Incentive Plan also permits eligible directors to receive partial payment of director fees in common sharesstock in lieu of cash, subject to approval by the Board of Directors. In addition, the planPlan permits the Board of Directors to grant discretionary awards to eligible directors under the plan.  None of the Company's
DirectorsCompany’s directors received additional monetary compensation for serving on the Board of Directors of the Company in 2001, other than reimbursement of reasonable
expenses incurred in attending meetings.

      2007.

In October 2002, the Board of Directors approved an amendment to the stock
incentive planStock Incentive Plan for all non-management directors. Under the amendment, each non-management director will receive 100,0001,000 options to purchase common stock of the Company at the fair market value of the common stock on the date of grant. These shares will vest in three equal increments with the initial increment vesting on the date of grant. The option grant contains an acceleration of vesting provision should the Company incur a change in control. A change in control is defined as a merger or consolidation of the Company with or into another unaffiliated entity, or the merger of an unaffiliated entity into the Company or another subsidiary thereof with the effect that immediately after such transaction the stockholders of the Company immediately prior to the transaction hold less than fifty percent (50%) of the total voting power of all securities generally entitled to vote in the election of directors, managers or trustees of the entity surviving such merger or consolidation.  Under the amendment, there will be no additional compensation awarded for committee participation.  The shares allocated to the Board of Directors are beingwere issued out of the Level 8 Systems, Inc. 1997 Employee Stock Plan.

                               EXECUTIVE OFFICERS

      

Audit Committee

The Company's current executive officers are listed below, together with
their age, positionAudit Committee is composed of Mr. Bruce Miller, Mr. Bruce Hasenyager and Mr. John W. Atherton. The responsibilities of the Audit Committee include the appointment of, retention, replacement, compensation and overseeing the work of the Company’s independent accountants and tax professionals. The Audit Committee reviews with the Company and business experience forindependent accountants the past five
years.

ANTHONY C. PIZI                                 Age:  45

Mr. Pizi currently serves as the Chairmanresults of the Board, Chief Executive Officeraudit engagement, approves professional services provided by the accountants including the scope of non-audit services, if any, and Chief Technology Officerreviews the adequacy of our internal accounting controls. The Audit Committee met formally six times during our fiscal year ended December 31, 2007. Each member attended every meeting while they were appointed to the Company since February 1, 2001. Prior to
joining the Company, Mr. Pizi was First Vice President and Chief Technology
Officer of Merrill Lynch's Private Client Technology Architecture and Service
Quality Group. Mr. Pizi's 16 years with Merrill Lynch included assignments in
Corporate MIS, Investment Banking and Private Client. Mr. Pizi earned his BS in
Engineering from West Virginia University.


                                       52


JOHN P. BRODERICK                               Age:  55

Mr. Broderick has served as the Chief Operating Officer of the Company since
June 2002, as the Chief Financial Officer of the Company since April 2001, and
as Corporate Secretary since August 2001. Prior to joining the Company, Mr.
Broderick was Executive Vice President of Swell Inc., a sports media e-commerce
company where he oversaw the development of all commerce operations and served
as the organization's interim CFO. Previously, Mr. Broderick served as chief
financial officer for Programmer's Paradise, a publicly held (NASDAQ: PROG)
international software marketer. Mr. Broderick received his B.S. in accounting
from Villanova University.Audit Committee. The Board of Directors has determined that the members of the Audit Committee are independent as defined in Rule 4200(a)(15) of the Nasdaq
Marketplace Rules. Until his resignation in January 2004,National Association of Securities Dealers’ listing standards. Mr. Frank ArtaleJohn W. Atherton was designated the "audit“audit committee financial expert"expert” as defined in Item 401(h) of Regulation S-K. Following the resignation

43
Table of Mr. Artale in January 2004, the
Company has not appointed a replacement "audit committee financial expert"Contents

Code of Ethics and continues to look for a candidate to fill this role on the Board or Directors
and the Audit Committee.

      Conduct
Our Board of Directors has adopted a code of ethics and a code of conduct that applies to all of our directors, Chief Executive Officer, Chief Financial Officer, and employees.  We will provide copies of our code of conduct and code of ethics without charge upon request. To obtain a copy of the code of ethics or code of conduct, please send your written request to Level 8 Systems,Cicero Inc., Suite 542, 8000 Regency Pkwy, Cary, North Carolina 27511,27518, Attn: Corporate Secretary.  The code of ethics is also available on the Company'sCompany’s website at WWW.LEVEL8.COM.


                                       53
www.ciceroinc.com.

44
Table of Contents

Compensation Committee Membership and Organization

The Compensation Committee of the Board of Directors has responsibility for establishing, implementing and monitoring adherence with the Company’s compensation philosophy. Its duties include:

·Setting the total compensation of our Chief Executive Officer and evaluating his performance based on corporate goals and objectives;
·Reviewing and approving the Chief executives Officer’s decisions relevant to the total compensation of the Company’s other executive officer;
·    Making recommendations to the Board of Directors with respect to equity-based plans in order to allow us to attract and retain qualified personnel; and
·Reviewing director compensation levels and practices, and recommending, from time to time, changes in such compensation levels and practices of the Board of Directors.

The members of the Compensation Committee are Messrs. Kingley and Porciello. None of the current members of the Compensation Committee has served as an executive officer of the Company, and no executive officer of the Company has served as a member of the Compensation Committee of any other entity of which Messrs. Kingley and Porciello have served as executive officers. Mr. Porciello is the Chief Executive Office of Pilar Services Inc., a reseller partner.  We have recognized approximately $1,000 and $100,000 in revenues with Pilar Services Inc. during 2007 and 2006, respectively.  There were no interlocking relationships between us and other entities that might affect the determination of the compensation of the directors and executive officers of the Company. The Compensation Committee meets on an as necessary basis during the year.

EXECUTIVE COMPENSATION

The following summary compensation table sets forth the compensation earned by all persons serving as the Company'sCompany’s executive officers during fiscal year 2003, serving or having served at the end2007.

Summary Compensation Table
Name and
Principal
Position
 
Fiscal
Year
 
Salary
 
 
Stock Awards (1)
 
 
Option Awards (2)
 
 
Non- Equity
Incentive
Plan Compensation (3)
 
 
All Other
Compensation (4)
 
 
 
Total
 
John P. Broderick
Chief Executive Officer Chief /Financial Officer, Corporate Secretary
 
2007
 
$
175,000
 
 
$
37,396
 
 
$
125,838
 
 
 
--
 
 
$
6,862
 
 
$
345,096
 
 
 
2006
 
$
150,000
 
 
 
--
 
 
 
--
 
 
 
--
 
 
$
4,973
 
 
$
154,973
 
Anthony C. Pizi
Chief Information Officer  (5)
 
2007
 
$
78,840
 
 
 
--
 
 
$
63,543
 
 
$
15,289
 
 
$
504
 
 
$
158,176
 
 
 
2006
 
$
150,000
 
 
 
--
 
 
 
--
 
 
 
--
 
 
$
1,073
 
 
$
151,073
 


(1)
In August 2007, we issued Mr. Broderick a restricted stock award in the amount of 549,360 shares which will vest to him upon his resignation or termination or a change of control. We used the Black-Scholes method to value these shares and assumed a life of 10 years.

(2)
We issued 549,360 options to Mr. Broderick in August 2007. The fair market on the date of grant was $0.51 each. The options vested one-third immediately and the balance on each of the next two anniversaries of the date of grant. The Company issued 122,080 options to Mr. Pizi in August 2007. The fair market value on the date of grant was $0.51 each. Mr. Pizi’s options vested immediately however he failed to exercise these options within 90 days of separation from the Company and therefore they were cancelled on November 30, 2007.

45
Table of fiscal 2003 whose salary and
bonus exceeded $100,000 for services renderedContents

(3)
Non-equity incentive plan compensation includes commission on revenue for named executive earned during fiscal year ended December 31, 2007.

(4)
Other compensation includes the Company’s portion of major medical insurance premiums and long term disability premiums for named executives during fiscal year ended December 31, 2007.
(5)
Mr. Pizi resigned as the Company’s Chief Information Officer effective July 31, 2007.
Grants of Plan Based Awards
We awarded 549,360 stock options to the Companynamed executive during fiscal 2003.
The table reflects compensation earned for each of the last three years or for
such shorter period of service as an executive officer as is reflected below.
For the principal terms of the options granted2007.  We did not award any stock appreciation rights (“SARs”) during fiscal 2003, see "Option
Grants2007.

The following table presents the number and values of exercisable options as of December 31, 2007 by the named executive.

Outstanding Equity Awards at December 31, 2007
 
 
Option Awards
 
Stock Awards
Name
 
Number of Securities Underlying Unexercised Options # Exercisable (Vested)
 
 
Number of Securities Underlying Unexercised Unearned Options# Unexercisable (Unvested)
 
 
Option Exercise price ($)
 
Option Expiration date
 
Number of Shares of Stock That Have Not Vested
 
Market Value of Shares of Stock That Have Not Vested
John P. Broderick
 
 
500
(1)
 
 
--
 
 
$
400.00
 
05/17/2011
 
 
 
 
 
 
 
250
(2)
 
 
--
 
 
$
175.00
 
09/25/2011
 
 
 
 
 
 
 
909
(3)
 
 
--
 
 
$
174.00
 
12/03/2011
 
 
 
 
 
 
 
1,000
(4)
 
 
--
 
 
$
39.00
 
07/08/2012
 
 
 
 
 
 
 
4,950
(5)
 
 
--
 
 
$
26.00
 
04/24/2013
 
 
 
 
 
 
 
5,000
(6)
 
 
--
 
 
$
31.00
 
02/18/2014
 
 
 
 
 
 
 
183,120
(7)
 
 
366,240
(7)
 
$
0.51
 
08/17/2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
549,630 (8)
 
$  126,415

(1)
These options were granted on May 17, 2001. This stock option vested and became exercisable in four equal installments with the first installment vesting on May 17, 2002.
(2)
These options were granted on September 25, 2001. This stock option vested and became exercisable in four equal annual installments with the first installment vesting on September 25, 2002.
(3)
These options were granted on December 3, 2001. This stock option vested and became exercisable in three equal annual installments with the first installment vesting on December 3, 2001.
(4)
These options were granted on July 8, 2002.  This stock option vested and became exercisable in three equal annual installments with the first installment vesting on July 8, 2002.
(5)
These options were granted on April 24, 2003. This stock option vested and became exercisable in three equal annual installments with the first installment vesting on April 24, 2003.
46
Table of Contents

(6)
These options were granted on February 18, 2004. This stock option vested and became exercisable in three equal annual installments with the first installment vesting on February 18, 2004.
(7)
These options were granted on August 17, 2007. This stock option vests in three equal installments with the first installment vesting on August 17, 2007.
(8)
These are restricted stock granted on August 17, 2007.  The shares will vest to him upon his resignation or termination or a change of control.
Options Exercised and Stock Vested

The named executive did not exercise any options during the year ended December 31, 2007. All of Mr. Broderick’s outstanding options are fully vested except for those identified in Fiscal 2003."



SUMMARY COMPENSATION TABLE

              NAME AND                                                                            SECURITIES        ALL OTHER
             PRINCIPAL                     FISCAL                                                 UNDERLYING          ANNUAL
              POSITION                      YEAR        SALARY                BONUS                OPTIONS         COMPENSATION
              --------                      ----        ------                -----                -------         ------------

Anthony C. Pizi                             2003      $ 200,000(2)         $    100,000             500,000        $         --
Chief Executive Officer, Chief              2002      $ 337,500(3)         $      --                500,000        $         --
Technology Officer and Chairman (1)         2001      $ 527,038            $      --                500,000        $         --

John P. Broderick                           2003      $ 200,000(4)         $     60,000             500,000        $         --
Chief Operating and Financial Officer,      2002      $ 200,000            $     40,000             100,000        $         --
Corporate Secretary                         2001      $ 146,788            $     40,000             165,900        $         --



(1)   Mr. Pizi began his service as Chief Executive Officerthe table above.

Employment Agreements, Termination of the Company in
      February 2001.

(2)   Mr. Pizi's base salary for fiscal 2003 was $200,000. Mr. Pizi had
      voluntarily elected to defer $31,250 of salary from 2003. During 2003, a
      salary deferral of $37,500 from 2002 was repaid to Mr. Pizi.

(3)   Mr. Pizi's base salary for fiscal 2002 was $300,000. Mr. Pizi had
      voluntarily elected to defer $75,000 of salary from 2001, which was paid
      in 2002,Employment and to defer $37,500 of 2002 salary.

(4)   Mr. Broderick's base salary for 2003 was $200,000. Mr. Broderick
      voluntarily elected to defer $31,250 of salary from 2003.

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

      Change-In-Control Arrangements

Under the employment agreement between the Company and Mr. PiziBroderick effective January 1, 2004, the Company is2008, we agreed to pay Mr. PiziBroderick an annual base salary of $200,$175,000 and a performance bonusbonuses in cash of up to $400$300,000 per annum based upon certain revenue goals and operating metrics, as determined by the Compensation Committee, of the Board of
Directors of the Company, in its discretion.  Upon termination of Mr. Pizi'sBroderick’s employment by the Company without cause, the Company haswe agreed to pay Mr. Pizi
(a)Broderick a lump sum payment of one year of Mr. Pizi'sBroderick’s then current base salary within thirty
(30)30 days of termination and (b) two hundred thousand (200,000) shares of the
Company's common stockany unpaid deferred salaries and immediately vest all unvested stock options held by
Mr. Pizi.bonuses. In the event there occurs a substantial change in Mr. Pizi'sBroderick’s job duties, there is a decrease in or failure to provide the compensation or vested benefits under the employment agreement or there is a change in control of the Company, the Company has agreed to grant Mr. Pizi five hundred thousand
(500,000) shares of the Company's common stock. If Mr. Pizi's employment is
terminated for any reason, Mr. Pizi has agreed that, for one (1) year after such
termination, he will not directly or indirectly solicit or divert business from
the Company or assist any business in attempting to do so or solicit or hire any
person who was an employee of the Company during the term of his employment
agreement or assist any business in attempting to do so.


                                       54



      Under the employment agreement between the Company and Mr. Broderick
effective January 1, 2004, the Company pays Mr. Broderick a base salary of $200,
and a performance bonus of cash up to $100 per annum based upon certain revenue
goals, as determined by the Compensation Committee of the Board of Directors of
the Company, in its discretion. Upon termination of Mr. Broderick's employment
by the Company without cause, the Company has agreed to provide Mr. Broderick
with salary continuation of six months of Mr. Broderick's then base salary
beginning on the first payday after the date of termination. In the event there
occurs a substantial change in Mr. Broderick's job duties, there is a decrease
in or failure to provide the compensation or vested benefits under the
employment agreement or there is a change in control of the Company, the Company
haswe agreed to pay Mr. Broderick (a) a lump sum payment of one year of Mr. Broderick'sBroderick’s then current base salary within thirty (30) days of termination and (b) two
hundred fifty thousand (250,000) shares of the Company's common stock and
immediately vest all unvested stock options held by Mr. Broderick.termination. Mr. Broderick will have thirty (30) days from the date written notice is given about either a change in his duties or the announcement and closing of a transaction resulting in a change in control of the Company to resign and execute his rights under this agreement. If Mr. Broderick'sBroderick’s employment is terminated for any reason, Mr. Broderick has agreed that, for one (1) year after such termination, he will not directly or indirectly solicit or divert business from the Companyus or assist any business in attempting to do so or solicit or hire any person who was anour employee of the Company during the term of his employment agreement or assist any business in attempting to do so.



                                       55

Director Compensation

The following table sets forth the total compensation paid, accrued or expensed during Fiscal 2007 by us to each of our non-employee directors who served during Fiscal 2007, rounded to the nearest whole-dollar amount:

Name
 
Fees Earned or Paid in Cash
 
 
Stock Awards
 
 
Option Awards
 
 
Non-Equity Incentive Plan Compensation
 
 
All Other Compensation
 
 
Total
 
John L. Steffens
 
--
 
 
--
 
 
$
1,497
 
 
--
 
 
--
 
 
$
1,497
 
Anthony Pizi
 
--
 
 
--
 
 
$
3,237
 
 
--
 
 
--
 
 
$
3,237
 
Mark landis
 
--
 
 
--
 
 
$
936
 
 
--
 
 
--
 
 
$
936
 
Bruce W. Hasenyager
 
--
 
 
--
 
 
$
1,497
 
 
--
 
 
--
 
 
$
1,497
 
Jay R. Kingley
 
--
 
 
--
 
 
$
1,497
 
 
--
 
 
--
 
 
$
1,497
 
Charles B. Porciello
 
--
 
 
--
 
 
$
1,497
 
 
--
 
 
--
 
 
$
1,497
 
Bruce D. Miller
 
--
 
 
--
 
 
$
1,497
 
 
--
 
 
--
 
 
$
1,497
 
Bruce A. Percelay
 
--
 
 
--
 
 
$
936
 
 
--
 
 
--
 
 
$
936
 
John W. Atherton
 
--
 
 
--
 
 
$
1,497
 
 
--
 
 
--
 
 
$
1,497
 
Don Peppers
 
--
 
 
--
 
 
$
936
 
 
--
 
 
--
 
 
$
936
 
Total
 
--
 
 
--
 
 
$
15,027
 
 
--
 
 
--
 
 
$
15,027
 

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Table of Contents

PRINCIPAL STOCKHOLDERS

The following table sets forth information as of August 12, 2004May 31,2008 with respect to beneficial ownership of shares by (i) each person known to the Company to be the beneficial owner of more than 5% of the outstanding common stock, (ii) each of the Company'sCompany’s directors, (iii) the executive officers of the Company named in the Summary Compensation Table (the "Named Executives"“Named Executives”) and (iv) all current directors and executive officers of the Company as a group. Unless otherwise indicated, the address for each person listed is c/o Level 8
Systems,Cicero Inc., 1433 State Highway 34, Farmingdale, New Jersey 07727.

      8000 Regency Parkway, Suite 542, Cary, North Carolina 27518.

The named person has furnished stock ownership information to the Company. Beneficial ownership as reported in this section was determined in accordance with Securities and Exchange Commission regulations and includes shares as to which a person possesses sole or shared voting and/or investment power and shares that may be acquired on or before September 12, 2004May 31, 2008 upon the exercise of stock options.options as well as exercise of warrants. The chart is based on 37,168,24545,911,234 common shares outstanding as of August
19, 2004.May 31, 2008.   Except as otherwise stated in the footnotes below, the named persons have sole voting and investment power with regard to the shares shown as beneficially owned by such persons.

 
 
Common Stock
 
Name of Beneficial Owner
 
No. of Shares
 
 
Percent of Class
 
Ahab International Ltd. (1)
 
 
4,813,698
(2)
 
 
10.5
%
Ahab Partners LP (1)
 
 
4,101,688
(3)
 
 
8.9
%
John L. Steffens (4)
 
 
5,382,668
(5)
 
 
11.7
%
Mark and Carolyn P. Landis (6)
 
 
5,104,863
(7)
 
 
11.1
%
BluePhoenix Solutions (8)
 
 
2,801,997
(9)
 
 
6.1
%
Anthony C. Pizi
 
 
1,397,634
(10)
 
 
3.0
%
Bruce Miller
 
 
1,982,244
(11)
 
 
4.3
%
Bruce Percelay
 
 
1,073,486
(12)
 
 
2.3
%
John P. Broderick
 
 
748,337
(13)
 
 
1.6
%
John W.  Atherton
 
 
148,884
(14)
 
 
*
 
Bruce W. Hasenyager
 
 
33,652
(15)
 
 
*
 
Don Peppers
 
 
101,750
(16)
 
 
*
 
Charles Porciello
 
 
80,286
(17)
 
 
*
 
Jay R. Kingley
 
 
1,000
(18)
 
 
*
 
All current directors and executive officers as a group (11 persons)
 
 
16,054,704
(19)
 
 
35.0
%


                                                                                               COMMON STOCK
                                                                              ------------------------------------------------
NAME OF BENEFICIAL OWNER                                                       NO. OF SHARES                  PERCENT OF CLASS
- ------------------------                                                       -------------                  ----------------

Seneca Capital
*
Represents less than one percent of the outstanding shares.

1.
The address of Ahab International Ltd.(1)......................................      1,902,771   (2)                      4.9%
Seneca Capital, L.P.(3)....................................................      1,936,235   (4)                      5.0%
Anthony C. Pizi............................................................      2,641,607   (5)                      6.6% and Ahab Partners LP is 299 Park Avenue New York, New York 10171.

2.
As of May 31, 2007, Ahab International Ltd. owns 4,801,186 shares of common stock and 12,512 shares issuable upon the exercise of warrants.  The exercise prices of the warrants are as follows: 3,194 at $40.00 per share, and 9,318 at $10.00 per share.

3.
As of December 31, 2007, Ahab Partners LP. owns 4,101,688 shares of common stock and 6,738 shares issuable upon the exercise of warrants.  The exercise prices of the warrants are as follows: 1,720 at $40.00 per share, and 5,018 at $10.00 per share.

4.
The address of John L. Steffens is 65 East 55th Street, New York, N.Y. 10022.

5.
Includes 5,160,307 shares of common stock, 14,832 shares of the Series A-1 Convertible Preferred Stock and 207,529 shares issuable upon the exercise of warrants. The exercise prices of the warrants are as follows: 4,912 at $40.00 per share, 14,332 at $10.00 per share and 188,285 at $0.18 per share.

6.
The address of Mark and Carolyn P. Broderick..........................................................        660,539   (6)                      1.7%
Nicholas Hatalski..........................................................         66,660   (7)                       *
Kenneth W. Nielsen.........................................................         66,660   (7)                       *
Bruce W. Hasenyager........................................................         66,660   (7)                       *
Jay R. Kingley.............................................................         66,660   (7)                       *
All current directorsLandis is 503 Lake Drive, Princeton, New Jersey 08540.

48
Table of Contents

7.
Includes 3,748,155 shares of common stock, 1,326,136 shares of the Series A-1 Convertible Preferred Stock, and executive officers30,572 shares of common stock issuable upon the exercise of warrants. The exercise prices of the stock options and warrants are at $0.51 and $10.00 per share respectively.  Disclaims beneficial ownership of 35,572 shares because they are anti-dilutive.

8.
The address of BluePhoenix Solutions is 8 Maskit Street, PO Box 2062, Herzlia, Israel 46120.

9.
Includes 2,741,997 shares of common stock

10.
Includes 1,274,951 shares of common stock, 111.016 shares of the Series A-1 Convertible Preferred Stock, and 11,667 shares of common stock issuable upon the exercise of warrants.  The exercise price of warrants is $10.00 per share of common stock.

11.
Consists of 1,963,078 shares of common stock and 19,166 shares of common stock issuable upon the exercise of warrants.  The exercise prices of the warrants are as follows:  2,457 at $40.00 per share, and 13,195 at $10.00 per share.  Mr. Miller has sole or shared voting or dispositive power with respect to the securities held by Delphi Partners, Ltd., which holds 491,267 shares of common stock and 3,514 shares of common stock issuable upon the exercise of warrants with an exercise price at $10.00 per share.

12.
Consists of 1,073,486 shares of common stock.

13.
Includes 3,248 shares of common stock.  195,729 shares subject to stock options exercisable within sixty (60) days and 549,360 shares of restricted stock that is awarded upon resignation or termination and change of control.

14.
Includes 148,784 shares of common stock, and 100 shares of common stock held in a group (6 persons)........      3,568,786   (8)                      8.8%
self-directed IRA.


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

* Represents less than one percent

15.
Consists of 32,652 shares of common stock and 1,000 shares subject to stock options exercisable within sixty (60) days.  Disclaims beneficial ownership of 1,000 shares of common stock because they are anti-dilutive.

16.
Includes 101,750 shares of common stock

17.
Consists of 80,286 shares of common stock.

18.
Consists of 1,000 shares subject to stock options exercisable within sixty (60) days.

19.
Includes shares issuable upon exercise of options and warrants exercisable within sixty (60) days as described in Notes 7-14 to our financial statements.

49
Table of the outstanding shares.

(1)   The address of Seneca Capital International, Ltd. is 950 3rd Ave, 29th
      Floor, New York, New York 10022.

(2)   Includes 779,826 shares of common stock issuable upon conversion of Series
      B3 Preferred Stock and 1,122,945 shares issuable upon exercise of warrants
      at an exercise price of $0.40.

(3)   The address of Seneca Capital L.P. is 950 3rd Ave, 29th Floor New York,
      New York 10022.

(4)   Includes 417,205 shares of common stock issuable upon the conversion of
      Series B3 Preferred Stock and 188,408 shares of common stock issuable upon
      the conversion of Series A3 Preferred Stock. Also owns 1,060,352 shares
      issuable upon the exercise of warrants. The exercise price of 790,082
      warrants is $0.40 per share of common stock. The exercise price of 270,270
      warrants is $0.37 per share of common stock. Also includes 270,270 shares
      of common stock.

(5)   Includes 1,187,798 shares subject to stock options exercisable within
      sixty (60) days, 394,737 shares of common stock issuable upon the
      conversion of Series C Preferred Stock, 90,118 shares of common stock
      exercisable upon the exercise of warrants at an exercise price of $0.17
      per share, 560,000 shares of common stock exercisable upon the exercise of
      warrants at an exercise price of $0.20 per share, 270,270 shares of common
      stock exercisable upon the exercise of warrants at an exercise price of
      $0.37 and 98,684 shares of common stock issuable upon the exercise of
      warrants at an exercise price of $0.38 per share of common stock subject
      to adjustment. Also includes 40,000 shares of common stock.

(6)   Consists of 660,539 shares subject to stock options exercisable within
      sixty (60) days.

(7)   Consists of 66,660 shares subject to stock options exercisable within
      sixty (60) days.

(8)   Includes shares issuable upon exercise of options and warrants exercisable
      within sixty (60) days as described in Notes 5-7.


                                       56
Contents
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

LOAN FROM RELATED PARTIES

      

Loans from Related Parties

In March 2004,February 2008, we converted a promissory noteentered into a convertible loan
agreementshort term note payable with MarkJohn L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The note bears interest at 10% per year and Carolyn Landis, who are related by marriageis unsecured. At    May 31, 2008, the Company was indebted to Anthony
Pizi, the Company's Chairman and Chief Executive Officer,Mr. Steffens in the amount of $125,000. Under the terms$45,000.

In October 2007, we entered into a long-term promissory note with John L. (Launny) Steffens as part of the agreement,restructuring of the loan is convertible into 446,429
sharesNote payable to Bank Hapoalim.  The Note bears interest of our common stock3% and matures in October 2009. We also granted Mr. Steffens 188,285 warrants to purchase 446,429 shares of our common stock exercisable at $0.28.$0.18 per share. We used the Black Scholes method to value the warrants and recorded a stock compensation charge and additional paid-in capital in the amount of $34,230. At May 31, 2008, we were indebted to Mr. Steffens in the amount of $300,000.

In November 2007, we entered into a short term note payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The warrants expireNote bears interest at 6% per year and is unsecured. At     May 31, 2008, we were indebted to Mr. Steffens in three years.

      From time to time during 2003, the Companyamount of $40,000.

During 2005, we entered into short term notes payable with Anthony Pizi, the Company's Chairman andCompany’s former Chief ExecutiveInformation Officer, for various working capital needs. The Notes bear interest at 1% per month and are unsecured. At DecemberMay 31, 2003, the Company was2008, we were indebted to Mr. Pizi in the amount of $85. $9,000.

Convertible Promissory Notes.  Our Directors and executive officers made several loans to us in exchange for convertible promissory notes. As part of the Plan of Recapitalization, which was approved by our shareholders in November 2006, we offered to adjust the conversion rates and terms on these notes. As a result of the Plan of Recapitalization, these notes were automatically converted into shares of the preferred stock designated as Series A-1 Preferred stock. Each share of Series A-1 Preferred Stock is convertible into 1,000 shares of the Company’s common stock. Because the conversion rates were adjusted, we calculated the amount of the beneficial conversion resulting from the adjusted conversion rate and recorded that amount as a deemed dividend and additional paid in capital.

In JanuaryJune, 2004, the Company repaid Mr. Pizi $75. On April 12,
2004, the Companywe entered into a short termconvertible promissory note payable with Mr. Pizi. The
note,Pizi in the face amount of $100,000, bearsbearing interest at 1% per month and is
convertiblewhich was converted into common stock14 shares of the Company at a conversion rate of $0.37 per
share.Company’s Series A-1 Preferred Stock. In addition, Mr. Pizi was granted 270,270 warrants to purchase the
Company'sour common stock at $0.37 per share. TheseAs part of the Note and Warrant Offering, Mr. Pizi elected to convert these warrants expire three years
fromby loaning the date of grant.Company the reduced exercise price.

 In JuneJuly 2004, the Companywe entered into a convertible promissory note with AnthonyMr. Pizi the Company's Chairman and Chief Executive Officer. The Note, in the face amount of $112, bears$112,000, bearing interest at 1% per month and is convertiblewhich was converted into 560,00078.4 shares of the Company's common stock andCompany’s Series A-1 Preferred Stock upon approval of the Plan of Recapitalization. In addition, at the time of the loan Mr. Pizi was granted warrants to purchase 560,000 shares of our common stock at $0.20 per share.  As part of the Note and Warrant Offering, Mr. Pizi elected to convert 289,376 of these warrants by loaning the Company the reduced exercise price. Mr. Pizi elected not to exercise 270,624 warrants which after the reverse stock split now total 2,706 warrants with an exercise price of $20 per share. Also in JuneJuly 2004, Mr. Pizi entered into a second convertible promissory note in the face amount of $15$15,000 which is convertiblewas converted into 90,11812.62 shares of the Company's common stock andCompany’s Series A-1 Preferred Stock. In addition, at the time of the loan, Mr. Pizi was granted warrants to purchase 90,118 shares of the Company'sour common stock at $0.17 per share. TheseMr. Pizi has not elected to exercise these warrants, expire three years fromwhich after the datereverse stock split now total 901 warrants with an exercise price of grant.

      Also in June$17.

In March 2004, the Companywe entered into a convertible loan agreementpromissory note with MarkMr. and CarolynMrs. Landis who are related by marriage to Anthony Pizi, the
Company's Chairman and Chief Executive Officer, in the amount of $125. Under the
terms of the agreement, the loan bears$125,000. The note bore interest at 1% per month, and is
convertiblewas converted into 781,25062.5 shares of ourSeries A-1 Preferred stock. In addition, Mr. and Mrs. Landis were granted warrants to purchase 446,429 shares of the Company’s common stock exercisable at $0.28 per share. As part of the Note and Warrant Offering, Mr. and Mrs. Landis elected to convert these warrants by loaning the Company the reduced exercise price.

In June 2004, we entered into a convertible promissory note with Mr. and Mrs. Landis in the amount of $125,000. The note bore interest at 1% per month and was converted into 113.64 shares of Series A-1 Preferred stock. In addition, Mr. and Mrs. Landis were granted warrants to purchase 781,250 shares of the Company'sCompany’s common stock exercisable at $0.16.$0.16 per share. As part of the Note and Warrant Offering, Mr. and Mrs. Landis elected to convert these warrants by loaning the Company the reduced exercise price.

50
Table of Contents

In October 2004, we entered into a convertible promissory note with Mr. and Mrs. Landis in the amount of $100,000. The note bore interest at 1% per month and was converted into 400 shares of Series A-1 Preferred stock. In addition, Mr. and Mrs. Landis were granted 2,000,000 warrants to purchase our common stock exercisable at $0.10 per share. Mr. and Mrs. Landis elected not to exercise these warrants as part of the Note and Warrant Offering and after the reverse stock split ratio these warrants total 20,000 with an exercise price of $10.00.

In November 2004, we entered into a convertible promissory note with Mr. and Mrs. Landis in the amount of $150,000. The note bore interest at 1% per month and was converted into 18,750 shares of common stock after the reverse stock split ratio. In addition, Mr. and Mrs. Landis were granted 1,875,000 warrants to purchase our common stock exercisable at $0.08 per share.  Mr. and Mrs. Landis elected not to exercise these warrants as part of the Note and Warrant Offering and after the reverse stock split ratio these warrants total 18,750 with an exercise price of $8.00.

In June 2004, we entered into a convertible promissory note with Fredric Mack, a former director of the Company, in the amount of $125,000. The note bore interest at 1% per month, and was converted into 54.69 shares of Series A-1 Preferred stock. In addition, Mr. Mack was granted warrants to purchase 390,625 shares of our common stock exercisable at $0.32 per share.  As part of the Note and Warrant Offering, Mr. Mack elected to convert these warrants by loaning the Company the reduced exercise price.

In April 2005, we entered into a convertible promissory note with Bruce Miller, a director of the Company, in the amount of $30,000. The note bore interest at 1% per month and was converted into 60 shares of Series A-1 Preferred stock.

In July 2004, we entered into a convertible promissory note with Nicholas Hatalski, who until July 22, 2005 was a director of the Company, in the amount of $25,000. The note bore interest at 1% per month and was converted into 10.94 shares of Series A-1 Preferred stock. In addition, Mr. Hatalski was granted warrants to purchase 78,125 shares of our common stock exercisable at $0.32 per share. Mr. Hatalski elected not to exercise these warrants as part of the Note and Warrant Offering and after the reverse stock split ratio these warrants total 781 with an exercise price of $32.

All of such warrants expire three years from date of grant.

Senior Reorganization Notes.  From March 2004 to April 2005, directors and executive officers made the following loans to the Company evidenced by Senior Reorganization Notes that were converted in three years.

November 2006:

Mr. Pizi held $423,333 of Senior Reorganization Notes, which were converted into warrants to purchase 571,659 shares of common stock at a purchase price of $0.20 per share.

Mr. Landis held $327,860 of Senior Reorganization Notes, which were converted into warrants to purchase  442,345 shares of common stock at an exercise price of $0.20 per share.

Mr. Mack held, together with his affiliates, $88,122 of Senior Reorganization Notes, which were converted into warrants to purchase 112,205 shares of common stock at a purchase price of $0.20 per share.

Mr. Miller held, together with his affiliates, $77,706 of Senior Reorganization Notes, which were converted into warrants to purchase 114,597 shares of common stock at a purchase price of $0.20.

Mr. Atherton held $20,000 of Senior Reorganization Notes which were converted into warrants to purchase 289,856 shares of common stock at a purchase price of $0.20.

Mr. Broderick, Chief Executive Officer and Chief Financial Officer of the Company, held $2,300 of Senior Reorganization Notes, which were converted into warrants to purchase 3,222 shares of common stock at a purchase price of $0.20 per share, and options to purchase 12,609 shares of common stock under the Company’s stock option plan.

Convertible Bridge Notes.  From July 2005 to November 2006, directors and executive officers made the following loans to us for Convertible Bridge Notes:

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Table of Contents

Mr. Pizi held $85,000 of Convertible Bridge Notes which bore interest at 10% and matured on September 15, 2005.  These notes automatically converted into 680,000 shares of Cicero common stock upon approval of the recapitalization plan by stockholders.

Mr. Landis held $395,000 of Convertible Bridge Notes which bore interest at 10% and matured on various dates in 2005 and 2006.  These notes automatically converted into 3,160,000 shares of Cicero common stock upon approval of the recapitalization plan by stockholders.

Mr. Mack held, together with his affiliates, $114,000 of Convertible Bridge Notes which bore interest at 10% and matured on various dates in 2005 and 2006.  These notes automatically converted into 897,564 shares of Cicero common stock upon approval of the recapitalization plan by stockholders.

Mr. Miller held, together with his affiliates, $120,000 of Convertible Bridge Notes which bore interest at 10% and matured on various dates in 2005 and 2006.  These notes automatically converted into 947,273 shares of Cicero common stock upon approval of the recapitalization plan by stockholders.

Mr. Hasenyager, a member of our Board of Directors, held $4,061 of Convertible Bridge Notes which bore interest at 10% and matured on September 15, 2005. These notes automatically converted into 32,485 shares of Cicero common stock upon approval of the recapitalization plan by stockholders.

Mr. Percelay, a member of our Board of Directors, held $130,000 of Convertible Bridge Notes which bore interest at 10% and matured on various dates in 2005 and 2006. These notes automatically converted into 1,027,273 shares of Cicero common stock upon approval of the recapitalization plan by stockholders.

Mr. Atherton, a member of our Board of Directors, held $15,000 of convertible Bridge Notes which bore interest at 10% and matured during 2006. These notes automatically converted into 120,000 shares of Cicero common stock upon approval of the recapitalization plan by stockholders.

Mr. Porciello, a member of our Board of Directors, held $10,000 of Convertible Bridge Notes which bore interest at 10% and matured during 2006. These notes automatically converted into 80,000 shares of Cicero common stock upon approval of the recapitalization plan by stockholders.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

      On November 24, 2003, Deloitte & Touche LLP resigned as the Company's
independent public accountants. 
During the two most recent fiscal years preceding such resignation, neither of Deloitte & Touche's reports on our
financial statements contained an adverse opinion or a disclaimer of opinion,
however, both reports contained qualifications as to uncertainty. During this
same period, there were no qualifications as to audit scopechanges in or accounting
principles, nor were there disagreements between the Company and Deloitte &
Touche on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to the
satisfaction of Deloitte & Touche, would have caused them to make a reference to
the subject matter of the disagreements in connection with their reports on the
financial statements for such years. There were no reportable events as
described in Item 304(a)(1)(v) of Regulation S-K. The Company has provided
Deloitte & Touche with a copy of the foregoing disclosures and Deloitte & Touche
has furnished the Company with a letter addressed to the SEC indicating
agreement with the statements provided therein.

      On February 2, 2004, Level 8 Systems appointed Margolis & Company P.C. as
the Company's newour company’s independent public accountants.



                                       57

DESCRIPTION OF CAPITAL STOCK

The following descriptions of certain provisions of theour certificate of incorporation and bylaws of Level 8 are necessarily general and do not purport to be complete and are qualified in their entirety by reference to theour certificate of incorporation and bylaws of Level 8 which have been incorporated by reference herein.

COMMON STOCK

      The

Common Stock

Our authorized capital stock of our company consists of 85225 million shares, of which 75215 million shares have been designated common stock, par value $.001 per share. As of May 10, 2004,31, 2008, there were 35,571,38345,911,234 shares of common stock issued and outstanding, held by approximately 232226 holders of record.  The holders of common stock are entitled to one vote for each share on all matters submitted to a vote of stockholders.  Holders of common stock are entitled to such dividends as may be declared from time to time by the board of directors out of funds legally available therefore, subject to the dividend and liquidation rights of any preferred stock (as described below) that may be issued, and subject to the dividend restrictions in certain credit facilities and various other agreements. In the event of the liquidation, dissolution or winding-up of our company, the holders of common stock are entitled to share equally and ratably in our assets, if any, remaining after provision for payment of all debts and liabilities of the Company and satisfaction of the liquidation preference of any shares of preferred stock that may be outstanding. The holders of common stock have no preemptive, subscription, redemptive or conversion rights. The outstanding shares of common stock are fully paid and nonassessable.

PREFERRED STOCK

      

52
Table of Contents

Preferred Stock

Our company is authorized to issue 10 million shares of preferred stock, par value $.001 per share. The board of directors of our company has authority, without stockholder approval, to issue shares of preferred stock in one or more series and to determine the number of shares, designations, dividend rights, conversion rights, voting power, redemption rights, liquidation preferences and other terms of any such series. The issuance of preferred stock, while providing desired flexibility in connection with possible acquisitions and other corporate purposes, could adversely affect the voting power of the holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation and could have the effect of delaying, deferring, or preventing a change in control of our company.

At the date of this prospectus, there were 1,763.5 shares of Series A-1 preferred stock designated and 1,544 issued and outstanding.  The Series A-1 preferred stock is convertible at any time at the option of the holder into an initial conversion ratio of 1,000 shares of Common Stock for each share of Series A-1 preferred stock. The initial conversion ratio shall be adjusted in the event of any stock splits, stock dividends and other recapitalizations. The Series A-1 preferred stock is also convertible on an automatic basis in the event that (i) the Company closes on an additional $5,000,000 equity financing from strategic or institutional investors, or (ii) the Company has four consecutive quarters of positive cash flow as reflected on the Company’s financial statements prepared in accordance with generally accepted accounting principals (“GAAP”) and filed with the Securities and Exchange Commission. The holders of Series A-1 preferred stock are entitled to receive equivalent dividends on an as-converted basis whenever the Company declares a dividend on its Common Stock, other than dividends payable in shares of Common Stock. The holders of the Series A-1 preferred stock are entitled to a liquidation preference of $500 per share of Series A-1 preferred stock upon the liquidation of the Company. The Series A-1 preferred stock is not redeemable.

The holders of Series A-1 preferred stock also possess the following voting rights: each share of Series A-1 preferred stock shall represent that number of votes equal to the number of shares of Common Stock issuable upon conversion of a share of Series A-1 preferred stock. The holders of Series A-1 preferred stock and the holders of Common Stock shall vote together as a class on all matters except: (i) regarding the election of the board of directors of the Company (as set forth below); (ii) as required by law; or (iii) regarding certain corporate actions to be taken by the Company (as set forth below).

The approval of at least two-thirds of the holders of Series A-1 preferred stock voting together as a class, shall be required in order for the Company to: (i) merge or sell all or substantially all of its assets or to recapitalize or reorganize; (ii) authorize the issuance of any equity security having any right, preference or priority superior to or on parity with the Series A-1 preferred stock; (iii) redeem, repurchase or acquire indirectly or directly any of its equity securities, or to pay any dividends on the Company’s equity securities; (iv) amend or repeal any provisions of its certificate of incorporation or bylaws that would adversely affect the rights, preferences or privileges of the Series A-1 preferred stock; (v) effectuate a significant change in the principal business of the Company as conducted at the effective time of the Recapitalization; (vi) make any loan or advance to any entity other than in the ordinary course of business unless such entity is wholly owned by the Company; (vii) make any loan or advance to any person, including any employees or directors of the Company or any subsidiary, except in the ordinary course of business or pursuant to an approved employee stock or option plan; and (viii) guarantee, directly or indirectly any indebtedness or obligations, except for trade accounts of any subsidiary arising in the ordinary course of business. In addition, the unanimous vote of the board of directors is required for any liquidation, dissolution, recapitalization or reorganization of the Company. The voting rights of the holders of Series A-1 preferred stock set forth in this paragraph shall be terminated immediately upon the closing by the Company of at least an additional $5,000,000 equity financing from strategic or institutional investors.

In addition to the voting rights described above, the holders of a majority of the shares of Series A-1 preferred stock are entitled to appoint two observers to the Company’s board of directors who shall be entitled to receive all information received by members of the board of directors, and shall attend and participate without a vote at all meetings of the Company’s board of directors and any committees thereof. At the option of a majority of the holders of Series A-1 preferred stock, such holders may elect to temporarily or permanently exchange their board observer rights for two seats on the Company’s board of directors, each having all voting and other rights attendant to any member of the Company’s board of directors.

53
Table of Contents

Warrants

As of the date of thisthe prospectus, 21,000 shares have been designated as
Series A 4% Convertible Redeemable Preferred Stock and none of which are
currently outstanding; 30,000 shares have been designated Series B 4%
Convertible Redeemable Preferred Stock, and none of which are currently
outstanding; 11,570 shares have been designated Series A1 Convertible Redeemable
Preferred Stock, and none of which are currently outstanding; 30,000 shares have
been designated Series B1 Convertible Redeemable Preferred Stock, and none of
which are currently outstanding; 11,570 shares have been designated Series A2
Convertible Redeemable Preferred Stock, and none of which are currently
outstanding; 30,000 shares have been designated Series B2 Convertible Redeemable
Preferred Stock, and none of which are currently outstanding; 11,570 shares have
been designated Series A3 Convertible Redeemable Preferred Stock, all of which
were issued October 25, 2002, and 1,571 of which are currently outstanding;
30,000 have been designated Series B3 Convertible Redeemable Preferred Stock,
all of which were issued October 25, 2002, and all of which all are currently
outstanding; 1,600 shares have been designated Series C Convertible Redeemable
Preferred Stock, 1,590 of which were issued August 13, 2002 and 1,166 of which
are currently outstanding; 3,705 shares have been designated Series D
Convertible Preferred Stock, 3,530 of which were issued March 19, 2003 and 2,692
of which are currently outstanding.

      Each series of preferred stock is entitled to vote on an as-converted
basis, subject to certain conversion restrictions, as to all matters presented
to the stockholders of the Company.

PROMISSORY NOTES

      As of the date of this prospectus 2,861,327422,456 shares have been designated as shares held for the conversion of promissory notes. The convertible notes bear
interest at 1% per month and are convertible into 2,861,327 shares of our common
stock and warrants to purchase 2,861,327 shares of our common stock. 446,429warrants. 188,285 warrants are exercisable at $0.28$0.18 per share, 405,405201,115 warrants are exercisable at $0.37$10 per share, 578,1258,208 warrants are exercisable at $0.32$20 per share, 560,0001,000 warrants are exercisable at $0.20$38 per share 90,118and 23,848 warrants are exercisable at $0.17 per share, and 781,250 warrants are exercisable at $0.16$40 per share. The warrants expire in three3 years from the date of grant.


                                       58



DISCLOSURE OF 

COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the “Act”), may be permitted to directors, officers orand controlling persons controllingof the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been informedadvised that in the opinion of the Securities and Exchange CommissionSEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.  In the event that a claim for indemnification against such liabilities (other then the payment by the registrant of expense 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 Act and will be governed by the final adjudication of such issue.

LEGAL MATTERS

Certain legal matters in connection with the shares of common stock offered by this prospectus have been passed on for Level 8 Systems, Inc.us by Powell, Goldstein, FrazerGolenbock Eiseman Assor Bell & MurphyPeskoe LLP, Atlanta, Georgia.

                                     New York, New York.

EXPERTS

The financial statements for the yearyears ended December 31, 20032007 and 2006 have been audited by Margolis & Company P.C., independent auditors, and the financial
statements for the years ended December 31, 2002 and 2001 included in this
prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein (which reports express an unqualified opinion and include an explanatory paragraph referring to the Company'sCompany’s ability to continue as a going concern), and are included in reliance upon the report of such firmsfirm given upon their authority as experts in accounting and auditing.


                                       59
AVAILABLE INFORMATION

We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You can receive copies of such reports, proxy and information statements, and other information, at prescribed rates, from the Securities and Exchange Commission by addressing written requests to the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.  The Securities and Exchange Commission also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants such as Level 8 Systems,Cicero Inc. that file electronically with the Securities and Exchange Commission. The address of the Securities and Exchange Commission Web site is http://www.sec.gov. We have filed with the Securities and Exchange Commission a Registration Statement on Form S-1 to register the shares that we will issue in this offering. This prospectus is a part of the Registration Statement. This prospectus does not include all of the information contained in the Registration Statement. For further information about us and the securities offered in this prospectus, you should review the Registration Statement. You can inspect or copy the Registration Statement, at prescribed rates, at the Securities and Exchange Commission'sCommission’s public reference facilities at the addresses listed above.


                                       60



                          Index to Financial Statements


Independent Auditors' Reports ........................................ F-2 & F-3

Financial Statements:

Audited Consolidated Financial Statements as

54
Table of December 2002 and 2003
and for the years ended December 31, 2001,2002, and 2003 ...............     F-4

Unaudited Contents
INDEX TO FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm
F-2
Consolidated Financial Statements (audited):
Consolidated Balance Sheets as of December 31, 2007 and 2006
F-3
Consolidated Statements of Operations for the years ended December 31, 2007, 2006, and 2005
F-4
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2007, 2006, and 2005
F-5
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2007, 2006, and 2005
F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005
F-7
Notes to Consolidated Financial Statements
F-9
Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007
F-29
Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007
F-30
Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007
F-31
Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2008 and 2007
F-32
Notes to Consolidated Financial Statements
F-33

F-1
Table of June 30, 2003 and 2004
and for the six months ended June 30, 2003 and 2004 ....................    F-33


                                      F-1
Contents

REPORT OF INDEPENDENT AUDITOR'S REPORT

REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of
Level 8 Systems,
Cicero Inc.
Princeton, New Jersey

Cary, North Carolina

We have audited the accompanying consolidated balance sheetsheets of Level 8 Systems,Cicero Inc. and subsidiaries (the "Company") as of December 31, 2003,2007 and 2006, and the related consolidated statements of operations, stockholders' equity (deficit), comprehensive loss and cash flows and comprehensive loss for each of the year then ended.years in the three-year period ended December 31, 2007.  Cicero Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

audits.

We conducted our auditaudits in accordance with auditingthe standards generally accepted
inof the United States of America.Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit providesaudits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Level 8 Systems,Cicero Inc. and subsidiaries as of December 31, 2003,2007 and 2006, and the results of their operations and their cash flows for each of the year thenyears in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company's recurring losses from operations and working capital deficiency raise substantial doubt about its ability to continue as a going concern.  Management's plans concerning these matters are also described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


                                      /s/ Margolis & Company P.C.



/s/ Margolis & Company P.C.
Certified Public Accountants


Bala Cynwyd, PA
February 12, 2004


                                      
March 10, 2008

F-2


                          INDEPENDENT AUDITORS' REPORT

To the Board
Table of Directors and Stockholders of
Level 8 Systems, Inc.
Princeton, New Jersey

We have audited the accompanying consolidated balance sheet of Level 8 Systems,
Inc. and subsidiaries (the "Company") as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity (deficit), cash
flows, and comprehensive loss for the two years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Level 8 Systems, Inc. and subsidiaries as of
December 31, 2002, and the results of their operations and their cash flows for
the two years then ended, in conformity with accounting principles generally
accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations and working capital deficiency raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.


                                              /s/ Deloitte & Touche LLP

Raleigh, North Carolina
March 28, 2003


                                      F-3


                              LEVEL 8 SYSTEMS,Contents

CICERO INC.
CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)



                                                                                  DECEMBER 31, 2003   DECEMBER 31, 2002
                                                                                  -----------------   -----------------
                                   ASSETS
Current assets:

    Cash and cash equivalents ......................................................     $      19      $     199
    Cash held in escrow ............................................................           776             --
    Assets of operations to be abandoned ...........................................           149            453
    Trade accounts receivable, net .................................................            12          1,291
    Receivable from related party ..................................................            --             73
    Notes receivable, net ..........................................................            --            867
    Prepaid expenses and other current assets ......................................           270            731
                                                                                         ---------      ---------
              Total current assets .................................................         1,226          3,614
Property and equipment, net ........................................................            26            162
Software product technology, net ...................................................         4,063          7,996
Other assets .......................................................................            47             80
                                                                                         ---------      ---------
              Total assets .........................................................     $   5,362      $  11,852
                                                                                         =========      =========
                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
    Short term debt ................................................................     $   2,625      $   2,893
    Accounts payable ...............................................................         2,545          3,537
    Accrued expenses:
       Salaries, wages, and related items ..........................................           508            107
       Restructuring ...............................................................            --            772
       Other .......................................................................         1,613          1,332
    Liabilities of operations to be abandoned ......................................           451            916
    Deferred revenue ...............................................................            39            311
                                                                                         ---------      ---------
              Total current liabilities ............................................         7,781          9,868
Long-term debt .....................................................................           131             --
Warrant liability ..................................................................           198            331
Senior convertible redeemable preferred stock ......................................         3,355             --
Commitments and contingencies (Notes 19 and 20) Stockholders' equity (deficit):
   Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized .....
     Series A3 - 10,070 shares issued and 4,070 and 10,070 shares outstanding at
            December 31, 2003 and 2002, respectively, $1,000 per share liquidation
            preference (aggregate liquidation value of $4,070) .....................            --             --
     Series B3 - 30,000 shares issued and outstanding, $1,000 per share
            liquidation preference (aggregate liquidation value of $30,000)
     Series C - 1,590 shares issued and 1,340 and 1,590 outstanding at
            December 31, 2003 and 2002, respectively, $1,000 .......................            --             --
            per share liquidation preference (aggregate liquidation value of $1,340)            --             --
   Common stock, $0.001 par value, 85,000,000 and 60,000,000 shares authorized
       at December 31, 2003 and 2002, respectively; 26,645,062 and 19,202,763 issued
       and outstanding at December 31, 2003 and 2002, respectively .................            27             19
    Additional paid-in-capital .....................................................       206,149        202,916
    Accumulated other comprehensive loss ...........................................            (6)          (717)
    Accumulated deficit ............................................................      (212,273)      (200,565)
                                                                                         ---------      ---------
              Total stockholders' equity (deficit) .................................        (6,103)         1,653
                                                                                         ---------      ---------
              Total liabilities and stockholders' equity (deficit) .................     $   5,362      $  11,852
                                                                                         =========      =========
(in thousands, except share and per share amounts)

 
 
December 31, 2007
 
 
December 31, 2006
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
250
 
 
$
310
 
Assets of operations to be abandoned
 
 
79
 
 
 
80
 
Trade accounts receivable, net
 
 
692
 
 
 
170
 
Prepaid expenses and other current assets
 
 
208
 
 
 
22
 
Total current assets
 
 
1,229
 
 
 
582
 
Property and equipment, net
 
 
22
 
 
 
15
 
Total assets
 
$
1,251
 
 
$
597
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
Short-term debt (Note 5)
 
$
1,235
 
 
$
2,899
 
Accounts payable
 
 
2,489
 
 
 
2,360
 
Accrued expenses:
 
 
 
 
 
 
 
 
Salaries, wages, and related items
 
 
1,002
 
 
 
1,012
 
Other
 
 
2,072
 
 
 
1,732
 
Liabilities of operations to be abandoned
 
 
455
��
 
 
435
 
Deferred revenue
 
 
108
 
 
 
38
 
Total current liabilities
 
 
7,361
 
 
 
8,476
 
Long-term debt (Note 6)
 
 
1,323
 
 
 
33
 
Total liabilities
 
 
8,684
 
 
 
8,509
 
 
Commitments and contingencies (Notes 14 and 15)
 
 
 
 
 
 
 
 
Stockholders' deficit:
 
 
 
 
 
 
 
 
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized Series A-1 – 1,603.6 shares issued and outstanding at December 31, 2007, $500 per share liquidation preference (aggregate liquidation value of $802) and 1,763.5 shares issued and outstanding at December 31, 2006, $500 per share liquidation preference (aggregate liquidation value of $880)
 
 
    --
 
 
 
    --
 
Common stock, $0.001 par value, 215,000,000 shares authorized at December 31, 2007 and 2006, respectively; 43,805,508 and 35,182,406 issued and outstanding at December 31, 2007 and 2006, respectively (Note 2)
 
 
44
 
 
 
35
 
Additional paid-in-capital
 
 
228,858
 
 
 
226,407
 
 
 
 
 
 
 
 
 
 
Accumulated deficit
 
 
(236,320
)
 
 
(234,345
)
Accumulated other comprehensive loss
 
 
(15
)
 
 
(9
)
Total stockholders' deficit
 
 
(7,433
)
 
 
(7,912
)
Total liabilities and stockholders' deficit
 
$
1,251
 
 
$
597
 


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

                                      F-4


                              LEVEL 8 SYSTEMS,

F-3
Table of Contents

CICERO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


                                                                           YEAR ENDED DECEMBER 31,
                                                                          -----------------------
                                                                        2003           2002           2001
                                                                   ---------      ---------      ---------
Revenue:

   Software ..................................................     $     102      $   1,491      $   1,658
   Maintenance ...............................................           316            571          9,262
   Services ..................................................           112          1,039          6,437
                                                                   ---------      ---------      ---------
           Total operating revenue ...........................           530          3,101         17,357
                                                                   ---------      ---------      ---------
Cost of revenue:
   Software ..................................................         4,152          7,396         14,800
   Maintenance ...............................................           373            181          3,249
   Services ..................................................           908            900          5,487
                                                                   ---------      ---------      ---------
           Total cost of revenue .............................         5,433          8,477         23,536
                                                                   ---------      ---------      ---------
Gross margin (loss) ..........................................        (4,903)        (5,376)        (6,179)
                                                                   ---------      ---------      ---------
Operating expenses:
   Sales and marketing .......................................         1,680          2,808         11,042
   Research and product development ..........................         1,017          1,902          5,365
   General and administrative ................................         2,558          3,935          9,630
   Amortization of intangible assets .........................            --             --          6,259
   Impairment of intangible assets ...........................            --             --          7,929
   (Gain)/loss on disposal of assets .........................           415            461         (6,345)
   Restructuring, net ........................................          (834)         1,300          8,650
                                                                   ---------      ---------      ---------
           Total operating expenses ..........................         4,836         10,406         42,530
                                                                   ---------      ---------      ---------
Loss from operations .........................................        (9,739)       (15,782)       (48,709)
                                                                   ---------      ---------      ---------

Other income (charges):
   Interest income ...........................................            33            180            820
   Interest expense ..........................................          (196)          (471)        (4,346)
   Other-than-temporary decline in fair value of marketable
   securities ................................................            --             --         (3,845)
   Change in fair value of warrant liability .................           133          2,947           (885)
   Other expense .............................................          (105)          (171)          (594)
                                                                   ---------      ---------      ---------
                                                                        (135)         2,485         (8,850)
                                                                   ---------      ---------      ---------
Loss before provision for income taxes .......................        (9,874)       (13,297)       (57,559)
Income tax provision (benefit) ...............................            --           (155)           501
                                                                   ---------      ---------      ---------
Loss from continuing operations ..............................        (9,874)       (13,142)       (58,060)
Loss from discontinued operations ............................          (132)        (5,040)       (47,075)
                                                                   ---------      ---------      ---------
Net loss .....................................................     $ (10,006)     $ (18,182)     $(105,135)
                                                                   =========      =========      =========
   Preferred dividends .......................................            --             --            926
   Accretion of preferred stock and deemed dividends .........         1,702            995             --
                                                                   ---------      ---------      ---------
Net loss applicable to common stockholders ...................     $ (11,708)     $ (19,177)     $(106,061)
                                                                   =========      =========      =========
Loss per share:
   Loss from continuing operations - basic and diluted .......     $   (0.54)     $   (0.75)     $   (3.70)
   Loss from discontinued operations - basic and diluted .....            --          (0.27)         (2.95)
                                                                   ---------      ---------      ---------
Net loss applicable to common stockholders - basic and diluted     $   (0.54)     $   (1.02)     $   (6.65)
                                                                   =========      =========      =========

Weighted average common shares outstanding - basic and diluted        21,463         18,877         15,958
                                                                   ---------      ---------      ---------
(in thousands, except per share amounts)

 
 
Years Ended December 31,
 
 
 
2007
 
 
2006
 
 
2005
 
Revenue:
 
 
 
 
 
 
 
 
 
Software
 
$
501
 
 
$
208
 
 
$
407
 
Maintenance
 
 
300
 
 
 
120
 
 
 
147
 
Services
 
 
1,007
 
 
 
644
 
 
 
231
 
Total operating revenue
 
 
1,808
 
 
 
972
 
 
 
785
 
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Software
 
 
19
 
 
 
9
 
 
 
16
 
Maintenance
 
 
264
 
 
 
212
 
 
 
350
 
Services
 
 
654
 
 
 
546
 
 
 
822
 
Total cost of revenue
 
 
937
 
 
 
767
 
 
 
1,188
 
Gross margin (loss)
 
 
871
 
 
 
205
 
 
 
(403
)
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
 
 
786
 
 
 
346
 
 
 
627
 
Research and product development
 
 
569
 
 
 
533
 
 
 
891
 
General and administrative
 
 
1,356
 
 
 
1,206
 
 
 
1,137
 
(Gain) on disposal of assets
 
 
-
 
 
 
(24
)
 
 
-
 
Total operating expenses
 
 
2,711
 
 
 
2,061
 
 
 
2,655
 
Loss from operations
 
 
(1,840
)
 
 
(1,856
)
 
 
(3,058
)
Other income (charges):
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
(257
)
 
 
(853
)
 
 
(593
)
Other
 
 
122
 
 
 
(288
)
 
 
(30
)
 
 
 
(135
)
 
 
(1,141
)
 
 
(623
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(1,975
)
 
$
(2,997
)
 
$
(3,681
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Accretion of preferred stock and deemed dividends
 
 
-
 
 
 
5,633
 
 
 
-
 
Net loss applicable to common stockholders
 
$
(1,975
)
 
$
(8,630
)
 
$
(3,681
)
Loss per share:
 
 
 
 
 
 
 
 
 
 
 
 
Net loss applicable to common stockholders - basic and diluted
 
$
(0.05
)
 
$
(0.25
)
 
$
(8.27
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic and diluted
 
 
36,771
 
 
 
35,182
 
 
 
445
 
The accompanying notes are an integral part of the consolidated financial statements.

                                      F-5


                              LEVEL 8 SYSTEMS,

F-4
Table of Contents
CICERO INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 (IN THOUSANDS)


                                                                                                            ACCUMULATED
                                               COMMON STOCK   PREFERRED STOCK     ADDITIONAL                  OTHER
                                                                                   PAID-IN    ACCUMULATED  COMPREHENSIVE
                                              SHARES  AMOUNT  SHARES  AMOUNT       CAPITAL     (DEFICIT)      INCOME       TOTAL
                                               ------ ------  ------  ------     -----------  -----------  -------------  --------

Balance at December 31, 2000.................  15,786  $  16      42   $  --      $  196,944   $  (75,327)     $  (3,903) $ 117,730
Shares issued as compensation................     369     --                           1,199                                  1,199
Preferred stock dividend.....................                                                        (926)
Reclassification of warrant liability........                                         (2,100)                                (2,100)
Foreign currency translation adjustment......
Reclassification of unrealized loss
included in income-other than
temporary decline............................
Unrealized losses on
marketable securities........................
Net loss.....................................                                                    (105,135)
                                              ------- ------  ------  ------      ----------   ----------    -----------   --------
Balance at December 31, 2001.................  16,155     16      42      --         196,043     (181,388)          (778)    13,893
Shares issued as compensation................     108     --                             139                                    139
Shares issued in private placement
of common stock..............................   2,382      3                           3,571                                  3,574
Shares issued for litigation settlement......     142     --                             270                                    270
Shares issued for Cicero license agreement ..     250     --                             622                                    622
Shares forfeited for repayment of
notes receivable ............................     (15)    --                             (21)                                   (21)
Shares issued in private placement of
series C preferred...........................             --       2                   1,590                                  1,590
Conversion of preferred shares to common.....     181     --      (2)                     --                                     --
Warrants issued for financing................                                            373         (373)                       --
Accretion of preferred stock.................                                            329         (329)                       --
Deemed dividend..............................                                                        (293)
Foreign currency translation adjustment......
Net loss.....................................                                                     (18,182)
                                              ------- ------  ------  ------      ----------   ----------   ------------   --------

Balance at December 31, 2002.................  19,203     19      42      --         202,916     (200,565)          (717)     1,653
Conversion of preferred shares to common.....   1,378      1      (6)                     --                                      1
Shares issued as compensation................      95     --                              48                                     48
Shares issued for bank guarantee.............     150     --                              51                                     51
Exercises of stock options...................      27     --                               6                                      6
Conversion of warrants.......................   3,352      4                             402                                    406
Conversion of senior convertible
redeemable preferred stock...................     546      1                             174                                    175
Accretion of preferred stock.................                                            640         (640)                       --
Shares issued in private placement
of common stock..............................   1,894      2                             850                                    852
Deemed dividend..............................                                          1,062       (1,062)                       --
Foreign currency translation adjustment......
Reclassification of unrealized loss
included in income...........................
Net loss.....................................                                                     (10,006)
                                              ------- ------  ------  ------      ----------   ----------   ------------   --------
Balance at December 31, 2003.................  26,645  $  27      36   $  --      $  206,149   $ (212,273)         $  (6)  $ (6,103)
                                               ====== ======  ======  ======      ==========   ==========   ============   ========
(in thousands)

 
 
Common Stock
 
 
Preferred Stock
 
 
Additional
Paid-in
Capital
 
 
Accumulated
(Deficit)
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
Total
 
 
 
Shares
 
 
Amount
 
 
 
Shares
 
 
Amount
 
 
 
 
 
 
 
 
 
Balance at December 31, 2004
 
 
43,304
 
 
$
43
 
 
 
33
 
 
 
--
 
 
$
210,142
 
 
$
(222,034
)
 
$
(8
)
 
$
(11,857
)
Conversion of preferred shares to common
 
 
395
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
--
 
 
 
 
 
 
 
 
 
 
 
--
 
Shares issued as compensation
 
 
961
 
 
 
2
 
 
 
 
 
 
 
 
 
 
 
101
 
 
 
 
 
 
 
 
 
 
 
103
 
Shares issued for bank guarantee
 
 
2,400
 
 
 
2
 
 
 
 
 
 
 
 
 
 
 
45
 
 
 
 
 
 
 
 
 
 
 
47
 
Conversion of senior convertible redeemable preferred stock
 
 
957
 
 
 
1
 
 
 
 
 
 
 
 
 
 
 
306
 
 
 
 
 
 
 
 
 
 
 
307
 
Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5
 
 
 
5
 
Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_
 
 
 
(3,681
)
 
 
 
 
 
 
(3,681
)
Balance at December 31, 2005
 
 
48,017
 
 
 
48
 
 
 
33
 
 
 
--
 
 
 
210,594
 
 
 
(225,715
)
 
 
(3
)
 
 
(15,076
)
Reversed stock split 100:1
 
 
(47,536
)
 
 
(48
)
 
 
(33
)
 
 
 
 
 
 
48
 
 
 
 
 
 
 
 
 
 
 
--
 
Balance at December 31, 2005 as adjusted for stock split
 
 
481
 
 
 
--
 
 
 
--
 
 
 
--
 
 
 
210,642
 
 
 
(225,715
)
 
 
(3
)
 
 
(15,076
)
Shares issued from conversion of senior reorganization debt
 
 
3,438
 
 
 
3
 
 
 
 
 
 
 
 
 
 
 
1,705
 
 
 
 
 
 
 
 
 
 
 
1,708
 
Shares issued from conversion of convertible bridge notes
 
 
30,508
 
 
 
32
 
 
 
 
 
 
 
 
 
 
 
3,877
 
 
 
 
 
 
 
 
 
 
 
3,909
 
Shares issued for bank guarantee
 
 
96
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
312
 
 
 
 
 
 
 
 
 
 
 
312
 
Shares issued from short term debt conversion
 
 
224
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
190
 
 
 
 
 
 
 
 
 
 
 
190
 
Shares issued from conversion of convertible promissory notes
 
 
 
 
 
 
 
 
 
 
2
 
 
 
 
 
 
 
992
 
 
 
 
 
 
 
 
 
 
 
992
 
Conversion of senior convertible redeemable preferred stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,061
 
 
 
 
 
 
 
 
 
 
 
1,061
 
Conversion of warrants
 
 
99
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,086
 
 
 
 
 
 
 
 
 
 
 
1,086
 
Shares issued for interest conversion
 
 
211
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
629
 
 
 
 
 
 
 
 
 
 
 
629
 
Shares issued as compensation
 
 
125
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
280
 
 
 
 
 
 
 
 
 
 
 
280
 
Accretion of preferred stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
529
 
 
 
(529
)
 
 
 
 
 
 
--
 
Deemed dividend
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5,104
 
 
 
(5,104
)
 
 
 
 
 
 
--
 
Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(6
)
 
 
(6
)
Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,997
)
 
 
 
 
 
 
(2,997
)
Balance at December 31, 2006
 
 
35,182
 
 
 
35
 
 
 
2
 
 
 
--
 
 
 
226,407
 
 
 
(234,345
)
 
 
(9
)
 
 
(7,912
)
Shares issued for private placement
 
 
5,892
 
 
 
6
 
 
 
 
 
 
 
 
 
 
 
1,034
 
 
 
 
 
 
 
 
 
 
 
1,040
 
Shares issued for litigation settlement
 
 
25
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
50
 
 
 
 
 
 
 
 
 
 
 
50
 
Conversion of preferred shares to common
 
 
160
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
--
 
Options issued as compensation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
650
 
 
 
 
 
 
 
 
 
 
 
650
 
Restricted shares issued as compensation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
36
 
 
 
 
 
 
 
 
 
 
 
36
 
Warrant issued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
34
 
 
 
 
 
 
 
 
 
 
 
34
 
Shares issued with refinancing of debt
 
 
2,546
 
 
 
3
 
 
 
 
 
 
 
 
 
 
 
647
 
 
 
 
 
 
 
 
 
 
 
650
 
Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(6
)
 
 
(6
)
Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,975
)
 
 
 
 
 
 
(1,975
)
Balance at December 31, 2007
 
 
43,805
 
 
$
44
 
 
 
2
 
 
 
--
 
 
$
228,858
 
 
$
(236,320
)
 
$
(15
)
 
$
(7,433
)
The accompanying notes are an integral part of the consolidated financial statements.

                                      F-6


                              LEVEL 8 SYSTEMS,

F-5
Table of Contents

CICERO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                 (IN THOUSANDS)


                                                                 YEAR ENDED DECEMBER 31,
                                                                 -----------------------
                                                           2003           2002            2001
                                                         ---------      ---------      ---------

Net loss ...........................................     ($ 10,006)     ($ 18,182)     ($105,135)
Other comprehensive income (loss), net of tax:
    Foreign currency translation adjustment ........            (6)          (199)          (287)
    Reclassification of accumulated foreign
        currency translation adjustments for
        dissolved subsidiaries .....................            --            260             --
    Unrealized loss on available-for-sale securities            --             --           (353)
    Reclassification of unrealized loss included in
        income - other than temporary decline ......           717             --          3,765
                                                         ---------      ---------      ---------
Comprehensive loss .................................     ($  9,295)     ($ 18,121)     ($102,010)
                                                         =========      =========      =========
(in thousands)


 
 
Years Ended December 31,
 
 
 
2007
 
 
2006
 
 
2005
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(1,975
)
 
$
(2,997
)
 
$
(3,681
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
 
(6
)
 
 
(6
)
 
 
5
 
Comprehensive loss
 
$
(1,981
)
 
$
(3,003
)
 
$
(3,676
)
The accompanying notes are an integral part of the consolidated financial statements.

                                      F-7


                              LEVEL 8 SYSTEMS,

F-6
Table of Contents

CICERO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


                                                                                       2003            2002          2001
                                                                                     ---------      ---------      ---------
Cash flows from operating activities:

   Net loss ....................................................................     ($ 10,006)     ($ 18,182)     ($105,135)
   Adjustments to reconcile net loss to net cash (used in) operating activities:
      Depreciation and amortization ............................................         3,116          8,042         27,758
      Change in fair value of warrant liability ................................          (133)        (2,947)           885
      Stock compensation expense ...............................................            48            139          1,199
      Unrealized loss on marketable securities-other than temporary decline ....            --             --          3,845
      Impairment of intangible assets and software product technology ..........           993             --         46,923
      Provision for doubtful accounts ..........................................           (52)          (477)         3,812
      (Gain) loss on disposal of assets ........................................           (23)           461         (6,346)
      Other ....................................................................            --             98           (188)
      Changes in assets and liabilities, net of assets acquired and liabilities
      assumed:
         Trade accounts receivable and related party receivables ...............         1,404            352         10,454
           Assets and liabilities held for sale - systems integration ..........            --          6,409             --
           Assets and liabilities of operations to be abandoned ................           101            473             --
         Due from Liraz ........................................................            --            (56)            (3)
         Prepaid expenses and other assets .....................................           420            803            834
           Accounts payable and accrued expenses ...............................          (351)        (2,181)        (5,284)
         Merger-related and restructuring ......................................            --             --            952
         Deferred revenue ......................................................          (273)          (122)           657
                                                                                     ---------      ---------      ---------
           Net cash (used in) operating activities .............................        (4,756)        (7,188)       (19,637)
                                                                                     ---------      ---------      ---------

Cash flows from investing activities:
   Proceeds from sale of available for sale securities .........................            --            175             --
   Purchases of property and equipment .........................................           (36)           (11)          (198)
   Cash payments secured through notes receivable ..............................            --             --            (77)
   Repayment of note receivable ................................................           867          2,460            675
   Cash received from sale of property .........................................            --             --          2,236
   Cash received from sale of line of business assets ..........................            --          1,300         19,900
   Additions to software product technology ....................................            --             --         (2,310)
                                                                                     ---------      ---------      ---------
           Net cash provided by investing activities ...........................           831          3,924         20,226
                                                                                     ---------      ---------      ---------

Cash flows from financing activities:
   Proceeds from issuance of common shares, net of issuance costs ..............           859          1,974             --
   Proceeds from issuance of preferred shares, net of issuance costs ...........            --          1,380             --
   Proceeds from issuance of convertible redeemable stock, less escrow of $776 .         2,754             --             --
   Proceeds from exercise of warrants ..........................................           406             --             --
   Dividends paid for preferred shares .........................................            --             --         (1,345)
   Bank note guarantee .........................................................            --             --          1,600
   Payments under capital lease obligations and other liabilities ..............            --             --           (133)
   Net borrowings on line of credit ............................................            --             --            245
   Borrowings under credit facility, term loans and notes payable ..............           980            381             --
   Repayments of term loans, credit facility and notes payable .................        (1,248)          (583)       (24,000)
                                                                                     ---------      ---------      ---------
           Net cash provided by (used in) financing activities .................         3,751          3,152        (23,633)
                                                                                     ---------      ---------      ---------
Effect of exchange rate changes on cash ........................................            (6)          (199)          (302)
                                                                                     ---------      ---------      ---------
Net (decrease) in cash and cash equivalents ....................................          (180)          (311)       (23,346)
Cash and cash equivalents at beginning of year .................................           199            510         23,856
                                                                                     ---------      ---------      ---------
Cash and cash equivalents at end of year .......................................     $      19      $     199      $     510
                                                                                     =========      =========      =========

Cash paid (refunds) during the year for:
   Income taxes ................................................................     $     (18)     $     117      $     280
                                                                                     ---------      ---------      ---------
   Interest ....................................................................     $     218      $     274      $   1,339
                                                                                     ---------      ---------      ---------
(in thousands)

 
 
Years Ended December 31,
 
 
 
2007
 
 
2006
 
 
2005
 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net loss
 
$
(1,975
)
 
$
(2,997
)
 
$
(3,681
)
Adjustments to reconcile net loss to net cash (used in) operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
10
 
 
 
12
 
 
 
11
 
Stock compensation expense
 
 
720
 
 
 
614
 
 
 
149
 
Provision (credit) for doubtful accounts
 
 
50
 
 
 
60
 
 
 
(12
)
Gain  on disposal of assets
 
 
--
 
 
 
24
 
 
 
--
 
Changes in assets and liabilities, net of assets acquired and liabilities assumed:
 
 
 
 
 
 
 
 
 
 
 
 
Trade accounts receivable and related party receivables
 
 
(622
)
 
 
(212
)
 
 
146
 
Assets and liabilities of operations to be abandoned
 
 
21
 
 
 
(27
)
 
 
(29
)
Prepaid expenses and other assets
 
 
(136
)
 
 
31
 
 
 
55
 
Accounts payable and accrued expenses
 
 
478
 
 
 
311
 
 
 
804
 
Deferred revenue
 
 
70
 
 
 
(40
)
 
 
(7
)
Net cash (used in) operating activities
 
 
(1,384
)
 
 
(2,224
)
 
 
(2,564
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
 
 
(17
)
 
 
(17
)
 
 
(6
)
Net cash (used in) investing activities
 
 
(17
)
 
 
(17
)
 
 
(6
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of common shares, net of issuance costs
 
 
1,040
 
 
 
380
 
 
 
--
 
Borrowings under credit facility, term loans and notes payable
 
 
984
 
 
 
2,148
 
 
 
2,542
 
Repayments of term loans, credit facility and notes payable
 
 
(677
)
 
 
--
 
 
 
(55
)
Net cash provided by  financing activities
 
 
1,347
 
 
 
2,528
 
 
 
2,487
 
Effect of exchange rate changes on cash
 
 
(6
)
 
 
(6
)
 
 
5
 
Net increase (decrease) in cash and cash equivalents
 
 
(60
)
 
 
281
 
 
 
(78
)
Cash and cash equivalents at beginning of year
 
 
310
 
 
 
29
 
 
 
107
 
Cash and cash equivalents at end of year
 
$
250
 
 
$
310
 
 
$
29
 
 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
 
 
Cash paid during the year for:
 
 
 
 
 
 
 
 
 
 
 
 
Income taxes
 
$
5
 
 
$
20
 
 
$
1
 
Interest
 
$
264
 
 
$
865
 
 
$
645
 

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

                                      F-8


                              LEVEL 8 SYSTEMS,

F-7
Table of Contents

CICERO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
        (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)



Non-Cash Investing and Financing Activities

2003


2007

During 2003,2007, the Company issued 161,43824,793 shares of common stock to Critical Mass Mail as part of a litigation settlement valued at $50,000.

In October 2007, the Company issued 2,546,149 shares of common stock to BluePhoenix (formerly Liraz Systems Ltd.) in exchange for $650,000 paid to Bank Hapoalim to retire a portion of that indebtedness.

2006

During 2006, the Company issued 111,000 shares of common stock to vendors for outstanding liabilities valued at $73. Of this total, 66,667 shares or $25, were
issued as part of the 1,894,444 shares issued in the October 2003 private
placement.

$237,000.

In November 2003,2006, the Company issued 150,00060,000 shares of common stock to Liraz Systems Ltd. as compensation for extension of a bank debt guaranty valued at $240,000.

In December 2006, the Company issued 224,000 shares of common stock to Liraz Systems Ltd. for its short term debt and interest of $191,000.

In December 2006, the Company issued 50,000 shares of common stock to Brown Simpson Partners I, Ltd. as compensation for assisting in its recapitalization.

2005

During 2005, the Company issued 9,613 shares of common stock to vendors for outstanding liabilities valued at $103,000.

In November 2005, the Company issued 24,000 shares of common stock to a designated subsidiary of Liraz Systems Ltd. as compensation for extension of a bank debt guarantee valued at $51.

$48,000.

During 2003,2005, the Company issued 546,8759,564 shares of Level 8 Systems common stock upon conversion of 1751,367 shares of Series D Convertible Redeemable Preferred Stock.

In October 2003, the Company issued 3,048,782 warrants to holders of the Series
A3 Convertible Redeemable Preferred Stock and Series B3 Convertible Redeemable
Preferred Stock under an existing agreement and in consideration for the waiver
of certain price protection anti-dilution provisions of the Series A3 Preferred
Stock and Series B3 Preferred Stock agreements. The warrants have a strike price
of $0.40 valued at $1,062. (See Note 11.)

In April 2003, the Company agreed to exchange the warrants issued in the January
2002 private placement priced at $2.50 each for new warrants priced at $0.60
each and has extended the expiration date to until March 2007. This exchange was
made as a result of a waiver by such warrant holders of certain terms and
conditions that would trigger payments by the Company if the Company did not
keep such shares registered under the Securities Act of 1933, as amended.

2002


During 2002, the Company issued 109,6722005, 150 shares of common stock to employees for
retention bonuses and severance. The bonus was valued at $92. (See Note 11.)

In January 2002, the Company extended the exclusive, perpetual license to
develop and sell the Cicero application integration software and obtain
ownership of the registered trademark from Merrill Lynch in exchange for 250,000
shares of common stock. Total consideration was valued at $622. (See Note 6.)

In June 2002, the Company issued 141,658 shares of common stock to a former
reseller of the Company as part of a settlement agreement. The settlement
agreement was valued at $270.

In August 2002, as part of the Series C Convertible Redeemable Preferred Stock offering, ("Series C Preferred Stock") the Company exchanged approximately $150
of indebtedness to Anthony Pizi, the Chairman of the Company, for Series C
Preferred Stock.

In August 2002, the Company completed an exchange of 11,570were converted into 3,947 shares of Series A1
Convertible Redeemable Preferred Stock ("Series A1 Preferred Stock") and 30,000
sharesLevel 8 Systems common stock.

F-8
Table of Series B1 Convertible Redeemable Preferred Stock ("Series B1 Preferred
Stock") for 11,570 shares of Series A2 Convertible Preferred Stock ("Series A2
Preferred Stock") and 30,000 shares of Series B2 Convertible Preferred Stock
("Series B2 Preferred Stock"), respectively. (See Note 11.)


                                      F-9


                              LEVEL 8 SYSTEMS,Contents

CICERO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF CASH FLOWS - CONTINUED
        (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


In October 2002, the Company completed an exchange of all of the outstanding
shares of Series A2 Convertible Redeemable Preferred Stock ("Series A2 Preferred
Stock") and Series B2 Convertible Redeemable Preferred Stock ("Series B2
Preferred Stock") and related warrants for an equal number of shares of newly
created Series A3 Convertible Redeemable Preferred Stock ("Series A3 Preferred
Stock") and Series B3 Convertible Redeemable Preferred Stock ("Series B3
Preferred Stock") and related warrants. This exchange was affected to correct a
deficiency in the conversion price from the prior exchange of Series A1 and B1
Preferred Stock and related warrants for Series A2 and B2 Preferred Stock and
related warrants. (See Note 11.)

In December 2002, the Company issued 1,462,801 warrants to holders of the Series
A3 Convertible Redeemable Preferred Stock and Series B3 Convertible Redeemable
Preferred Stock under an existing agreement and in consideration for the waiver
of certain price protection anti-dilution provisions of the Series A3 Preferred
Stock and Series B3 Preferred Stock agreements. The warrants have a strike price
of $0.40. (See Note 11.)

In December 2002, the Company received $744 and $617 in notes receivable related
to the sale of assets related to Systems Integration segment products. (See Note
2.)


2001

During 2001, the Company issued 369,591 shares of common stock to employees for
retention bonuses, severance and consulting. These amounts were valued at
$1,199. (See Note 11.)

In September and October 2001, the Company received $400 and $1,000 in notes
receivable related to the sale of Message Queuing/XIPC and AppBuilder assets,
respectively. (See Note 2.)

During 2001, the Company recorded a $3,765 unrealized loss on marketable
securities related to an other-than-temporary decline in fair value.

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

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

On October 16, 2001, the Company completed an exchange of 11,570 shares of
Series A 4% Convertible Redeemable Preferred Stock ("Series A Preferred Stock")
and 30,000 shares of Series B 4% Convertible Redeemable Preferred Stock ("Series
B Preferred Stock") for 11,570 shares of Series A1 Preferred Stock and 30,000
shares of Series B1 Preferred Stock, respectively. (See Note 11.)



                                      F-10



NOTE 1. 

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

Cicero Inc., formerly Level 8 Systems, Inc. ("Level 8"(''Cicero'' or the "Company"''Company''), is a global provider of business integration software thatwhich enables organizations to integrate new and existing information and processes at the desktop.  Business integration software addresses the emerging need for a company's information systems to deliver enterprise-wide views of the company's business information processes.

GOING CONCERN:


Going Concern:

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company has incurred aan operating loss of  $10,006approximately $1,975,000 for the year ended December 31, 20032007 and has experienced negative cash flows from operations for each of the years ended December 31, 2003, 20022007, 2006 and 2001.2005.  At December 31, 2003,2007, the Company had a working capital deficiency of approximately $6555.$6,132,000. The Company'sCompany’s future revenues are entirely dependent on acceptance of a newly developed and marketed product, Cicero,Cicero®, which has had limited success in commercial markets to date. These factors among others raise substantial doubt about the Company'sCompany’s ability to continue as a going concern for a reasonable period of time

time.

The financial statements presented herein do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should Level 8the Company be unable to continue as a going concern.  In order to address these issues and to obtain adequate financing for the Company'sCompany’s operations for the next twelve months, the Company is actively promoting and expanding its Cicero-relatedCicero®-related product line and continues to negotiate with significant customers thatwho have begun or finalizedexpressed interest in the "proof of concept" stage
with the CiceroCicero® software technology. The Company is experiencing difficulty increasing sales revenue largely because of the inimitable nature of the product as well as customer concerns about the financial viability of the Company. Cicero® software is a new “category defining” product in that most Enterprise Application Integration (EAI) projects are performed at the server level and Cicero®’s integration occurs at the desktop without the need to open and modify the underlying code for those applications being integrated. Many companies are not aware of this new technology or tend to look toward more traditional and accepted approaches. The Company is attempting to addresssolve the financial concernsformer problem by improving the market’s knowledge and understanding of potential customers by pursuing
strategic partnerships with companies that have significant financial resources,
althoughCicero® software through increased marketing and leveraging its limited number of reference accounts while enhancing its list of resellers and system integrators to assist in the sales and marketing process. Additionally, the Company has not experienced significant successis seeking additional equity capital or other strategic transactions in the near term to date with this
approach. In January 2004, the Company completed a private placement of its
common stock wherein it raised approximately $1,247 of new capital.provide additional liquidity.  Management expects that it will be able to raise additional capital and to continue to fund operations and also expects that increased revenues will reduce its operating losses in future periods, however, there can be no assurance that management'smanagement’s plan will be executed as anticipated.

PRINCIPLES OF CONSOLIDATION:

Principles of Consolidation:

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. See Note 2 regarding the sales of subsidiaries.
All of the Company's subsidiaries are wholly-owned for the periods presented.

All significant inter-company accounts and transactions are eliminated in consolidation.

USE OF ESTIMATES:


F-9
Table of Contents

Use of Estimates:

The preparation of financial statements in conformity with accounting principals generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual amounts could differ from these estimates.



                                      F-11



FINANCIAL INSTRUMENTS:


Financial Instruments:

The carrying amount of the Company'sCompany’s financial instruments, representing accounts receivable, notes receivable, accounts payable and debt approximate their fair value.

FOREIGN CURRENCY TRANSLATION:


Foreign Currency Translation:

The assets and liabilities of foreign subsidiaries are translated to U.S. dollars at the current exchange rate as of the balance sheet date. The resulting translation adjustment is recorded in other comprehensive income as a component of stockholders' equity. Statements of operations items are translated at average rates of exchange during each reporting period.

Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

CASH AND CASH EQUIVALENTS:


Cash and Cash Equivalents:

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

PROPERTY AND EQUIPMENT:


Trade Accounts Receivable:

Trade accounts receivable are stated in the amount management expects to collect from outstanding balances.  Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts.  Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable.  Changes in the valuation allowance have not been material to the financial statements.

Property and Equipment:

Property and equipment purchased in the normal course of business is stated at cost, and property and equipment acquired in business combinations is stated at its fair market value at the acquisition date.  All property and equipment is depreciated using the straight-line method over estimated useful lives.

Expenditures for repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of property and equipment are removed from the accounts upon retirement or other disposition and any resulting gain or loss is reflected in the Consolidated Statements of Operations.

SOFTWARE DEVELOPMENT COSTS:


Software Development Costs:

The Company capitalizes certain software costs after technological feasibility of the product has been established. Generally, an original estimated economic life of three years is assigned to capitalized software costs, once the product is available for general release to customers. Costs incurred prior to the establishment of technological feasibility are charged to research and product development expense.

Additionally, the Company has recorded software development costs for its
purchases

F-10
Table of developed technology through acquisitions. (See Note 6.)

Contents

Capitalized software costs are amortized over related sales on a product-by-product basis using the straight-line method over the remaining estimated economic life of the product.  (See Note 6.5.)

The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs requiresrequire considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technologies.


                                      F-12


LONG-LIVED ASSETS:


Long-Lived Assets:

The Company reviews the recoverability of long-lived intangible assets when circumstances indicate that the carrying amount of assets may not be recoverable. This evaluation is based on various analyses including undiscounted cash flow projections. In the event undiscounted cash flow projections indicate impairment, the Company would record an impairment based on the fair value of the assets at the date of the impairment. Effective January 1, 2002, theThe Company accounts for impairments under the Financial Accounting Standards Board ("FSAB"FASB") Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets"Assets”. Prior to the adoption of this
standard, impairments were accounted for using SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
which was superseded by SFAS No. 144. During 2003, the Company recorded
impairments associated with its Cicero technology. During 2002, the Company
recorded impairments associated with the sale of the Geneva and Star SQL and
CTRC operations. (See Note 6.)

REVENUE RECOGNITION:


Revenue Recognition:

The Company recognizes license revenue from end-users and third party resellers in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software“Software Revenue Recognition"Recognition”, as amended by SOP 98-9, "Modification''Modification of SOP 97-2, 'Software Revenue Recognition,' with Respect to Certain Transactions"Transactions''.  The Company reviews each contract to identify elements included in the software arrangement.  SOP 97-2 and SOP 98-9 require that an entity recognize revenue for multiple element arrangements by means of the "residual method"''residual method'' when (1) there is vendor-specific objective evidence ("VSOE"(''VSOE'') of the fair values of all of the undelivered elements that are not accounted for by means of long-term contract accounting, (2) VSOE of fair value does not exist for one or more of the delivered elements, and (3) all revenue recognition criteria of SOP 97-2 (other than the requirement for VSOE of the fair value of each delivered element) are satisfied.  VSOE of the fair value of undelivered elements is established on the price charged for that element when sold separately.  Software customers are given no rights of return and a short-term warranty that the products will comply with the written documentation.  The Company has not experienced any product warranty returns.

Revenue from recurring maintenance contracts is recognized ratably over the maintenance contract period, which is typically twelve months. Maintenance revenue that is not yet earned is included in deferred revenue. Any unearned
receipts from service contracts result in deferred revenue.


Revenue from consulting and training services is recognized as services are performed. Any unearned receipts from service contracts result in deferred revenue.

COST OF REVENUE:


Cost of Revenue:

The primary components of the Company's cost of revenue for its software products are software amortization on internally developed and acquired technology, royalties on certain products, and packaging and distribution costs. The primary component of the Company's cost of revenue for maintenance and services is compensation expense.

ADVERTISING EXPENSES:


Advertising Expenses:

The Company expenses advertising costs as incurred.  Advertising expenses were approximately $9, $53,$104,000, $88,000, and $1,198$16,000 for the years ended December 31, 2003, 20022007, 2006 and 2001,2005, respectively.

RESEARCH AND PRODUCT DEVELOPMENT:


Research and Product Development:

Research and product development costs are expensed as incurred.


                                      F-13



INCOME TAXES:


Income Taxes:

The Company uses SFAS No. 109, "Accounting''Accounting for Income Taxes"Taxes'', to account for income taxes. This statement requires an asset and liability approach that recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events, other than enactments of changes in the tax law or rates, are generally considered. A valuation allowance is recorded when it is "more''more likely than not"not'' that recorded deferred tax assets will not be realized.  (See Note 9.8.)

DISCONTINUED OPERATIONS:

During

F-11
Table of Contents
Stock Split:
As discussed in Note 2, the third quarterCompany’s stockholders approved a 100 to 1 reverse stock split in November 2006.  The Company retained the current par value of 2002,$.001 per share for all common shares.  All references in the Company made a decisionfinancial statements and notes to disposethe number of shares outstanding, per share amounts, and stock option data of the Systems Integration segment and entered into negotiations with potential buyers.
The Systems Integration segment qualified for treatment as a discontinued
operation in accordance with SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", and the Company reclassified the results of
operations for the Systems Integration segment in 2002 and 2001 to "loss from
discontinued operations" in the Consolidated Statements of Operations. The
Consolidated Statements of Cash Flows for 2001 has notCompany’s common shares have been restated to reflect the discontinued operations as the information is not available and is
impractical to obtain. The saleeffect of the Systems Integration segment was completed
in December 2002. (See Note 2.)

LOSS PER SHARE:

reverse stock split for the periods presented.
Loss Per Share:

Basic loss per share is computed based upon the weighted average number of common shares outstanding. Diluted loss per share is computed based upon the weighted average number of common shares outstanding and any potentially dilutive securities. During 2003, 2002,2007, 2006, and 2001,2005, potentially dilutive securities included stock options, warrants to purchase common stock, and preferred stock.

The following table sets forth the potential shares that are not included in the diluted net loss per share calculation because to do so would be anti-dilutive for the periods presented:

                                               YEAR ENDED DECEMBER 31,
                                               ------------------------
                                         2003            2002            2001
                                      ----------      ----------      ----------
Stock options ..................       5,625,878       3,834,379       4,366,153
Warrants .......................      10,926,706       5,315,939       2,568,634
Preferredpresented. The amounts have been restated in accordance with SAB Topic 4 (c ) to reflect the adjustment to the Company’s capitalization as a result of the 100:1 reverse stock ................      16,893,174       7,812,464       3,782,519
                                      ----------      ----------      ----------
                                      33,445,758      16,962,782      10,717,306
                                      ==========      ==========      ==========


split which was approved by the Company in November 2006:

 
 
2007
 
 
2006
 
 
2005
 
Stock options
 
 
2,529,025
 
 
 
45,315
 
 
 
59,009
 
Warrants
 
 
445,387
 
 
 
323,623
 
 
 
193,761
 
Preferred stock
 
 
1,603,618
 
 
 
1,763,478
 
 
 
85,046
 
 
 
 
4,578,030
 
 
 
2,132,416
 
 
 
337,816
 

In 20032007, 2006 and 2002,2005, no dividends were declared on preferred stock.
Stock-Based Compensation:

During 2006, the Company adopted SFAS No. 123 (revised 2004) (SFAS No. 123R”), “Share-Based Payment”, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments.  In 2001,
dividends totaled $926,January 2005, the SEC issued SAB No. 107, which provides supplemental implementation guidance for SFAS No. 123R.  SFAS No. 123R eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and were included ininstead generally requires that such transactions be accounted for using a fair-value-based method.  The Company uses the loss per share calculations.

STOCK-BASED COMPENSATION:Black-Scholes option-pricing model to determine the fair-value of stock-based awards under SFAS No. 123R, consistent with that used for pro forma disclosures under SFAS No. 123, “Accounting for Stock-Based Compensation”.  The Company has adoptedelected to use the modified prospective transition method as permitted by SFAS No. 123R and, accordingly, prior periods have not been restated to reflect the impact of SFAS No. 123R.  The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options that are ultimately expected to vest as the requisite service is rendered beginning on the first day of the Company’s year ended December 31, 2006.  Stock-based compensation expense for awards granted prior to 2006 is based on the grant-date fair-value as determined under the pro forma provisions of SFAS No. 123.  The Company granted 2,756,173 options in August 2007 at an exercise price of $0.51 per share.  The Company recognized $650,000 of stock-based compensation. The Company did not grant options during 2006.

Prior to the adoption of SFAS No. 123R, the Company measured compensation expense for its employee stock-based compensation plans using the intrinsic value method prescribed by APB Opinion No. 25.  The Company applied the disclosure provisions of SFAS No. 123 "Accountingas amended by SFAS No. 148, “Accounting for Stock-Based Compensation"Compensation – Transition and Disclosure”, and hasas if the fair-value-based method had been applied Accounting Principles Boardin measuring compensation expense.  Under APB Opinion No. 25, "Accounting for Stock Issuedwhen the exercise price of the Company’s employee stock options was equal to Employees", and related Interpretations
in accounting for its stock-based compensation plans. Had compensation cost for
the Company'smarket price of the underlying stock option plans been determined based on the fair value atdate of the grant, dates for awards underno compensation expense was recognized.

F-12
Table of Contents

The following table illustrates the plans, consistent with the method required by
SFAS No. 123, the Company'seffect on net loss and diluted net loss per common share would
have beenas if the pro forma amounts indicated below.


                                                                             2003           2002           2001
                                                                           ---------      ---------      ---------

Net loss applicable to common stockholders, as reported ..............     $ (11,708)     $ (19,177)     $(106,061)
Less:  Total stock-based employee compensation expense under
    fair value based method for all awards, net of related tax effects        (1,016)        (3,387)        (2,735)
                                                                           ---------      ---------      ---------

Pro forma loss applicable to common stockholders .....................     $ (12,724)     $ (22,564)     $(108,796)
                                                                           =========      =========      =========

Loss per share:
  Basic and diluted, as reported .....................................     $   (0.54)     $   (1.02)     $   (6.65)
  Basic and diluted, pro forma .......................................     $   (0.59)     $   (1.20)     $   (6.82)



                                      F-14
Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation during 2005 (in thousands):

 
 
Years Ended December 31,
 
 
 
2005
 
Net loss applicable to common stockholders, as reported
 
$
(3,681
)
Less:  Total stock-based employee compensation expense underfair value based method for all awards, net of related tax effects
 
 
(180
)
 
 
 
 
 
Pro forma loss applicable to common stockholders
 
$
(3,861
)
 
 
 
 
 
Loss per share:
 
 
 
 
Basic and diluted, as reported
 
$
(8.27
)
Basic and diluted, pro forma
 
$
(8.68
)

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

                                          2003          2002          2001
                                          ----          ----          ----

Expected life (in years) ........        8.33 years    10 years      5 years
Expected volatility .............        126%           96%           90%
Risk free interest rate .........        4.00%         4.25%         4.50%
Expected dividend yield .........          0%            0%            0%


WARRANTS LIABILITY:

The Company has issued warrants to Series A3 and Series B3 preferred
stockholders which contain provisions that allow the warrant holders to force a
cash redemption for events outside the control of the Company. The fair value of
the warrants are accounted for as a liability and are re-measured through the
Consolidated Statements of Operations at each balance sheet date.

RECLASSIFICATIONS:


 
 
2007
 
 
2006
 
 
2005
 
 
 
 
 
 
 
 
 
 
 
Expected life (in years)
 
10.0 years
 
 
3.6 years
 
 
6.0 years
 
Expected volatility
 
 
166
%
 
 
140
%
 
 
149
%
Risk free interest rate
 
 
5.25
%
 
 
4.93
%
 
 
4.48
%
Expected dividend yield
 
 
0
%
 
 
0
%
 
 
0
%
Reclassifications:

Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the 20032007 presentation. Such reclassifications had no effect on previously reported net incomeloss or stockholder's equity.

RECENT ACCOUNTING PRONOUNCEMENTS:

stockholders’ deficit.
Recent Accounting Pronouncements:

In January 2003, the FASB issued Interpretation No. 46 or FIN 46"Consolidation
of Variable Interest Entities", an interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements". In October 2003, the FASB
issued FASB Staff Position FIN 46-6, "Effective Date of FASB Interpretation No.
46, Consolidation of Variable Interest Entities" deferring the effective date
for applying the provisions of FIN 46 for public entities' interests in variable
interest entities or potential variable interest entities created before
February 1, 2003 for financial statements of interim or annual periods that end
after December 15, 2003. FIN 46 establishes accounting guidance for
consolidation of variable interest entities that function to support the
activities of the primary beneficiary. In December 2003, the FASB issued FIN 46
(revised December 2003), "Consolidation of Variable Interest Entities." This
revised interpretation is effective for all entities no later than the end of
the first reporting period that ends after March 15, 2004. The Company has no
investment in or contractual relationship or other business relationship with a
variable interest entity and therefore the adoption of this interpretation did
not have any impact on its consolidated financial position or results of
operations. However, if the Company enters into any such arrangement with a
variable interest entity in the future or an entity with which we have a
relationship is reconsidered based on guidance in FIN 46 to be a variable
interest entity, the Company's consolidated financial position or results of
operations might be materially impacted.

In May 2003,2007, the FASB issued SFAS No. 150, "Accounting159, “The Fair Value Option for Certain Financial Instruments with CharacteristicsAssets and Financial Liabilities – an amendment of Both Liabilities and Equity"FASB Statement 115”.  SFAS No. 150
establishes standards for how an issuer classifies and measures certainThe statement permits entities to choose to measure many financial instruments and certain other items at fair value.  The objective is to improve financial reporting by providing entities with characteristics of boththe opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. Somedifferently without having to apply complex hedge provisions.  Most of the provisions of this statement apply only to entities that elect the fair value option; however , the amendment to FASB Statement are consistent115, “Accounting for Certain Investment in Debt and Equity Services,” applies to all entities with the current definition of liabilities in FASB Concepts
Statement No. 6, "Elements of Financial Statements".available-for-sale and trading securities.  The Company does not believe adoption of this statement did notwill have a material impact on the Company's results of operations
andCompany’s financial condition.


                                      F-15
statements.

In December 2002,July 2006, the FASB issued SFASFIN No. 148, "Accounting48, “Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123." This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirementsUncertainty in Income Taxes – An Interpretation of SFAS No. 123 to require prominent disclosures109”.  FIN No. 48 clarifies the accounting for uncertainty in both annual and interimincome taxes recognized in an enterprise’s financial statements aboutin accordance with SFAS No. 109, “Accounting for Income Taxes.”  FIN No. 48 also prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  In addition, FIN No. 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The provisions of FIN No. 48 are to be applied to all tax positions upon initial adoption of this standard.  Only tax positions that meet the methodmore-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized as an adjustment to the opening balance of accountingaccumulated deficit (or other appropriate components of equity) for stock-based employee
compensation and the effectthat fiscal year.  The provisions of the method used on reported results. This
statement requires that companies having a year-endFIN No. 48 are effective for fiscal years beginning after December 15, 2002
follow the prescribed format and provide the additional disclosures in their
annual reports.2006.  The adoption of this statement did not have a material impact on
the Company's results of operations and financial condition.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The adoption of this statementnew standard did not have a material impact on our financial position, results of operations, or cash flows.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulleting (“SAB”) 108, to address diversity in practice in quantifying financial condition.

NOTE 2. DISPOSITIONS

SALE OF GENEVA:

Effective October 1, 2002,statement misstatements.  SAB 108 requires that the Company soldquantify misstatements based on their impact on each of its Systems Integration software
business to EM Software Solutions, Inc. Under the terms of the agreement, EM
Solutions acquired all rights, titlefinancial statements and interest to the Geneva Enterprise
Integrator and Geneva Business Process Automator products along with certain
receivables, deferred revenue, maintenance contracts, fixed assets and certain
liabilities.related disclosures.  SAB 108 is effective for fiscal years ending after November 15, 2006.  The Company had identified these assetshas adopted SAB 108 effective as being held for sale
during the third quarter of 2002 and, as such, reclassified theDecember 31, 2006.  The adoption of this bulletin did not have a material impact on our financial position, results of operations, or cash flows.

F-13
Table of Contents

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”.  SFAS No. 157 provides guidance for using fair value to "income/loss from discontinued operations".measure assets and liabilities.  It also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings.  SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company in the first quarter of 2008.  The Company received
total proceedsis currently evaluating the effect that the adoption of $1,637; $276 inSFAS No. 157 will have on our financial position, results of operations, or cash flows.


NOTE 2.
RECAPITALIZATION

In November 2006, the Company’s stockholders approved an amendment to the Certificate of Incorporation to provide the Company’s Board of Directors with discretionary authority to effect a short-term note in the amount of $744reverse stock split ratio from 20:1 to 100:1 and a five-year note payable monthly in the aggregate amount of $617. The
short-term note was due by February 13, 2003 and was repaid subsequent to
December 31, 2002. The five-year note was recorded net of an allowance of $494.
The carrying value of the assets sold was approximately $374 resulting in a loss
on the disposal of discontinued operations of $769. Revenues for the Systems
Integration segment were $3,700 in 2002 and $5,700 in 2001. (See Note 6.)

SALE OF STAR SQL AND CTRC:

In June 2002, the Company entered into an Asset Purchase Agreement with
StarQuest Ventures, Inc., a California company and an affiliate of Paul Rampel,
a former member ofNovember 20, 2006, the Board of Directors set that reverse stock ratio to be 100:1. In addition, the Company’s stockholders approved an amendment to change the name of the Company from Level 8 Systems, Inc. to Cicero Inc., to increase the authorized common stock of the Company from 85 million shares to 215 million shares and to convert existing preferred shares into a new Series A-1 preferred stock of Cicero Inc.  The proposals at the Special Meeting of Stockholders of Level 8 Systemscomprised a proposed recapitalization of Level 8 which was also subject to the receipt of amendments to outstanding convertible promissory notes, senior reorganization notes and a former
executive officer. Under the termsconvertible bridge notes.

As part of the Asset Purchase Agreement, Level 8 sold
its Star SQLplan of recapitalization, Senior Reorganization Notes in the aggregate principal amount of $2,559,000 to Senior Reorganization Noteholders who had loaned funds to the Company in exchange for Senior Reorganization Notes and CTRC productsAdditional Warrants at a special one-time exercise price of $0.10 per share, (i) will receive and certain fixed assetshave automatically exercised Additional Warrants exercisable into shares of Common Stock, by applying the accrued interest on their Senior Reorganization Notes and by cashless exercise to StarQuest Venturesthe extent of the balance of the exercise price, (ii) if a holder of existing warrants who advanced the exercise price of their warrants to the Company, will have their existing warrants automatically exercised and (iii) those Senior Reorganization Noteholders who loaned the Company the first $1,000,000 in respect of the exercise price of their existing warrants will receive Early Adopter Warrants of the Company at a ratio of 2:1 for $365shares issuable upon exercise of each existing warrant exercised at the special exercise price of $10.00 per share. At the time of issuance of the Senior Reorganization Notes, the trigger for conversion into exercisable warrants was an anticipated recapitalization merger. Since the recapitalization plan was amended, the Company solicited Senior Noteholders for their consent to convert upon approval of the plan of recapitalization by stockholders.  Approximately $2,309,000 of the Senior Reorganization Noteholders have consented to the change in the “trigger” and have cancelled their notes and converted into 3,438,473 shares of the Company’s common stock.

In accordance with EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, the Company has allocated the proceeds received from the Note and Warrant Offering between the warrants exercised and the assumption of certain maintenance liabilities. The Company
received $300 in cashfuture warrants granted and a note receivable of $65. The loss on salehas employed the Black-Scholes valuation method to determine the fair value of the assetswarrants exercised and the additional warrants issued. The Senior Reorganization Noteholders who have consented to convert their debt amounted to approximately $2,309,000. Of that amount, approximately $979,000 represents the exercise price of existing warrants that was $74. The Company used $150 from the proceedsloaned to repay borrowings from
Mr. Rampel.

SALE OF APPBUILDER ASSETS:

On October 1, 2001, the Company sold its Geneva AppBuilder software business to
BluePhoenix Solutions, a wholly owned subsidiary of Liraz Systems Ltd. Underfor which the termswarrant holders will receive both additional warrants and early adopter warrants. Using the Black-Scholes formula, the Company has determined that the fair value of the agreement,warrants granted to this tranche is approximately $440,000. The difference between the fair value of the additional warrants and the total invested in this tranche, or $539,000, is treated as a beneficial conversion and fully amortizable. The second tranche of investment that consisted of those warrant holders who loaned the exercise price of their existing warrants, and will receive additional warrants but no early adopter warrants, amounted to approximately $107,000. Using Black-Scholes, the Company soldhas determined that the rights, titlefair value of the warrants granted to this tranche is approximately $32,000 and interestthe beneficial conversion amount is $75,000. The third tranche consisted of investors who had no existing warrants and will only receive additional warrants upon consummation of the Recapitalization. The total investment in this tranche is $1,223,000. Using Black-Scholes, the Company has determined that the fair value of the warrants granted to this tranche is approximately $570,000 and the beneficial conversion amount is $653,000. Since this beneficial conversion feature is immediately convertible upon issuance, the Company has fully amortized this beneficial conversion feature in the AppBuilder product and certain receivables, unbilled, deferred revenue,
maintenance contracts, fixed assets and certain liabilities. The AppBuilder
product accounted for approximately 99%Statement of total revenuesOperations for the year ended December 31, 2006.

Also as part of the recapitalization plan, Convertible Bridge Notes in the principal amount of $3,915,000 are automatically cancelled and approximately 85%converted into 30,508,448 shares of total revenues within the messaging and application
engineering segment. TheCompany’s common stock. Also in accordance with EITF 98-5, using the Black-Scholes formula, the Company received total proceeds of $20,350; $19,000 in
cash, a note receivable for $1,000 due February 2002 and a cash payment forhas calculated the net assets. The carryingfair value of the net assets soldcommon stock resulting from conversion of the Convertible Bridge Notes. Based upon that calculation, the fair value of the stock received was approximately $15,450.$195,000. The resulting gaindifference between the total of approximately $4,900 was recordedthe Convertible Bridge Notes and the fair value of the stock ($3,720,000) is treated as a beneficial conversion. Since this beneficial conversion feature is immediately convertible upon issuance, the Company has fully amortized this beneficial conversion feature in the gain on disposalStatement of asset. Operations for the year ended December 31, 2006.

F-14
Table of Contents

The Company subsequently repaid $22,000had issued $992,000 aggregate principal amount of Convertible Promissory Notes.  As part of the recapitalization plan, these Noteholders were offered reduced conversion prices to convert their notes into shares of the Company’s new series A-1 preferred stock. All Noteholders have agreed to convert their notes into shares of Series A-1 preferred stock. The Company has cancelled these notes and issued 1,591 shares of its short-term debt usingSeries A-1 preferred stock. In accordance with EITF 98-5 and specifically paragraph 8, the proceedsCompany has utilized the Black-Scholes formula to determine the fair value of the stock received. The Company has calculated the fair value of the stock received to be $484,000 resulting in a beneficial conversion of $508,000. Since this beneficial conversion is immediately recognizable by the holders, the Company has fully amortized this conversion and cash on hand. In March 2002,recorded an accretion to preferred stock in the $1,000 note was
repaid with cashStatement of $825 and settlement of other liabilities. AtOperations for the year ended December 31, 2001,2006.

Holders of the $1,000 note was recordedCompany’s Series A-3, B-3, C and D preferred stock were offered reduced conversion rates on their existing preferred stock in exchange for shares in a new Series A-1 preferred stock for Cicero Inc. as note receivable from related partypart of the recapitalization plan. As a result of stockholder approval, the Company affected an exchange of existing preferred shares into 172.15 Series A-1 preferred shares. In exchange for the reduced conversion prices, holders of the series A-3, B-3 and $863, including $57 classified as assets to be abandoned, was recordedD shares forfeited their anti-dilution protection along with certain other rights, ranks and privileges. The Company’s Series D preferred stock contained a redemption feature which required that the Company account for same as a receivable fromliability. The Company’s Series A-1 preferred stock contains no redemption features and accordingly, upon exchange, the fair value of these shares were converted to equity. The Company employed the Black-Scholes formula to value the shares exchanged and have determined that the reduced conversion prices and exchange has created a related party representing amounts due tobeneficial conversion of $21,000. As the new Series A-1 preferred shares are immediately convertible, the Company from
BluePhoenix Solutionshas recorded this beneficial conversion as a deemed dividend in the Statement of Operations for the net asset amount noted above and the reimbursement
for certain general and administrative expenses performed by the Company.


                                      F-16



SALE OF MESSAGE QUEUING AND XIPC ASSETS:

Also during the quarteryear ended September 30, 2001, the Company sold two of its
messaging products - Geneva Message Queuing and Geneva XIPC to Envoy
Technologies, Inc. Under the terms of the agreement, Envoy acquired all rights,
title and interest to the products along with all customer and maintenance
contracts. The Company retained all accounts receivable, received $50 in cash
and a note receivable for $400. The resulting gain of $342 has been recorded in
the gain on disposal of assets.

ASSETS AND LIABILITIES TO BE ABANDONED:

At December 31, 2002, the Company had made the decision to close its remaining
foreign subsidiaries.

In December 2002, the Company received notification of the finalization of the
bankruptcy proceeding in France and recorded a gain on the closure of the
subsidiary of $332 in Gain (loss) on disposal of assets.

In March 2003, the Company received notification of the finalization of the
bankruptcy proceeding in the United Kingdom and recorded a gain on the closure
of the subsidiary of $216 in Gain (loss) on disposal of assets.

In December 2003, the Company received notification of the liquidation of the
Denmark subsidiary and the Company recorded a gain on the closure of the
subsidiary of $62 in Gain (loss) on disposal of assets.

NOTE 3. ACCOUNTS RECEIVABLE

2006.


NOTE 3.
ACCOUNTS RECEIVABLE

Trade accounts receivable was composed of the following at December 31:

                                                           2003          2002
                                                          -------       -------
Current trade accounts receivable ..................      $    20       $ 1,434
Less: allowance for doubtful accounts ..............           (8)         (143)
                                                          -------       -------
                                                          $    12       $ 1,291
                                                          =======       =======


Approximately $0 and $9 of current trade receivables were unbilled at December
31 2003 and 2002, respectively.

(in thousands):

 
 
2007
 
 
2006
 
Current trade accounts receivable
 
$
792
 
 
$
230
 
Less: allowance for doubtful accounts
 
 
100
 
 
 
60
 
 
 
$
692
 
 
$
170
 


The (credit) provision for uncollectible amounts was ($623), ($477)$50,000, $60,000, and $3,812($12,000), for the years ended December 31, 2003, 20022007, 2006, and 20012005, respectively.  Write-offs (net of recoveries) of accounts receivable were ($488), ($437) and $6,0470) for the years ended December 31, 2003, 20022007, 2006 and 2001, respectively. Included in the
write-offs for 2001 was approximately $3,800 from one customer who filed for
Chapter 11 Protection under the U.S. Bankruptcy laws.

NOTE 4.           PROPERTY AND EQUIPMENT

2005.


NOTE 4.
PROPERTY AND EQUIPMENT

Property and equipment was composed of the following at December 31:

                                                              2003         2002
                                                             -----        -----
Computer equipment ...................................       $ 242        $ 206
Furniture and fixtures ...............................           8            8
Office equipment .....................................         138          138
                                                             -----        -----
                                                               388          352
Less: accumulated depreciation and amortization ......        (362)        (190)
                                                             -----        -----

                                                             $  26        $ 162
                                                             =====        =====


31 (in thousands):

 
 
2007
 
 
2006
 
Computer equipment
 
$
263
 
 
$
252
 
Furniture and fixtures
 
 
8
 
 
 
8
 
Office equipment
 
 
154
 
 
 
149
 
 
 
 
425
 
 
 
409
 
Less: accumulated depreciation and amortization
 
 
(403
)
 
 
(394
)
 
 
 
 
 
 
 
 
 
 
 
$
22
 
 
$
15
 

Depreciation and amortization expense of property and equipment was $167, $402$10,000, $12,000, and $945$11,000, for the years ended December 31, 2003, 2002,2007, 2006, and 2001,2005, respectively.


                                      F-17



NOTE 5. NOTES RECEIVABLE

As discussed in Note 2, in 2002 the Company disposed

F-15
Table of the remaining assets of
the Systems Integration segment through a saleContents

NOTE 5.
SHORT-TERM DEBT

Term loan, notes payable, and notes payable to EM Software Solutions, Inc. As
part of the proceeds, the Company received two notes receivable from the
purchaser. The first note was due on February 13, 2003 in the amount of $744 and
bore interest at prime plus 2.25%. This note was repaid in February 2003. The
second note was in the principal amount of $617 and bears interest at prime plus
1%. Principal and interest is payable monthly and the note matures in 2007. Due
to the uncertainty of the collection of the note at the time, the Company
recorded the note net of an allowance of $494.

As more fully discussed in Note 20, the Company had beenrelated party to litigation for
breach of a real estate lease. That case was settled in August 2003. Under the
terms of the settlement agreement, the Company agreed to assign the note
receivable due from EM Software Solutions, with recourse equal to the unpaid
portion of the Note should the Note obligor default on future payments. The
principal balance outstanding on the Note at the time of assignment was $545.
The Company assessed the probability of liability under the recourse provisions
using a weighted probability cash flow analysis and has recognized a long-term
liability in the amount of $131. In addition, the Company wrote off the
unreserved portion of the Note or $51.

In conjunction with the sale of Profit Key on April 6, 1998, the Company
received a note receivable from the purchaser for $2,000. The remaining balance
on the note totaled $1,000 and was due in equal annual installments beginning on
March 31, 2001. The note bore interest at 9% per annum. In 2002, the Company
sold its remaining interest in the note to a group of investors including
Nicholas Hatalski and Paul Rampel, both members of the Company's Board of
Directors at the time, and Anthony Pizi, the Company's Chairman for $400, and
recorded a loss on the sale of $100.

NOTE 6. SOFTWARE PRODUCT TECHNOLOGY

As of December 31, 2003, all of the Company's software product technology
relates to the Cicero technology. Effective July 2002, the Company determined
that the estimated asset life of the Cicero technology has been extended as a
result of the January 2002 amended license agreement with Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") wherein the exclusive right to
modify, commercialize, and distribute the technology was extended in perpetuity.
Accordingly, the Company reassessed the estimated life of the technology and
extended it from three years to five years. The effect of the change in the
estimated life resulted in a reduction of $4,608 and $2,407 of amortization
expense for the years ended December 31, 2003 and 2002, respectively. The impact
on the net loss applicable to common stockholders - basic and diluted was
$(0.21) per share for December 31, 2003 and $(0.13) per share for December 31,
2002.

In accordance with FASB 86 "Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed", the Company completed an assessment of the
recoverability of the Cicero product technology as of September 30, 2003 and
again at December 31, 2003. This assessment was completed due to the Company's
continued operating losses and the limited software revenue generated by the
Cicero technology over the past twelve months. Currently, the Company is in
negotiations with numerous customers to purchase licenses, which would have a
significant impact on the cash flows from the Cicero technology and the Company.
Since the negotiations have been in process for several months and expected
completion of the transactions has been delayed, the Company has reduced its
cash flow projections. Historical cash flows generated by the Cicero technology
do not support the long-lived asset and accordingly the Company has impaired the
unamortized book value of the technology in excess of the expected net
realizable value as of December 31, 2003. This impairment charge, in the amount
of $993, has been recorded in cost of software revenue.

During the third quarter of 2001, the Company reduced its carrying value by
$3,070 of the capitalized software cost recorded as part of the StarQuest
acquisition to its fair value based upon an evaluation of its net realizable
value. In May 2002, based upon the potential sale of the assets to a third
party, the Company determined that an additional impairment had occurred in the
amount of $1,564, which was recorded as software amortization. The Company has
been assessing its assets to determine which assets if any are to be considered
non-strategic and, in May 2002, the Company received an unsolicited offer to
purchase the Star/SQL and CTRC products. In June 2002, the Company sold the
Star/SQL and CTRC asset. (See Note 2.)


                                      F-18


During the years ended December 31, 2003, 2002 and 2001, the Company recognized
$3,933 of which $993 is an impairment charge, and $7,375 and $11,600,
respectively, of expense related to the amortization of these costs, which is
recorded as cost of software revenue in the consolidated statements of
operations. Accumulated amortization of capitalized software costs was $20,436
and $16,503 at December 31, 2003 and 2002, respectively.

NOTE 7. IDENTIFIABLE AND UNIDENTIFIABLE INTANGIBLE ASSETS

Identifiable and unidentifiable intangible assets primarily included goodwill,
existing customer base, assembled workforce and trademarks recorded in
connection with the Company's previous acquisitions. At December 31, 2003 and
2002, the Company had no identifiable and unidentifiable intangible assets. Pro
forma net loss applicable to common stockholders as if the provisions of SFAS
142, "Goodwill and Other Intangible Assets", had been adopted for the year ended
December 31, 2001 would have been ($98,023).

SALE OF SEER TECHNOLOGIES ASSETS (APPBUILDER):

As described in Note 2, Sale of AppBuilder Assets, the Company sold the
intangible assets acquired from Seer Technologies to BluePhoenix Solutions (a
wholly-owned subsidiary of Liraz Systems Ltd.) in October 2001, which resulted
in a net reduction of $11,052 in intangible assets.

ASSET IMPAIRMENTS:

During the quarter ended September 30, 2001, the Company was notified by one of
its resellers that they would no longer engage in re-sales of the Company's CTRC
products acquired from StarQuest. This reseller accounted for substantially all
of the product sales and as a result, the Company performed an assessment of the
recoverability of the Message Application Engineering Segment. The results of
the Company's analysis of undiscounted cash flows indicated that an impairment
had occurred. The Company estimated the fair market value of the related assets
through a discounted future cash flow valuation technique. The results of this
analysis indicated that the carrying value of these intangible assets exceeded
their fair market values. The Company has reduced the carrying value of these
intangible assets by approximately $10,999 as of September 30, 2001, of which
$3,070 was recorded as software amortization costs. (See Note 6.)

NOTE 8. SHORT TERM DEBT

      Short-term debt was composedconsist of the following at December 31:

                                                          2003             2002
                                                         ------           ------
Term loan (a) ................................           $1,971           $2,512
Note payable; related party (b) ..............               85               --
Notes payable (c) ............................              444              381
Short term convertible note (d) ..............              125               --
                                                         ------           ------
                                                         $2,625           $2,893
                                                         ======           ======

(a)   The Company has a $1,971 term loan bearing interest at LIBOR plus 1%
      (approximately 2.13% at December 31, 2003). Interest is payable quarterly.
      There are no financial covenants and the term loan is guaranteed by Liraz
      Systems Ltd., the Company's former principal shareholder. The loan matures
      on November 8, 2004. (See Note 16.)

(b)   In December 2003,31(in thousands):

 
 
2007
 
 
2006
 
Term loan (a)
 
$
--
 
 
$
1,971
 
Note payable related party (b)
 
 
49
 
 
 
9
 
Notes payable (c)
 
 
1,186
 
 
 
919
 
 
 
$
1,235
 
 
$
2,899
 


(a)
The Company had a $1,971 term loan bearing interest at LIBOR plus 1.5%.  Interest was payable quarterly.  There are no financial covenants and the term loan was guaranteed by Liraz Systems Ltd. (now known as BluePhoenix Solutions), the Company’s former principal stockholder.  The loan matured on October 31, 2007.  In October 2007, the Company, in conjunction with Blue Phoenix Solutions, retired the term loan.  (See Note 14.)

(b)
In November 2007, the Company entered into a short term note payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The Note bears interest at 6% per year and is unsecured. At December 31, 2007, the Company was indebted to Mr. Steffens in the amount of $40,000.

From time to time the Company entered into a promissory note with the
      Company's Chairman. The Note bears interest at 12% per annum.

(c)   The Company is attempting to secure a revolving credit facility and on an
      interim basis and from time to time has issued a series of short term
      promissory notes with private lenders, which provides for short term
      borrowings both unsecuredone of the Company’s directors and secured by accounts receivable.the former Chief Information Officer, Anthony Pizi.  The Notesnotes bear interest at 12% per annum. (d)   InAs of December 2003,31, 2007 and 2006, the Company entered into a promissory note with a
      private lender. The Note bears interest at 12% per annumwas indebted to Anthony Pizi in the amount of $9,000.

(c)
The Company does not have a revolving credit facility and from time to time has issued a series of short term promissory notes with private lenders, which provide for short term borrowings, both secured by accounts receivable and unsecured.  In addition, the Company has settled certain litigation and agreed to issue a series of promissory notes to support its  obligations in the aggregate principal amount of $88,000. The notes bear interest between 10% and 36% per annum.


NOTE 6.
LONG-TERM DEBT

Long-term loan and allows for
      the conversion of the principal amount due into common stock of the
      Company. The Note is convertible at $0.28 per share.


                                      F-19



NOTE 9. INCOME TAXES

Income tax expense were composednotes payable to related party consist of the following forat December 31(in thousands):

 
 
2007
 
 
2006
 
Term loan (a)
 
$
1,021
 
 
$
--
 
Note payable; related party (b)
 
 
300
 
 
 
--
 
Other long-term debt
 
 
2
 
 
 
33
 
 
 
$
1,323
 
 
$
33
 


(a)
In October 2007, the Company, in conjunction with Blue Phoenix Solutions, retired the note payable to Bank Hapoalim and entered into a new note with Blue Phoenix Solutions in the principal amount of $1,021,000 with interest at Libor plus 1% (approximately 5.86% at December 31, 2007) maturing in December 2011. Interest is payable quarterly.

(b)
In October 2007, the Company entered into a long-term note with John L. (Launny) Steffens, the Chairman on the Board of Directors, as part of the restructuring of the Note payable to Bank Hapoalim.  The Note bears interest of 3% and matures in October 2009.  At December 31, 2007, the Company was indebted to Mr. Steffens in the amount of $300,000.

Scheduled maturities of the years ended December
31:

                                              2003        2002         2001
                                             -------     -------      -------
Federal - current ......................     $    --     $    --      $    --
State and local - current ..............          --          --           --
                                             -------     -------      -------

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

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

Total income tax provision (benefit) ...     $    --     $  (155)     $   501
                                             =======     =======      =======


above debt  are as follows:

Year
 
 
 
2008
 
$
2
 
2009
 
$
300
 
2011
 
$
1,021
 

F-16
Table of Contents

NOTE 7.
INCOME TAXES

A reconciliation of expected income tax at the statutory federal rate with the actual income tax provision is as follows for the years ended December 31:


                                                               2003          2002          2001
                                                             --------      --------      --------

Expected income tax benefit at statutory rate (34%) ....     $ (3,402)     $ (6,235)     $(35,200)
State taxes, net of federal tax benefit ................         (405)         (358)       (5,158)
Effect of foreign operations including withholding taxes          (31)          (68)          801
Effect of change in valuation allowance ................        3,769         6,362        37,076
Amortization and write-off of non-deductible goodwill ..           --            --         1,906
Non-deductible expenses ................................           69           144         1,076
                                                             --------      --------      --------
             Total .....................................     $     --      $   (155)     $    501
                                                             ========      ========      ========
31 (in thousands):

 
 
2007
 
 
2006
 
 
2005
 
Expected income tax benefit at statutory rate (34%)
 
$
(672
)
 
$
(1,019
)
 
$
(1,251
)
State taxes, net of federal tax benefit.
 
 
(118
)
 
 
(180
)
 
 
(308
)
Effect of change in valuation allowance
 
 
788
 
 
 
1,073
 
 
 
1,537
 
Non-deductible expenses
 
 
2
 
 
 
126
 
 
 
22
 
Total
 
$
--
 
 
$
--
 
 
$
--
 

Significant components of the net deferred tax asset (liability) at December 31 were as follows:

                                                         2003            2002
                                                       --------        --------

Current assets:
    Allowance for doubtful accounts ............       $     85        $     41
    Accrued expenses, non-tax deductible .......            200             200

Noncurrent assets:
    Loss carry forwards ........................         74,517          71,448
    Depreciation and amortization ..............          5,709           4,486
                                                       --------        --------
                                                         80,511          76,175

Less: valuation allowance ......................        (80,511)        (76,175)
                                                       --------        --------

                                                       $     --        $     --
                                                       ========        ========



 
 
2007
 
 
2006
 
Current assets:
 
 
 
 
 
 
Allowance for doubtful accounts
 
$
44
 
 
$
24
 
Accrued expenses, non-tax deductible
 
 
222
 
 
 
279
 
Deferred revenue
 
 
44
 
 
 
15
 
Noncurrent assets:
 
 
 
 
 
 
 
 
Stock Compensation Expense
 
 
287
 
 
 
--
 
Loss carryforwards
 
 
92,337
 
 
 
91,016
 
Depreciation and amortization
 
 
5,119
 
 
 
5,931
 
 
 
 
98,053
 
 
 
97,265
 
 
 
 
 
 
 
 
 
 
Less: valuation allowance
 
 
(98,053
)
 
 
(97,265
)
 
 
 
 
 
 
 
 
 
 
 
$
--
 
 
$
--
 

At December 31, 2003,2007, the Company had net operating loss carryforwards of approximately $186,293,$230,847,000, which may be applied against future taxable income. These carryforwards will expire at various times between 20052008 and 2023.2027. A substantial portion of these carryforwards isare restricted to future taxable income of certain of the Company's subsidiaries or limited by Internal Revenue Code Section 382. Thus, the utilization of these carryforwards cannot be assured. Net operating loss carryforwards include tax deductions for the disqualifying dispositions of incentive stock options. When the Company utilizes the net operating loss related to these deductions, the tax benefit will be reflected in additional paid-in capital and not as a reduction of tax expense. The total amount of these deductions included in the net operating loss carryforwards is $21,177.


                                      F-20
$21,177,000.

The undistributed earnings of certain foreign subsidiaries are not subject to additional foreign income taxes nor considered to be subject to U.S. income taxes unless remitted as dividends. The Company intends to reinvest such undistributed earnings indefinitely; accordingly, no provision has been made for U.S. taxes on those earnings. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable.

The Company provided a full valuation allowance on the total amount of its deferred tax assets at December 31, 20032007 and 2006 since management does not believe that it is more likely than not that these assets will be realized.

NOTE 10. SENIOR CONVERTIBLE REDEEMABLE PREFERRED STOCK

On March 19, 2003,


NOTE 8.
STOCKHOLDERS’ EQUITY

Common Stock:

During 2007, the Company completed a $3,500 private placement of Series D
Convertible Preferred Stock ("Series D Preferred Stock"), convertible at a
conversion ratio of $0.32 per share oftwo common stock into an aggregatefinancing rounds wherein it raised a total of 11,031,250 shares$1,033,000 of common stock. As partcapital from several new investors as well as certain members of the financing,its Board of Directors. In February 2007, the Company has
also issued warrants to purchase an aggregate of 4,158,780 shares of common
stock at an exercise price of $0.07 per share ("Series D-1 Warrants"). On
October 10, 2003, the Company, consistent with its obligations, also issued
warrants to purchase an aggregate of 1,665,720 shares of common stock at an
exercise price the lesser of $0.20 per share or market price at the time of
exercise ("Series D-2 Warrants"). The Series D-2 Warrants became exercisable on
November 1, 2003, because the Company failed to report $6,000 in gross revenues
for the nine month period ended September 30, 2003. Both existing and new
investors participated in the financing. The Company also agreed to register the
common stock issuable upon conversion of the Series D Preferred Stock and
exercise of the warrants for resale under the Securities Act of 1933, as
amended. Under the terms of the financing agreement, a redemption event may
occur if any one person, entity or group shall control more than 35% of the
voting power of the Company's capital stock. The Company allocated the proceeds
received from the sale of the Series D Preferred Stock and warrants to the
preferred stock and detachable warrants on a relative fair value basis,
resulting in an allocation of $2,890 to the Series D Preferred Stock and $640 to
the detachable warrants. Based upon the allocation of the proceeds, the Company
determined that the effective conversion price of the Series D Preferred Stock
was less than the fair value of the Company's common stock on the date of
issuance. The beneficial conversion feature was recorded as a discount on the
value of the Series D Preferred Stock and an increase in additional paid-in
capital. Because Series D Preferred Stock was convertible immediately upon
issuance, the Company fully amortized such beneficial conversion feature on the
date of issuance.

As part of the financing, the Company and the lead investors have agreed to form
a joint venture to exploit the Cicero technology in the Asian market. The terms
of the agreement require that the Company place $1,000 of the gross proceeds
from the financing into escrow to fund the joint venture. The escrow agreement
allows for the immediate release of funds to cover organizational costs of the
joint venture. During the quarter ended March 31, 2003, $225 of escrowed funds
was released. Since the joint venture was not formed and operational on or by
July 17, 2003, the lead investors have the right, but not the obligation, to
require the Company to purchase $1,000 in liquidation value of the Series D
Preferred Stock at a 5% per annum premium, less their pro-rata share of
expenses. The Company and the lead investor have mutually agreed to extend the
escrow release provisions until September 30, 2004.

Another condition of the financing requires the Company to place an additional
$1,000 of the gross proceeds into escrow, pending the execution of a definitive
agreement with Merrill Lynch, providing for the sale of all right, title and
interest to the Cicero technology. Since a transaction with Merrill Lynch for
the sale of Cicero was not consummated by May 18, 2003, the lead investors have
the right, but not the obligation, to require the Company to purchase $1,000 in
liquidation value of the Series D Preferred Stock at a 5% per annum premium.
During the second quarter, $390 of escrowed funds was released. In addition, the
Company and the lead investor agreed to extend the escrow release provisions
until the end of July 2003 when all remaining escrow monies were released to the
Company.


                                      F-21



NOTE 11. STOCKHOLDERS' EQUITY

COMMON STOCK:

In October 2003, the Company entered into a Securities Purchase Agreement with
several investors wherein the Company agreed to sell 1,894,444sold 3,723,007 shares of its common stock and issue 473,611 warrants to purchase the Company's common stock
at a price of $0.45for $0.1343 per share for a total of $853 in proceeds. This offering
closed on$500,000.  In October 15, 2003. The warrants expire in three years from2007, the dateCompany completed a private sale of grant.shares of its common stock to a group of investors, four of which are members of our Board of Directors. Under the terms of that agreement, the Company sold 2,169,311 shares of its common stock for $0.2457 per share for a total of $533,000. These shares were issued in reliance upon the exemption from registration under Rule 506 of Regulation D and on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering.

In January 2002,

F-17
Table of Contents

As part of the recapitalization plan described in Note 2, the Company enteredconverted outstanding convertible promissory notes, senior reorganization notes and convertible bridge notes. Senior reorganization debt amounting to $2,309,000 was cancelled and converted into a Securities Purchase Agreement with
several investors wherein the Company agreed to sell up to 3,000,0003,438,473 shares of itsthe Company’s common stock and warrants.stock. The common stock was valued at $1.50 per share
and warrants to purchase additional shares were issued with an exercise priceCompany also converted $3,915,000 of $2.75 per share. This offering closed on January 16, 2002. Of the 3,000,000
shares, the Company sold 2,381,952Convertible Bridge Notes into 30,508,448 shares of Cicero common stock for a total of $3,574
and granted 476,396 warrants to purchase the Company's common stock at an
exercise price of $2.75 per share. The warrants expire in three years from the
date of grant and have a call feature that forces exercise if the Company's
common stock exceeds $5.50 per share.stock. These shares were issued in reliance upon the exemption from registration under Rule 506 of Regulation D and on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering. Under this
Private Placement, the Company had agreed to certain terms and conditions that
would trigger payments by the Company if the Company did not keep such shares
registered under the Securities Act of 1933, as amended. 

Stock Grants:

In April 2003, in
exchange for a waiver of such provisions the Company agreed to exchange the
warrants from the January 2002 Private Placement priced at $2.50 for new
warrants priced at $0.60 and has extended the expiration date until March 2007.
Each participant is required to execute a waiver prior to receiving the repriced
warrants.

STOCK GRANTS:

During 2002,August 2007, the Company issued 109,672Mr. John P. Broderick, our Chief Executive Officer, a restricted stock award in the amount of 549,360 shares of common stockwhich will vest to employees for
retention bonuses and severance. The grants represented compensation for
services previously performed and were valued and recorded based on the fair
market value of the stock on the date of grant, which totaled $92. During 2003,
no stock awards were made to employees.

STOCK OPTIONS:him upon his resignation or termination.  The Company maintains two stock option plans,used the 1995Black-Scholes method to value these shares and 1997 assumed a life of 10 years.  The Company recorded compensation expense of approximately $36,000 for fiscal 2007.
Stock Incentive
Plans,Options:

In 2007, the Board of Directors approved the 2007 Cicero Employee Stock Option Plan which permitpermits the issuance of incentive and nonstatutorynonqualified stock options, stock appreciation rights, performance shares, and restricted and unrestricted stock to employees, officers, directors, consultants, and advisors. In July
2003, stockholders approved a proposal to increase theThe aggregate number of shares reserved
within these plans to a combined total of 10,900,000 shares of common stock for
issuancewhich may be issued under this Plan shall not exceed 4,500,000 shares upon the exercise of awards and provide that the term of each award be determined by the Board of Directors.  The Company also has a stock incentive plan for outside directors and the Company has set aside 120,0001,200 shares of common stock for issuance under this plan. The Company's 1997 Employee Stock Option Plan expired during 2007.

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


                                      F-22

Activity for stock options issued under these plans for the fiscal years ending December 31, 2003, 20022007, 2006 and 20012005 was as follows:

                                                                                                   WEIGHTED
                                                                          OPTION PRICE             AVERAGE
                                                  PLAN ACTIVITY            PER SHARE            EXERCISE PRICE

Balance at December 31, 2000...................        3,857,517            1.37-39.31               15.83
    Granted....................................        3,037,581            1.74- 6.13                3.60
    Forfeited..................................       (2,528,945)           1.37-39.31               16.38
                                               --------------------

Balance at December 31, 2001...................        4,366,153            1.37-39.31                6.92
    Granted....................................        1,942,242            0.34- 1.70                0.58
    Forfeited..................................       (2,474,016)           0.39-39.31                6.76
                                               --------------------

Balance at December 31, 2002                           3,834,379            0.34-39.31                3.81
    Granted...........................                 2,566,126            0.22- 0.57                0.24
    Exercised........................                   (121,434)           0.22- 0.22                0.22
     Forfeited........................                  (653,193)           0.22-39.31                2.60
                                               --------------------

Balance at December 31, 2003...                        5,625,878            0.20-39.31                2.43
                                               ====================
 
 
Plan Activity
 
 
Option Price
Per Share
 
 
Weighted Average
Exercise Price
 
Balance at December 31, 2004
 
 
74,887
 
 
 
12.00-3,931.00
 
 
 
111.00
 
Granted
 
 
2,529
 
 
 
7.00 – 12.00
 
 
 
9.00
 
Exercised
 
 
(2,529
)
 
 
7.00 – 12.00
 
 
 
9.00
 
Forfeited
 
 
(15,877
)
 
 
22.00-3,931.00
 
 
 
75.00
 
Balance at December 31, 2005
 
 
59,010
 
 
 
12.00-3,931.00
 
 
 
124.00
 
Forfeited
 
 
(13,695
)
 
 
22.00-3,931.00
 
 
 
137.14
 
Balance at December 31, 2006
 
 
45,315
 
 
 
12.00-3,931.00
 
 
 
120.61
 
Granted
 
 
2,756,173
 
 
 
0.51
 
 
 
0.51
 
Forfeited
 
 
(270,413
)
 
 
0.51-612.50
 
 
 
12.21
 
Expired
 
 
(2,050
)
 
 
1,473.00
 
 
 
1,473.00
 
Balance at December 31, 2007
 
 
2,529,025
 
 
 
0.51-3,931.00
 
 
 
1.35
 


There were 2,756,173 options granted during 2007 and none during 2006. The weighted average grant date fair value of options issued during the years ended December 31, 2003, 2002,2007 and 20012005 was equal to $0.24, $0.58,$0.51 and $2.59$9.00 per share, respectively. There were no option grants issued below fair market value during 2003, 2002 or 2001.

2007 and 2005.

F-18
Table of Contents

At December 31, 2003, 20022007, 2006, and 2001,2005, options to purchase approximately
2,770,126, 1,409,461,888,634, 45,315, and 1,313,8265,237 shares of common stock were exercisable, respectively, pursuant to the plans at prices ranging from $0.22$0.51 to $39.32.$3,931.25. The following table summarizes information about stock options outstanding at December 31, 2003:



                                                                                                                 WEIGHTED
                                                      REMAINING CONTRACTUAL                                      AVERAGE
                                     NUMBER              LIFE FOR OPTIONS                 NUMBER                  EXERCISE
       EXERCISE PRICE            OUTSTANDING               OUTSTANDING                 EXERCISABLE                 PRICE
       --------------            -----------               -----------                 -----------                 -----

        $ 0.22 - 3.93                4,514,878                 8.8                       1,870,153                 $  0.62
          3.94  -7.86                  846,650                 5.4                         635,623                    6.27
           7.87-11.79                   93,650                 4.3                          93,650                    8.92
          11.80-15.72                   40,000                 0.5                          40,000                   12.29
          15.73-19.66                    7,500                 6.6                           7,500                   18.81
          19.67-23.59                    3,000                 6.5                           3,000                   20.00
          23.60-27.52                        0                 0.0                               0                    0.00
          27.53-31.45                    3,000                 6.0                           3,000                   30.25
          31.46-35.38                        0                 0.0                               0                    0.00
          35.39-39.32                  117,200                 1.0                         117,200                   38.03
                        ----------------------------                           ---------------------------

                                     5,625,878                 8.0                       2,770,126                 $  4.05
                        ============================                           ===========================



                                      F-23



PREFERRED STOCK:

In connection with the sale of Series D 2007:

 
 
EXERCISE PRICE
 
 
 
 
NUMBER
OUTSTANDING
 
 
REMAINING CONTRACTUAL
LIFE FOR OPTIONS
OUTSTANDING
 
 
 
 
NUMBER
EXERCISABLE
 
 
WEIGHTED
AVERAGE
EXERCISE
PRICE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
0.51-0.51
 
 
 
2,500,760
 
 
 
9.6
 
 
 
860,369
 
 
$
0.51
 
 
0.52-393.12
 
 
 
26,680
 
 
 
5.5
 
 
 
26,680
 
 
 
40.60
 
 
393.13-786.25
 
 
 
1,350
 
 
 
3.2
 
 
 
1,350
 
 
 
532.20
 
 
786.26-1,179.37
 
 
 
165
 
 
 
2.0
 
 
 
165
 
 
 
944.41
 
 
1,179.38-3,538.12
 
 
 
40
 
 
 
2.6
 
 
 
40
 
 
 
1,881.25
 
 
3,538.13-3,931.25
 
 
 
30
 
 
 
2.2
 
 
 
30
 
 
 
3,931.25
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2,529,025
 
 
 
9.6
 
 
 
888,634
 
 
$
2.91
 


Preferred Stock the holders of the
Company's Series A3 Preferred Stock and Series B3 Preferred Stock (collectively,
the "Existing Preferred Stockholders"), entered into an agreement whereby the
Existing Preferred Stockholders have agreed to waive certain applicable price
protection anti-dilution provisions. Under the terms of the waiver agreement,
the Company is also permitted to issue equity securities representing aggregate
proceeds of up to an additional $4,900 following the sale of the Series D
Preferred Stock. Additionally, the Existing Preferred Stockholders have also
agreed to a limited lock-up restricting their ability to sell common stock
issuable upon conversion of their preferred stock and warrants and to waive the
accrual of any dividends that may otherwise be payable as a result of the
Company's delisting from Nasdaq. As consideration for the waiver agreement, the
Company has agreed to issue on a pro rata basis up to 1,000 warrants to all the
Existing Preferred Stockholders on a pro rata basis at such time and from time
to time as the Company closes financing transactions that represent proceeds in
excess of $2,900, excluding the proceeds from the Series D Preferred Stock
transaction. Such warrants will have an exercise price that is the greater of
$0.40 or the same exercise price as the exercise price of the warrant, or equity
security, that the Company issues in connection with the Company's financing or
loan transaction that exceeds the $2,900 threshold.

On August 14, 2002, the Company completed a $1,600 private placement of Series C
Convertible Preferred Stock ("Series C Preferred Stock"), convertible at a
conversion ratio of $0.38 per share of common stock into an aggregate of
4,184,211 shares of common stock. :

As part of the financing,recapitalization plan approved by shareholders in November 2006, the Company has also
issued warrantsoffered to purchase an aggregate of 1,046,053exchange its existing Series A-3, B-3, C and D preferred shares at reduced conversion rates in exchange for shares of common stock at
an exercise price of $0.38 per share. As consideration for the $1,600 private
placement, the Company received approximately $1,400 in cash and allowed certain
debt holders to convert approximately $150 of debt and $50 accounts payable to
equity. The Chairman and CEO of the Company, Anthony Pizi, converted $150 of
debt owed to him into shares ofa new Series C Preferred Stock and warrants. Both
existing and new investors participated in the financing. The Company also
agreed to register the common stock issuable upon conversion of the Series C
Preferred Stock and exercise of the warrants for resale under the Securities Act
of 1933, as amended. The Company allocated the proceeds received from the sale
of the Series C Preferred Stock and warrants to theA-1 preferred stock and the
detachable warrants onin Cicero Inc. This proposal also required approval by existing preferred shareholders as a relative fair value basis, resulting in the allocation
$1,271class. The new conversion prices with respect to the Series C Preferred StockA-3, B-3 and $329D preferred stock were negotiated with the holders of each series based upon such factors as the current conversion price in relation to the detachable warrants.
Based onmarket, the allocation of the proceeds, the Company determined that the
effective conversion price of the Series C Preferred Stock was less than the
fair value of the Company's common stock on the date of issuance. As a result,
the Company recorded a beneficial conversion feature in thedollar amount of $329 based
on the difference between the fair market value of the Company's common stock on
the closing date of the transactionrepresented by such series and, the effective conversion price of the
Series C Preferred Stock. The beneficial conversion feature was recorded as a
discount on the value of the Series C Preferred Stock and an increase in
additional paid-in capital. Because the Series C Preferred Stock was convertible
immediately upon issuance, the Company fully amortized such beneficial
conversion feature on the date of issuance.

In connection with the sale of Series C Preferred Stock, the Company agreed with
the existing holders of its Series A1 Convertible Preferred Stock (the "Series
A1 Preferred Stock") and the Series B1 Convertible Preferred Stock (the "Series
B1 Preferred Stock"), in exchange for their waiver of certain anti-dilution, provisions, to reprice an aggregate of 1,801,022 warrants to purchase common
stock from an exercise price of $1.77 to $0.38. The Company entered into an
Exchange Agreement with such holders providing for the issuance of 11,570 shares
of Series A2 Convertible Preferred Stock ("Series A2 Preferred Stock")liquidation preferences, seniority and 30,000 Series B2 Convertible Preferred Stock ("Series B2 Preferred Stock"),
respectively. Series A2 Preferred Stock and Series B2 Preferred Stock are
convertible into an aggregate of 1,388,456 and 2,394,063 shares of the Company's
common stock at $8.33 and $12.53 per share, respectively. The exchange is being
undertaken in consideration of the temporary release of the anti-dilution
provisions of the Series A1 Preferred Stockholders and Series B1 Preferred
Stockholders. Based on a valuation performed by an independent valuation firm,
the Company recorded a deemed dividend of $293, to reflect the increase in the
fair value of the preferred stock and warrants as a result of the exchange. (See
"Stock Warrants" for fair value assumptions.) The dividend increased the fair
value of the warrant liability. As of December 31, 2003, no warrants had been
exercised.


                                      F-24



On October 25, 2002, the Company effected an exchange of all of our outstanding
shares of Series A2 Convertible Redeemable Preferred Stock ("Series A2 Preferred
Stock") and Series B2 Convertible Redeemable Preferred Stock ("Series B2
Preferred Stock") and related warrants for an equal number of shares of newly
created Series A3 Convertible Redeemable Preferred Stock ("Series A3 Preferred
Stock") and Series B3 Convertible Redeemable Preferred Stock ("Series B3
Preferred Stock") and related warrants. This exchange was made to correct a
deficiency in the conversion price from the prior exchange of Series A1 and B1
Preferred Stock and related warrants for Series A2 and B2 Preferred Stock and
related warrants on August 29, 2002.other senior rights.  The conversion price for the Series A3
Preferred Stock andC preferred stock was determined in relation to the conversion price for the Series B3 Preferred Stock
remainD preferred stock.  The Board of Directors determined the same as the previously issued Series A1 and A2 Preferred Stock and
Series B1 and B2 Preferred Stock, at $8.33 and $12.53, respectively. The
exercise price for the aggregate 753,640 warrants relating to the Series A3
Preferred Stock ("Series A3 Warrants") was increased from $0.38 to $0.40 per
share which is a reduction from the $1.77 exercisenew conversion price of each series of Level 8 preferred stock after discussion and review of those rights, ranks and privileges that were being waived by the warrants
relating to the Series A1 Preferred Stock. The exercise price for the aggregate
1,047,382 warrants relating to the Series B3 Preferred Stock ("Series B3
Warrants") was increased from $0.38 to $0.40 per share which is a reduction from
the $1.77 exercise price of the warrants relating to the Series B1 Preferred
Stock. The adjusted exercise price was based on the closing price of the
Company's Series C Convertible Redeemable Preferred Stock and warrants on August
14, 2002, plus $0.02, to reflect accurate current market value according to
relevant Nasdaq rules. This adjustment was made as part of the agreement under
which thepresent holders of the Company's Preferred Stock agreed to waive their
price-protectionpreferred stock.  Among those rights being waived are anti-dilution protections to allow the Company to issue the
Series C Preferred Stockprotection, liquidation preferences and warrants without triggering the price-protection
anti-dilution provisions and excessively diluting its common stock. The Company
may cause the redemption of the Series A3 Preferred Stock warrants and the
Series B3 Preferred Stock warrants for $.0001 at any time if the closing price
of the Company's common stock over 20 consecutive trading days is greater than
$5.00 and $7.50 per share, respectively. seniority.

The holders of the Series A3A-1 preferred stock shall have the rights and preferences set forth in the Certificate of Designations filed with the Secretary of State of the State of Delaware upon the approval of the Recapitalization.  The rights and interests of the Series B3 Warrants may causeA-1 preferred stock of the warrantsCompany will be substantially similar to the rights interests of each of the series of  the former Level 8 preferred stock other than for (i) anti-dilution protections that have been permanently waived and (ii) certain voting, redemption and other rights that holders of Series A-1 preferred stock will not be entitled to.  All shares of Series A-1 preferred stock will have a liquidation preference pari passu with all other Series A-1 preferred stock.

The Series A-1 preferred stock is convertible at any time at the option of the holder into an initial conversion ratio of 1,000 shares of Common Stock for each share of Series A-1 preferred stock.  The initial conversion ratio shall be adjusted in the event of any stock splits, stock dividends and other recapitalizations.  The Series A-1 preferred stock is also convertible on an automatic basis in the event that (i) the Company closes on an additional $5,000,000 equity financing from strategic or institutional investors, or (ii) the Company has four consecutive quarters of positive cash flow as reflected on the Company’s financial statements prepared in accordance with generally accepted accounting principals (“GAAP”) and filed with the Commission.  The holders of Series A-1 preferred stock are entitled to receive equivalent dividends on an as-converted basis whenever the Company declares a dividend on its Common Stock, other than dividends payable in shares of Common Stock.  The holders of the Series A-1 preferred stock are entitled to a liquidation preference of $500 per share of Series A-1 preferred stock upon the liquidation of the Company.  The Series A-1 preferred stock is not redeemable.

The holders of Series A-1 preferred stock also possess the following voting rights.  Each share of Series A-1 preferred stock shall represent that number of votes equal to the number of shares of Common Stock issuable upon conversion of a share of Series A-1 preferred stock.  The holders of Series A-1 preferred stock and the holders of Common Stock shall vote together as a class on all matters except: (i) regarding the election of the Board of Directors of the Company (as set forth below); (ii) as required by law; or (iii) regarding certain corporate actions to be redeemedtaken by the Company (as set forth below).

The approval of at least two-thirds of the holders of Series A-1 preferred stock voting together as a class, shall be required in order for cashthe Company to: (i) merge or sell all or substantially all of its assets or to recapitalize or reorganize; (ii) authorize the issuance of any equity security having any right, preference or priority superior to or on parity with the Series A-1 preferred stock; (iii) redeem, repurchase or acquire indirectly or directly any of its equity securities, or to pay any dividends on the Company’s equity securities; (iv) amend or repeal any provisions of its certificate of incorporation or bylaws that would adversely affect the rights, preferences or privileges of the Series A-1 preferred stock; (v) effectuate a significant change in the principal business of the Company as conducted at the difference
betweeneffective time of the exercise price and the fair market value immediately preceding a
redemption event as definedRecapitalization; (vi) make any loan or advance to any entity other than in the contract.ordinary course of business unless such entity is wholly owned by the Company; (vii) make any loan or advance to any person, including any employees or directors of the Company or any subsidiary, except in the ordinary course of business or pursuant to an approved employee stock or option plan; and (viii) guarantee, directly or indirectly any indebtedness or obligations, except for trade accounts of any subsidiary arising in the ordinary course of business.   In addition, the unanimous vote of the Board of Directors is required for any liquidation, dissolution, recapitalization or reorganization of the Company.   The voting rights of the holders of Series A-1 preferred stock set forth in this paragraph shall be terminated immediately upon the closing by the Company of at least an additional $5,000,000 equity financing from strategic or institutional investors.

F-19
Table of Contents

In addition to the voting rights described above, the holders of a majority of the shares of Series A-1 preferred stock are entitled to appoint two observers to the Company’s Board of Directors who shall be entitled to receive all information received by members of the Board of Directors, and shall attend and participate without a vote at all meetings of the Company’s Board of Directors and any committees thereof.  At the option of a majority of the holders of Series A-1 preferred stock, such holders may elect to temporarily or permanently exchange their board observer rights for two seats on the Company’s Board of Directors, each having all voting and other rights attendant to any member of the Company’s Board of Directors.  As such,part of the Recapitalization, the right of the holders of Series A-1 preferred stock to elect a majority of the voting members of the Company’s Board of Directors shall be terminated.

As a result of the reduced conversion prices the Company exchanged all of the Series A-3, B-3, C and D preferred stock into 172 shares of Series A-1 preferred stock and using Black-Scholes, we calculated a beneficial conversion in the exchange of the Series A-3, B-3, C and D shares for Series A-1 preferred stock. The beneficial conversion of $21,000 is treated as a deemed dividend in the Statement of Operations for the year ended December 31, 2006.

As part of the recapitalization plan, Noteholders of $992,000 of Convertible Promissory Notes were offered reduced conversion prices to convert their notes into shares of the Company’s new series A-1 preferred stock. All Noteholders have agreed to convert their notes into shares of Series A-1 preferred stock. The Company has cancelled these notes and issued 1,591 shares of its Series A-1 preferred stock. In accordance with EITF 98-5 and specifically paragraph 8, the Company has utilized the Black-Scholes formula to determine the fair value of the warrants at issuancestock received. The Company has been classified as a warrant liability in accordance
with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in a Company's Own Stock". As of December 31, 2003, no
warrants have been exercised andcalculated the fair value of the liability is $198.

Under the terms of the agreement, the Company is authorizedstock received to issue equity
securitiesbe $484,000 resulting in a single or seriesbeneficial conversion of financing transactions representing
aggregate gross proceeds to$508,000. Since this beneficial conversion is immediately recognizable by the Company of approximately $5,000, or up to an
aggregate 17,500 shares of common stock, without triggering the price-protection
anti-dilution provisions in the Series A3 Preferred Stock and B3 Preferred Stock
and related warrants. In exchange for the waiver of these price-protection
anti-dilution provisions, the Company repriced the warrants as described above
and have agreed to issue on a pro rata basis up to 4,600 warrants to the holders,
of Series A3 Preferred Stock and Series B3 Preferred Stock at such time and from
time to time as the Company closes subsequent financing transactions up to the
$5,000 issuance cap or the 17,500 share issuance cap. As a result of the Series
C Preferred Stock financing, which represented approximately $1,600 of the
Company's $5,000 in allowable equity issuances, the Company is obligated to
issue an aggregate of 1,462,801 warrants at an exercise price of $0.40 per share
to the existing preferred stockholders. The warrants were issued on December 31,
2002 and had a fair value of $373, which was recorded as a dividend to,
Preferred stockholders. As a result of the Series D preferred Stock financing
which represented approximately $3,500 against the allowable equity issuances,
the Company was obligated to issue an aggregate of 3,048,782 warrants at an
exercise price of $0.40 per share to the existing Series A3 and Series B3
preferred shareholders. The warrants were issued on October 8, 2003 and had a
fair value of $1,062, which was recorded as a deemed dividend to preferred
stockholders. Additionally, the Company has agreedfully amortized this conversion and recorded an accretion to issue a warrant to
purchase commonpreferred stock toin the existing preferred stockholders on a pro rata basisStatement of Operations for each warrant to purchase common stock that the Company issues to a
third-party lender in connection with the closing of a qualified loan
transaction. The above referenced warrants will have the same exercise price as
the exercise price of the warrant, or equity security, that the Company issues
in connection with the Company's subsequent financing or loan transaction or
$0.40, whichever is greater. These warrants are not classified as a liability
under EITF 00-19.

year ended December 31, 2006.

During 20032005 and 20022004, there were 6,250456 shares of preferred stock converted into 1,377,92113,511 shares of the Company's common stock and 1,5004,686 shares of preferred stock converted into 180,00770,375 shares of the Company'sCompany’s common stock, respectively.  There were 4,0701,571 shares of the Series A3 Preferred Stock and 30,000 shares of Series B3 Preferred Stock, 1,340991 shares of Series C Preferred Stock, and 3,3551,061 shares of  Series D Preferred Stock outstanding at December 31, 2003.


                                      F-25



STOCK WARRANTS:

2005.

Stock Warrants:

The Company values warrants based on the Black-Scholes pricing model.  Warrants granted in 2003, 2002,2007, 2006 and 2001were2005 were valued using the following assumptions:

                                      EXPECTED LIFE IN     EXPECTED       RISK FREE INTEREST       EXPECTED       FAIR VALUE OF
                                            YEARS         VOLATILITY             RATE              DIVIDEND        COMMON STOCK
                                            -----         ----------             ----              --------        ------------

December 2000 Commercial
  Lender Warrants                             4              87%                  5%                 None               $6.19
Preferred Series A3 and B3 Warrants           4             108%                  4%                 None               $1.89
2002-2003 Financing Warrants                  5              97%                  2%                 None               $0.40
Preferred Series C Warrants                   5             117%                  3%                 None               $0.38
Preferred Series D-1 Warrants                 5             117%                  3%                 None               $0.07
Preferred Series D-2 Warrants                 5             102%                  3%                 None               $0.20
Private Placement                             3             102%                  3%                 None               $0.45



During December 2000, the Company issued a commercial lender rights to purchase
up to 172,751 shares of the Company's common stock at an exercise price of $4.34

 
 
Expected Life in Years
 
 
Expected Volatility
 
 
Risk Free Interest Rate
 
Expected Dividend
 
Fair Value of Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Series D-1 Warrants
 
 
5
 
 
 
117
%
 
 
3
%
None
 
$
7.00
 
Preferred Series D-2 Warrants
 
 
5
 
 
 
102
%
 
 
3
%
None
 
$
20.00
 
Early Adopter Warrants
 
 
4
 
 
 
104
%
 
 
4
%
None
 
$
1.50
 
Long Term Promissory Note Warrants
 
 
10
 
 
 
168
%
 
 
5.25
%
None
 
$
0.18
 

Increase in connection with a new credit facility. The warrants were valued at $775 or
$4.49 per share and are exercisable until December 28, 2004. As of December 31,
2003, no warrants have been exercised.

INCREASE IN CAPITAL STOCK:

Capital Stock:

In July 2003,November 2006, the stockholders approved a proposal to amend the Amended and Restated Certificate of Incorporation to increase the aggregate number of shares of Common Stock that the Company is authorized to issue from 60,000,00085,000,000 to 85,000,000.

NOTE 12. EMPLOYEE BENEFIT PLANS

As215,000,000.

F-20
Table of January 1, 2001, theContents

NOTE 9.
EMPLOYEE BENEFIT PLANS

The Company sponsoredsponsors one defined contribution plan for its U.S. employees - the Level 8 Systems 401(k). On December 31, 2000,Cicero Inc 401(K) Plan.  Under the terms of the Plan, the Company, amended the Level 8 Systems 401(k) plan to provideat its discretion, provides a 50% matching contribution up to 6% of an employee'semployee’s salary.  Participants must be eligible Level 8company plan participants and employed at December 31 of each calendar year to be eligible for employer matching contributions. Matching contributions to the Plan included in the Consolidated StatementStatements of Operations totaled $14, $7,$0, $0 and $7$30,000, for the years ended December 31, 2003, 2002,2007, 2006, and 2001,2005, respectively. On December 1, 2005, the Company suspended further contributions to the defined contribution plan.

The Company also had employee benefit plans for each of its foreign subsidiaries, as mandated by each country's laws and regulations.  There was $0,
$12,The Company’s foreign subsidiaries are no longer active.


NOTE 10.
SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

In 2007, one customer accounted for 87.2% of operating revenues and $260 in expense recognized under these plansrepresented 100% of accounts receivable at December 31, 2007.  In 2006, four customers accounted for 50.0%, 18.7%, 13.3% and 10.0% of operating revenue. In 2005, two customers accounted for 52.4% and 13.0% of operating revenues.


NOTE 11.
FOREIGN CURRENCIES

The Company’s net foreign currency transaction losses/ (gains) were $15,000, $14,000, and $(23,000), for the years ended December 31, 2003, 2002,2007, 2006, and 2001,2005, respectively. The Company no longer maintains
foreign subsidiaries.

NOTE 13. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

In 2003, three customers accounted for 42.1%, 19.5% and 12.7% of operating
revenues. In 2002, two customers accounted for 38.7% and 26.7% of operating
revenues.


                                      F-26



NOTE 14. FOREIGN CURRENCIES

As of December 31, 2003,


NOTE 12.
SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION

Based upon the current business environment in which the Company had $0operates, the economic characteristics of its operating segments and $8management’s view of U.S. dollar equivalent
cash and trade receivable balances, respectively, denominatedthe business, a revision in foreign
currencies.

Asterms of December 31, 2002,aggregation of its segments was appropriate. Therefore the Company had $73 and $87 of U.S. dollar equivalent
cash and trade receivable balances, respectively, denominated in foreign
currencies. The Company's net foreign currency transaction losses were $31,
$171, and $198 forsegment discussion outlined below clarifies the years ended 2003, 2002 and 2001, respectively.

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

                                                             2003           2002
                                                             ----           ----
Euro ...............................................         41.2%          4.0%
Pound Sterling .....................................           --           2.1%


NOTE 15. SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION

Duringdetermined by management under SFAS No. 131. All prior year amounts have been restated to conform to the first quarter of 2001, management reassessed how the Company would be
managed and how resources would be allocated. new reporting segment structure.

Management now makes operating decisions and assesses performance of the Company'sCompany’s operations based on one reportable segment, it’s the following reportableSoftware product segment.  Prior to this change the Company had segregated into two separate segments: (1) Desktop Integration segment, and (2)Messaging. The Messaging business has always been an immaterial part of the Company’s overall business and Application Engineering segment. The Company previously had three
reportable segments butgenerally all its sales efforts are focused on the Cicero product. As such, the Company has reportedelected to combine the Systems Integration segment
as discontinued operations.

two products into one reportable segment.

The principalSoftware product in the Desktop Integration segment is Cicero. Cicerocomprised of the Cicero® product and the Ensuredmail product.  Cicero® is a business integration software product that maximizes end-user productivity, streamlines business operations and integrates disparate systems and applications.

The productsapplications, while renovating or rejuvenating older legacy systems by making them usable in the business processes.Ensuredmail is an encrypted email technology that comprisecan reside on either the Messaging and Application Engineering segment are
Geneva Integration Broker, Geneva Message Queuing, Geneva XIPC, Geneva
AppBuilder, CTRC and Star/SQL. During 2001,server or the Company sold three of its
messaging products, Geneva Message Queuing, Geneva XIPC and AppBuilder. During
2002, the Company sold its CTRC and Star/SQL products.

Segment data includes a charge allocating all corporate headquarters costs to
each of its operating segments based on each segment's proportionate share of
expenses. During 2002, the Company reported the operations of its Systems
Integration segment as discontinued operations and has reallocated the corporate
overhead for the Systems Integration segment in 2002 and 2001. The Company
evaluates the performance of its segments and allocates resources to them based
on earnings (loss) before interest and other income/(expense), taxes, in-process
research and development, and restructuring.


                                      F-27
desktop.

The table below presents information about reported segments for the twelve
monthsyear ended December 31, 20032007, 2006 and 2002:

                                          DESKTOP  MESSAGING/APPLICATION
                                        INTEGRATION    ENGINEERING        TOTAL
                                        -----------    -----------        -----
2003:

Total revenue .....................      $    466       $     64       $    530
Total cost2005 (in thousands):

 
 
For the year ended December 31,
 
 
 
2007
 
 
2006
 
 
2005
 
Total revenue
 
$
1,808
 
 
$
972
 
 
$
785
 
Total cost of revenue
 
 
937
 
 
 
767
 
 
 
1,188
 
Gross margin (loss)
 
 
871
 
 
 
205
 
 
 
(403
)
Total operating expenses
 
 
2,711
 
 
 
2,085
 
 
 
2,655
 
Segment loss
 
$
(1,840
)
 
$
(1,880
)
 
$
(3,058
)

F-21
Table of revenue .............         5,371             62          5,433
Gross margin (loss) ...............        (4,905)             2         (4,903)
Total operating expenses ..........         4,999            256          5,255
Segment profitability (loss) ......      $ (9,904)      $   (254)      $(10,158)

2002:

Total revenue .....................      $  2,148       $    953       $  3,101
Total cost of revenue .............         6,527          1,950          8,477
Gross margin (loss) ...............        (4,379)          (997)        (5,376)
Total operating expenses ..........         8,211            434          8,645
Segment profitability (loss) ......      $(12,590)      $ (1,431)      $(14,021)

2001:

Total revenue .....................      $    134       $ 17,223       $ 17,357
Total cost of revenue .............         9,427         14,109         23,536
Gross margin (loss) ...............        (9,293)         3,114         (6,179)
Total operating expenses ..........        18,858          7,179         26,037
Segment profitability (loss) ......      $(28,151)      $ (4,065)      $(32,216)


Contents

A reconciliation of segment operating expenses to total operating expense follows:

                                              2003          2002         2001
                                            --------      --------     --------
Segment operating expenses ............     $  5,255      $  8,645     $ 26,037
Amortization of intangible assets .....           --            --        6,259
Write-off of intangible assets ........           --            --        7,929
(Gain)Loss on disposal of assets ......          415           461       (6,345)
Restructuring, net ....................         (834)        1,300        8,650
                                            --------      --------     --------
Total operating expenses ..............     $  4,836      $ 10,406     $ 42,530
                                            ========      ========     ========


      follows (numbers are in thousands):

 
 
2007
 
 
2006
 
 
2005
 
Segment operating expenses
 
$
2,711
 
 
$
2,085
 
 
$
2,655
 
(Gain) on disposal of assets
 
 
--
 
 
 
(24
)
 
 
--
 
Total operating expenses
 
$
2,711
 
 
$
2,061
 
 
$
2,655
 

A reconciliation of total segment profitability to net loss for the fiscal years ended December 31:


                                                 2003          2002          2001
                                               --------      --------      --------

Total segment profitability (loss) .......     $(10,158)     $(14,021)     $(32,216)
Amortization of intangible assets ........           --            --        (6,259)
Impairment of intangible assets ..........           --            --        (7,929)
Gain/(loss) on disposal of assets ........         (415)         (461)        6,345
Restructuring ............................          834        (1,300)       (8,650)
Interest and other income/(expense), net .         (135)        2,485        (8,850)
                                               --------      --------      --------
Net loss before provision for income taxes     $ (9,874)     $(13,297)     $(57,559)
                                               ========      ========      ========



                                      F-28



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

                                                           2003            2002
                                                           ----            ----
Desktop Integration ............................          $4,089          $8,096
Messaging/Application Engineering ..............              --              62
                                                          ------          ------

Total assets ...................................          $4,089          $8,158
                                                          ======          ======

31(in thousands):

 
 
2007
 
 
2006
 
 
2005
 
Total segment profitability (loss)
 
$
(1,840
)
 
$
(1,880
)
 
$
(3,058
)
Gain on disposal of assets
 
 
--
 
 
 
24
 
 
 
--
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest and other income/(expense), net
 
 
(135
)
 
 
(1,141
)
 
 
(623
)
Net loss
 
$
(1,975
)
 
$
(2,997
)
 
$
(3,681
)

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

                                         2003             2002             2001
                                       -------          -------          -------
Australia ...................          $    --          $    --          $   141
Denmark .....................               32               20            2,333
France ......................               --                7               30
Germany .....................               --               35              757
Israel ......................               --                4              659
Italy .......................               18               32              813
Norway ......................               --                1              491
Switzerland .................               --               --              667
United Kingdom ..............               --               13            1,929
USA .........................              476            2,989            6,402
Other .......................                4               --            3,135
                                       -------          -------          -------

                                       $   530          $ 3,101          $17,357
                                       =======          =======          =======


31(in thousands):

 
 
2007
 
 
2006
 
 
2005
 
 
 
 
 
 
 
 
 
 
 
USA
 
 
1,808
 
 
 
972
 
 
 
783
 
Italy
 
 
-
 
 
 
-
 
 
 
2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,808
 
 
$
972
 
 
$
785
 

Presentation of revenue by region is based on the country in which the customer is domiciled. As of December 31, 20032007, 2006 and 2002,2005, all of the long-lived assets of the Company are located in the United States. The Company reimburses the
Company's foreign subsidiaries for their costs plus an appropriate mark-up for
profit. Intercompany profits and losses are eliminated in consolidation.

NOTE 16. 

NOTE 13.
RELATED PARTY INFORMATION

BluePhoenix Solutions, formerly Liraz Systems Ltd. guarantees, the Company’s former principal stockholder, guaranteed certain debt obligations of the Company. In October 2007, the Company agreed to restructure the note payable to Bank Hapoalim and guaranty by BluePhoenix Solutions. Under a new agreement with BluePhoenix, the Company made a principal reduction payment to Bank Hapoalim in the amount of $300,000. Simultaneously, BluePhoenix paid $1,671,000 to Bank Hapoalim, thereby discharging that indebtedness. The Company and BluePhoenix entered into a new Note in the amount of $1,021,000, bearing interest at LIBOR plus 1.0% and maturing on December 31, 2011. In addition, BluePhoenix acquired 2,546,149 shares of the Company’s common stock in exchange for $650,000 paid to Bank Hapoalim to retire that indebtedness.  Of the new note payable to BluePhoenix, approximately $350,000 is due on January 31, 2009 and the balance is due on December 31, 2011.  In November 2003,2006, the Company and Liraz agreed to extend the guaranteeguaranty and with the approval of the lender, agreed to extend the maturity of the debt obligation until November 8, 2004.October 31, 2007. The Company issued 150,00060,000 shares of common stock to Liraz in exchange for this debt extensionextension.

In October 2007, the Company entered into a long-term note with John L. (Launny) Steffens, the Chairman on the Board of Directors, as part of the restructuring of the Note payable to Bank Hapoalim.  The Note bears interest of 3% and will issue additional stock on
Marchmatures in October 2009.  At December 31, 2004, June 30, 20042007, the Company was indebted to Mr. Steffens in the amount of $300,000.

In November 2007, the Company entered into a short term note payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The Note bears interest at 6% per year and September 30, 2004 unlessis unsecured. At December 31, 2007, the debtCompany was indebted to Mr. Steffens in the amount of $40,000.

During 2006, under an existing reseller agreement, the Company recognized $100,000 of software revenue with Pilar Services, Inc. Pilar Services is repaid
before those dates. (See Note 8.)

presently owned and managed by Charles Porciello who is a member of our Board of Directors. As of December 31, 2007, the receivable was still outstanding and the Company has reserved 100% of the balance as doubtful.

From time to time during 2003,2005 and 2004, the Company entered into short term notes payable with Anthony Pizi, the Company's Chairman andCompany’s former Chief ExecutiveInformation Officer. The Notes bear interest at 1% per month and are unsecured. At December 31, 2003,2007, the Company was indebted to Mr. Pizi in the amount of $85. In January 2004,$9,000.

F-22
Table of Contents

Convertible Promissory Notes: Directors and executive officers made the following loans to the Company repaid Mr. Pizi $75.

On December 26, 2003,for convertible promissory notes:  In June 2004, the Company entered into a short term note payableconvertible loan agreement with Mark Landis who is related by marriage to AnthonyMr. Pizi the Company's Chairman
and Chief Executive Officer. The note, in the amount of $125,$100,000. Under the terms of the agreement, the loan bears interest at 1% per month and is convertible upon the option of the Note holder into 270,270 shares of our common stock and warrants to purchase 270,270 shares of our common stock exercisable at $0.37. The warrants expire in three years from the date of grant. As part of the recapitalization plan, the Company has offered to lower that conversion rate and exchange the Note for 14 shares of Series A-1 preferred stock. In November 2006, the Noteholder consented to the amended conversion rate and the Note has been cancelled.

In July 2004, the Company entered into a convertible promissory note with Mr. Pizi in the face amount of $112,000.  Under the terms of the agreement, the loan bears interest at 1% per month and is convertible upon the option of the Note holder into 560,000 shares of our common stock and warrants to purchase 560,000 shares of our common stock at $0.20 per share. As part of the recapitalization plan, the Company has offered to lower that conversion rate and exchange the Note for 78.4 shares of Series A-1 preferred stock. In November 2006, the Noteholder consented to the amended conversion rate and the Note has been cancelled. Also in July 2004, Mr. Pizi entered into a second convertible promissory note in the face amount of $15,000 which bears interest at 1% per month and is convertible into 90,118 shares of our common stock and warrants to purchase 90,118 shares of the Companyour common stock at a conversion
rate of $0.32$0.17 per share.  In October 2001,All such warrants expire three years from the Company sold its AppBuilder assets to BluePhoenix (a wholly
owned subsidiarydate of Liraz) for $19,000 cash, a note receivable of $1,000 and of
payment for net assets of $350. See Note 2.

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


                                      F-29



NOTE 17. RESTRUCTURING CHARGESgrant. As part of the Company'srecapitalization plan, to focus on the emerging desktop integration
marketplace with its new Cicero product, the Company completed substantial
restructurings in 2002 and 2001. At December 31, 2002, the Company's accrual for
restructuring was $772, which was primarily comprised of excess facility costs.
As more fully discussed in Note 20 Contingencies, subsequent to September 30,
2003, the Company settled litigation relating to these excess facilities.
Accordingly, the Company has reversedoffered to lower that conversion rate and exchange the restructuring balance, asnote for 12.62 shares of September
30, 2003. UnderSeries A-1 preferred stock. In November 2006, the terms ofNoteholder consented to the settlement agreement,amended conversion rate and the Note has been cancelled.

In March 2004, the Company agreed to
assign theentered into a convertible promissory note receivable from the sale of Geneva to EM Software Solutions,
Inc., (see Note 2 Dispositions), with recourse equal to the unpaid portion of
the note receivable should the note obligor, EM Software Solutions, Inc.,
default on future payments. The current unpaid principal portion of the note
receivable assigned is approximately $545Mr. and matures December 2007. The Company
assessed the probability of liability under the recourse provisions using a
probability weighted cash flow analysis and has recognized a long-term liabilityMrs. Mark Landis in the amount of $131.

During$125,000.  Mr. Landis is a director and the second quarter of 2002, the Company announced an additional round of
restructurings to further reduce its operating costs and streamline its
operations. The Company recorded a restructuring charge in the amount of $1,300,
which encompassed the cost associated with the closureCompany’s former Chairman of the Company's
Berkeley, California facility as well as a significant reduction inBoard and Mr. and Mrs. Landis are parents-in-law to Mr. Pizi, the Company's European personnel.

During the first quarter of 2001, the Company announced and began implementation
of an initial operational restructuring. The Company recorded restructuring
charges of $6,650 during the quarter ended March 31, 2001 and an additional
charge of $2,000 for the quarter ended June 30, 2001. Restructuring charges have
been classified in "Restructuring" on the consolidated statements of operations.
These operational restructuring involved the reduction of employee staff
throughout the Company in all geographical regions in sales, marketing,
services, development and all administrative functions.

The overall restructuring plan included the termination of 236 employees. The
plan included a reduction of 107 personnel in the European operations and 129
personnel in the US operations. Employee termination costs were comprised of
severance-related payments for all employees terminated in connection with the
operational restructuring. Termination benefits did not include any amounts for
employment-related services prior to termination.

NOTE 18. FUNDED RESEARCH AND DEVELOPMENT

In July 2001, the Company and a significant customer entered into a multi-year
agreement to fund the development of the next generation of Level 8's Geneva
Enterprise Integrator and Geneva Business Process Automator software. The terms
of the agreement provided $6,500 in funding for research and development for 18
months in exchange for a future fully paid and discounted licensing arrangement.
In May 2002, the Company and Amdocs Ltd. agreed to terminate the funded
development agreement and enter into a non-exclusive license to develop and sell
its Geneva J2EE technology.Company’s former Chief Information Officer. Under the terms of the agreement, the loan bears interest at 1% per month and is convertible upon the option of the note holder into 446,429 shares of our common stock and warrants to terminatepurchase 446,429 shares of our common stock exercisable at $0.28. The warrants expire in three years from the funded researchdate of grant. As part of the recapitalization plan, the Company has offered to lower that conversion rate and development program, Amdocs Ltd. assumed full responsibilityexchange the note for 62.5 shares of Series A-1 preferred stock. In November 2006, the development team of professionals locatedNoteholder consented to the amended conversion rate and the Note has been cancelled.

In June 2004, the Company entered into a convertible promissory note with Mr. and Mrs. Landis in the Company's Dulles,
Virginia facility.amount of $125,000. Under the terms of the note, the loan bears interest at 1% per month and is convertible into 781,250 shares of the Company’s common stock and warrants to purchase 781,250 shares of Level 8 common stock exercisable at $0.16 per share. The Geneva products comprisedwarrants expire in three years from the Systems Integration segmentdate of grant. As part of the recapitalization plan, the Company has offered to lower that conversion rate and exchange the note for 113.64 shares of Series A-1 preferred stock. In November 2006, the Noteholder consented to the amended conversion rate and the Note has been cancelled.

In October 2004, the Company entered into a convertible promissory note with Mr. and Mrs. Landis in the amount of $100,000. Under the terms of the agreement, the loan bears interest at 1% per month and is convertible into 1,000,000 shares of our common stock and warrants to purchase 2,000,000 shares of the Company’s common stock exercisable at $0.10 per share. The warrants expire in three years.  As part of the recapitalization plan, the Company has offered to lower that conversion rate and exchange the note for 400 shares of Series A-1 preferred stock.  In November 2006, the Noteholder consented to the amended conversion rate and the Note has been cancelled.

In November 2004, the Company entered into a convertible promissory note with Mr. and Mrs. Landis, in the amount of $150,000. Under the terms of the agreement, the loan bears interest at 1% per month and is convertible into 1,875,000 shares of our common stock and warrants to purchase 1,875,000 shares of the Company’s common stock exercisable at $0.08 per share. All such warrants expire three years from the date of grant. As part of the recapitalization plan, the Company has offered to lower that conversion rate and exchange the note for 750 shares of Series A-1 preferred stock.  In November 2006, the Noteholder consented to the amended conversion rate and the Note has been cancelled.

In June 2004, the Company entered into a convertible promissory note with Fredric Mack, a former director of the Company, in the amount of $125,000. Under the terms of the note, the loan bears interest at 1% per month, and is convertible into 390,625 shares of the Company’s common stock and warrants to purchase 390,625 shares of the Company’s common stock exercisable at $0.32 per share.  As part of the recapitalization plan, the Company has offered to lower that conversion rate and exchange the note for 54.69 shares of Series A-1 preferred stock.   In November 2006, the Noteholder consented to the amended conversion rate and the Note has been cancelled.

In April 2005, the Company entered into a convertible promissory note with Bruce Miller, a director of the Company, in the amount of $30,000. Under the terms of the note, the loan bears interest at 1% per month and is convertible into 428,571 shares of the Company’s common stock. As part of the recapitalization plan, the Company has offered to lower that conversion rate and exchange the note for 60 shares of Series A-1 preferred stock. In November 2006, the Noteholder consented to the amended conversion rate and the Note has been cancelled.

F-23
Table of Contents

In July 2004, the Company entered into a convertible promissory note with Nicholas Hatalski, who until July 22, 2005 (during the period when the terms of the recapitalization merger were being negotiated and at the time of approval of the recapitalization merger by our board of directors), was a director of the Company, in the amount of $25,000. Under the terms of the note, the loan bears interest at 1% per month and is convertible into 78,125 shares of the Company’s common stock and warrants to purchase 78,125 shares of the Company’s common stock exercisable at $0.32 per share. As part of the recapitalization plan, the Company has offered to lower that conversion rate and exchange the note for 10.94 shares of Series A-1 preferred stock. In November 2006, the Noteholder consented to the amended conversion rate and the Note has been cancelled.

All of such warrants expire three years from date of grant.

Senior Reorganization Notes.  From March 2004 to April 2005, directors and executive officers made the following loans to us for Senior Reorganization Notes:  Mr. Pizi held $423,333 of Senior Reorganization Notes, which were converted into warrants to purchase an additional 5,716 shares of Cicero common stock at a purchase price of $0.20 per share.

Mr. Landis held $327,860 of Senior Reorganization Notes, which were converted into warrants to purchase an additional 4,423 shares of Cicero common stock at an exercise price of $0.20 per share.

Mr. Mack held, together with his affiliates, $88,122 of Senior Reorganization Notes, which were converted into warrants to purchase an additional 1,122 shares of Cicero common stock at a purchase price of $0.20 per share.

Mr. Miller held, together with his affiliates, $77,706 of Senior Reorganization Notes, which were converted into warrants to purchase an additional 1,145 shares of Cicero common stock at a purchase price of $0.20.

Mr. Atherton held, together with his affiliates, $20,000 of Senior Reorganization Notes which were converted into warrants to purchase an additional 2,898 shares of Cicero common stock at a purchase price of $0.20.

Mr. Broderick, Chief Executive Officer and Chief Financial Officer of the Company, held $2,300 of Senior Reorganization Notes, which were converted into warrants to purchase 3,222 shares of the Cicero Inc. common stock at a purchase price of $0.20 per share, and options to purchase 12,609 shares of common stock under the Company’s stock option plan that will convert into options to purchase Cicero common stock.

Such warrants are only issuable upon approval of the recapitalization merger, and were subsequently identified as being held for sale. Accordingly,automatically exercised in connection with the consummation of the recapitalization plan.

Convertible Bridge Notes.  From July 2005 to December 2006, directors and executive officers made the following loans to the Company reclassifiedfor Convertible Bridge Notes:

Mr. Pizi held $85,000 of Convertible Bridge Notes which bore interest at 10% and matured on September 15, 2005.  These notes automatically converted into 680,000 shares of Cicero common stock upon approval of the Systems Integration segment to discontinued operations.
The business was eventually sold to EM Software Solutions, Inc,recapitalization plan by stockholders.

Mr. Landis held $395,000 of Convertible Bridge Notes which bore interest at 10% and matured on various dates in December
2002.

NOTE 19. LEASE COMMITMENTS

2005 and 2006.  These notes automatically converted into 3,160,000 shares of Cicero common stock upon approval of the recapitalization plan by stockholders.

Mr. Mack held, together with his affiliates, $114,000 of Convertible Bridge Notes which bear interest at 10% and matured on various dates in 2005 and 2006.  These notes automatically converted into 897,564 shares of Cicero common stock upon approval of the recapitalization plan by stockholders.

Mr. Miller held, together with his affiliates, $120,000 of Convertible Bridge Notes which bear interest at 10% and matured on various dates in 2005 and 2006.  These notes automatically converted into 947,273 shares of Cicero common stock upon approval of the recapitalization plan by stockholders.

Mr. Bruce Hasenyager, a member of our Board of Directors, held $4,061 of Convertible Bridge Notes which bear interest at 10% and matured on September 15, 2005. These notes automatically converted into 32,485 shares of Cicero common stock upon approval of the recapitalization plan by stockholders.

Mr. Bruce Percelay, a member of our Board of Directors, held $130,000 of Convertible Bridge Notes which bear interest at 10% and matured on various dates in 2005 and 2006. These notes automatically converted into 1,027,273 shares of Cicero common stock upon approval of the recapitalization plan by stockholders.

F-24
Table of Contents

Mr. John W. Atherton, a member of our Board of Directors, held $15,000 of convertible Bridge Notes which bear interest at 10% and matured during 2006. These notes automatically converted into 120,000 shares of Cicero common stock upon approval of the recapitalization plan by stockholders.

Mr. Charles Porciello, a member of our Board of Directors, held $10,000 of Convertible Bridge Notes which bear interest at 10% and matured during 2006. These notes automatically converted into 80,000 shares of Cicero common stock upon approval of the recapitalization plan by stockholders.

NOTE 14.
LEASE COMMITMENTS

The Company leases certain facilities and equipment under various operating leases.  Future minimum lease commitments on operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2003 were2007 consisted of only one lease as follows:

                                             Lease
                                         Commitments
                                       --------------
2004................................... $     214
2005...................................       221
2006...................................        84
                                       --------------
                                        $     519
                                       ==============



                                      F-30
follows (in thousands):
 
 
Lease
Commitments
 
 
 
 
 
2008
 
$
103
 
2009
 
 
97
 
2010
 
 
101
 
 
 
$
301
 

Rent expense for the years ended December 31, 2003, 20022007, 2006, and 20012005 was $586,
$2,980$74,000, $60,000, and $1,835, respectively. Sublease income was $241, $2,487 and $221 for
the fiscal years ended December 31, 2003, 2002 and 2001,$122,000, respectively.  As of December 31, 2003,2007, 2006, and 2005, the Company had no sublease arrangements.

NOTE 20. CONTINGENCIES



NOTE 15.
CONTINGENCIES

Various lawsuits and claims have been brought against the Companyus in the normal course of our business. In January 2003, an action was brought against the Company
in the Circuit Court of Loudon County Virginia for a breach of a real estate
lease. The case was settled in August 2003. Under the terms of the settlement
agreement, the Company agreed to assign a note receivable with recourse equal to
the unpaid portion of the note should the note obligor default on future
payments. The unpaid balance of the note being transferred was $545 and matures
in December 2007. The Company assessed the probability of liability under the
recourse provisions using a weighted probability cash flow analysis and has
recognized a long-term liability in the amount of $131.


In October 2003, the Company waswe were served with a summons and complaint in Superior Court of North Carolina regarding unpaid invoices for services rendered to the Company by one of its vendors.our subcontractors.  The amount in dispute iswas approximately $200$200,000 and is included in accounts payable. Subsequent to 2003,March 31, 2004, we settled this litigation.  Under the Company has been served with an additional summons and
complaint regardingterms of the settlement agreement, we agreed to pay a security deposit fortotal of $189,000 plus interest over a sublease in Virginia. The amount in
dispute is approximately $247.19-month period ending November 15, 2005. The Company disagrees with this allegation
although it has reservedis in the process of negotiating a series of payments for this contingency.

the remaining liability of approximately $80,000.

Under the indemnification clause of the Company'sCompany’s standard reseller agreements and software license agreements, the Company agrees to defend the reseller/licensee against third party claims asserting infringement by the Company'sCompany’s products of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/licensee.

NOTE 21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)




                                                                         FIRST        SECOND         THIRD        FOURTH
                                                                        QUARTER       QUARTER       QUARTER       QUARTER
                                                                       --------      --------      --------      --------
                                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
2003:

       Net revenues ..............................................     $    143      $    177      $    113      $     97
       Gross profit/(loss) .......................................       (1,037)         (968)       (1,734)       (1,164)
       Net loss from continuing operations .......................       (2,974)       (2,424)       (2,468)       (2,008)
        Net loss discontinued operations .........................          (46)          (20)          (58)           (8)
       Net loss ..................................................       (3,020)       (2,444)       (2,526)       (2,016)
        Net loss/share continued operations - basic and diluted ..     $  (0.19)     $  (0.12)     $  (0.12)     $  (0.11)
       Net loss/share discontinued operations -- basic and diluted           --            --            --            --
        Net loss/share -basic and diluted ........................     $  (0.19)     $  (0.12)     $  (0.12)     $  (0.11)

2002:
       Net revenues ..............................................     $    446      $    630      $    823      $  1,202
       Gross profit/(loss) .......................................       (3,548)       (1,749)         (422)          343
       Net loss from continuing operations .......................       (5,409)       (5,062)       (1,948)         (723)
        Net loss discontinued operations .........................         (676)       (5,481)          484           633
       Net loss ..................................................       (6,085)      (10,543)       (1,464)          (90)
        Net loss/share continued operations - basic and diluted ..     $  (0.29)     $  (0.26)     $  (0.12)     $  (0.07)
       Net loss/share discontinued operations -- basic and diluted     $  (0.04)     $  (0.29)     $   0.03      $   0.03
        Net loss/share -basic and diluted ........................     $  (0.33)     $  (0.55)     $  (0.09)     $  (0.04)
NOTE 16. 
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)



                                      F-31



NOTE 22. SUBSEQUENT EVENTS


 
 
First
Quarter
 
 
Second
Quarter
 
 
Third
Quarter
 
 
Fourth
Quarter
 
 
 
(In thousands, except per share data)
 
2007:
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
232
 
 
$
316
 
 
$
387
 
 
$
873
 
Gross margin
 
 
65
 
 
 
160
 
 
 
82
 
 
 
564
 
Net income/(loss)
 
 
(529
)
 
 
(452
)
 
 
(966
)
 
 
(29
)
Net loss/share –basic and diluted attributedto common stockholders
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.02
)
 
 
--
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2006:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
281
 
 
$
320
 
 
$
248
 
 
$
123
 
Gross margin/(loss)
 
 
 75
 
 
 
 114
 
 
 
 60
 
 
 
 (44
)
Net loss
 
 
 (576
)
 
 
 (515
)
 
 
 (647
)
 
 
(1,259
)
Net loss/share –basic and diluted attributed to common stockholders
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.22
)

F-25
Table of Contents
NOTE 17.
SUBSEQUENT EVENTS
In January 2004,March 2008, the Company acquired substantially allwas notified that a group of investors including two members of the assetsBoard of Directors acquired a short term promissory note due SDS Merchant Fund in the principal amount of $250,000. The note is unsecured and certain liabilitiesbears interest at 10% per annum. Also in March, our Board of Critical Mass Mail, Inc., d/b/Directors approved a Ensuredmail,resolution to convert this debt plus accrued interest into common stock of the Company. The total principal and interest amounted to $361,827 and is being converted into 1,417,264 shares of common stock. Mr. John Steffens, the Company’s Chairman, will acquire 472,516 shares and Mr. Bruce Miller, also a federally
certified encryption software company.member of our Board of Directors, will acquire 472,374 shares.

In March 2008, the Company amended the terms of its Note Payable with BluePhoenix Solutions. Under the terms of the purchase
agreement,original Note, the Company issued 2,027,027 shareswas to make a principal reduction payment in the amount of common stock at a price of
$0.37. The total purchase price of the assets and certain liabilities being
acquired was $750 and has been accounted for by the purchase method of
accounting.$350,000 on January 30, 2009. The Company and BluePhoenix agreed to register the common stockaccelerate that principal payment to March and April 2008 in return for resale under the
Securities Acta conversion of 1933, as amended.

Also in January 2004, and simultaneously with the asset purchase of Critical
Mass Mail, Inc., the Company completed a common stock financing round wherein it
raised $1,247 of capital from several new investors as well as certain investors
of Critical Mass Mail, Inc. The Company sold 3,369,192 shares of common stock at
a price of $0.37 per share. As part of the financing, the Company has also
issued warrants to purchase 3,369,192$50,000 into 195,848 shares of the Company'sCompany’s common stock at an
exercise pricestock. In March, the Company paid $200,000 plus accrued interest and in April, the Company will pay $100,000 plus accrued interest.

F-26
Table of $0.37. The warrants expire three years from the date of grant.
The Company also agreed to register the common stock and the warrants for resale
under the Securities Act of 1933, as amended.


                                      F-32


                              LEVEL 8 SYSTEMS,Contents

CICERO INC.
CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
                                   (UNAUDITED)


                                                                           JUNE 30,     DECEMBER 31,
                                                                            2004           2003
                                                                          ---------      ---------
                                     ASSETS

Current assets:

 Cash and cash equivalents ..........................................     $      29      $      19
 Cash held in escrow ................................................           777            776
 Assets of operations to be abandoned ...............................           136            149
 Trade accounts receivable, net .....................................            43             12
 Prepaid expenses and other current assets ..........................            64            270
                                                                          ---------      ---------
                 Total current assets ...............................         1,049          1,226
Property and equipment, net .........................................            21             26
Software product technology, net ....................................            --          4,063
Other assets ........................................................            47             47
                                                                          ---------      ---------
                 Total assets .......................................     $   1,117      $   5,362
                                                                          =========      =========

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Short-term debt .....................................................     $   3,145      $   2,625
Accounts payable ....................................................         2,405          2,545
Accrued expenses:
    Salaries, wages, and related items ..............................           797            508
    Other ...........................................................         1,804          1,613
Liabilities of operations to be abandoned ...........................           482            451
Deferred revenue ....................................................           251             39
                                                                          ---------      ---------
                 Total current liabilities ..........................         8,884          7,781
Long-term debt ......................................................           185            131
Warrant liability ...................................................            --            198
Senior convertible redeemable preferred stock .......................         2,692          3,355
Stockholders' equity (deficit):
        Preferred Stock .............................................            --             --
       Common Stock .................................................            36             27
       Additional paid-in-capital ...................................       209,025        206,149
       Accumulated other comprehensive loss .........................            (2)            (6)
       Accumulated deficit ..........................................      (219,703)      (212,273)
                                                                          ---------      ---------
                 Total stockholders' equity (deficit) ...............       (10,644)        (6,103)
                                                                          ---------      ---------
                 Total liabilities and stockholders' equity (deficit)     $   1,117      $   5,362
                                                                          =========      =========
(in thousands)

 
 
March 31,
2008
 
 
December 31,
2007
 
ASSETS
 
(unaudited)
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
68
 
 
$
250
 
Assets of discontinued operations
 
 
83
 
 
 
79
 
Trade accounts receivable, net
 
 
283
 
 
 
692
 
Prepaid expenses and other current assets
 
 
186
 
 
 
208
 
Total current assets
 
 
620
 
 
 
1,229
 
Property and equipment, net
 
 
21
 
 
 
22
 
Total assets
 
$
641
 
 
$
1,251
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
Short-term debt
 
$
558
 
 
$
1,235
 
Accounts payable
 
 
2,315
 
 
 
2,489
 
Accrued expenses:
 
 
 
 
 
 
 
 
Salaries, wages, and related items
 
 
1,007
 
 
 
1,002
 
Other
 
 
1,864
 
 
 
2,072
 
Liabilities of discontinued operations
 
 
474
 
 
 
455
 
Deferred revenue
 
 
732
 
 
 
108
 
Total current liabilities
 
 
6,950
 
 
 
7,361
 
Long-term debt
 
 
1,122
 
 
 
1,323
 
Total liabilities
 
 
8,072
 
 
 
8,684
 
Stockholders'  (deficit):
 
 
 
 
 
 
 
 
Preferred stock
 
 
--
 
 
 
--
 
Common stock
 
 
45
 
 
 
44
 
Additional paid-in capital
 
 
229,347
 
 
 
228,858
 
Accumulated deficit
 
 
(236,805
)
 
 
(236,320
)
Accumulated other comprehensive loss
 
 
(18
)
 
 
(15
)
Net stockholders'  (deficit)
 
 
(7,431
)
 
 
(7,433
)
Total liabilities and stockholders'  (deficit)
 
$
641
 
 
$
1,251
 

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

                                      F-33


                              LEVEL 8 SYSTEMS,
F-27
Table of Contents
CICERO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
                                   (UNAUDITED)


                                                                               SIX MONTHS ENDED
                                                                                   JUNE 30,
                                                                              2004          2003
                                                                            --------      --------
Revenue:

   Software ...........................................................     $    108      $     79
   Maintenance ........................................................          146           167
   Services ...........................................................           79            74
                                                                            --------      --------
           Total operating revenue ....................................          333           320

Cost of revenue:
   Software ...........................................................        4,408         1,682
   Maintenance ........................................................          198           195
   Services ...........................................................          566           448
                                                                            --------      --------
           Total cost of revenue ......................................        5,172         2,325

Gross margin (loss) ...................................................       (4,839)       (2,005)

Operating expenses:
   Sales and marketing ................................................          682         1,059
   Research and product development ...................................          599           508
   General and administrative .........................................          916         1,312
   Loss on disposal of assets .........................................           --           486
   Impairment of intangible assets ....................................          587            --
                                                                            --------      --------
           Total operating expenses ...................................        2,784         3,365
                                                                            --------      --------
Loss from operations ..................................................       (7,623)       (5,370)

Other income (expense):
   Interest income ....................................................            2            26
   Interest expense ...................................................          (89)         (102)
   Change in fair value of warrant liability ..........................          198           107
   Other income (expense) .............................................           98           (59)
                                                                            --------      --------
Loss before provision for income taxes ................................       (7,414)       (5,398)
   Income tax provision ...............................................           --            --
                                                                            --------      --------

Loss from continuing operations .......................................       (7,414)       (5,398)
Loss from discontinued operations .....................................          (16)          (66)
                                                                            --------      --------
Net loss ..............................................................     $ (7,430)     $ (5,464)
                                                                            ========      ========

Loss per share from continuing operations--basic and diluted ..........        (0.22)        (0.31)
Loss per share from discontinued operations-basic and diluted .........         0.00          0.00
                                                                            --------      --------
Net loss per share applicable to common shareholders--basic and diluted     $  (0.22)     $  (0.31)
                                                                            --------      ========

Weighted average common shares outstanding --  basic and diluted ......       33,063        19,460
(in thousands, except per share amounts)
(unaudited)

 
 
Three Months Ended
March 31,
 
 
 
2008
 
 
2007
 
Revenue:
 
 
 
 
 
 
Software
 
$
200
 
 
$
--
 
Maintenance
 
 
133
 
 
 
41
 
Services
 
 
137
 
 
 
191
 
Total operating revenue
 
 
470
 
 
 
232
 
 
 
 
 
 
 
 
 
 
Cost of revenue
 
 
 
 
 
 
 
 
Software
 
 
7
 
 
 
--
 
Maintenance
 
 
71
 
 
 
53
 
Services
 
 
162
 
 
 
114
 
Total cost of revenue
 
 
240
 
 
 
167
 
 
 
 
 
 
 
 
 
 
Gross margin
 
 
230
 
 
 
65
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Sales and marketing
 
 
253
 
 
 
137
 
Research and product development
 
 
155
 
 
 
138
 
General and administrative
 
 
298
 
 
 
258
 
Total operating expenses
 
 
706
 
 
 
533
 
Loss from operations
 
 
(476
)
 
 
(468
)
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
 
(78
)
 
 
(62
)
Other income/(expense)
 
 
69
 
 
 
1
 
Loss before provision for income taxes
 
 
(485
)
 
 
(529
)
Income tax provision
 
 
--
 
 
 
--
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(485
)
 
$
(529
)
 
 
 
 
 
 
 
 
 
Net loss per share applicable to common stockholders—basic and diluted
 
$
(0.01
)
 
$
(0.01
)
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding --  basic and diluted
 
 
43,879
 
 
 
38,930
 


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

                                      F-34


                              LEVEL 8 SYSTEMS,

F-28
Table of Contents

CICERO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)


                                                                                                   SIX MONTHS ENDED
                                                                                                       JUNE 30,
                                                                                                   2004         2003
                                                                                                 -------      -------
Cash flows from operating activities:

   Net loss ................................................................................     $(7,430)     $(5,464)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization ........................................................       4,281        1,605
      Change in fair value of warrant liability ............................................        (198)        (107)
      Stock compensation expense ...........................................................         121           15
      Impairment of intangible assets ......................................................         587           --
      Provision for doubtful accounts ......................................................          (7)         (52)
      (Gain) on disposal of assets .........................................................          --          (13)
      Other ................................................................................          --            1
      Changes in assets and liabilities, net of assets acquired and liabilities assumed:
        Trade accounts receivable and related party receivables ............................         (29)       1,254
        Assets and liabilities - discontinued operations ...................................          44          623
        Prepaid expenses and other assets ..................................................         276          171
        Accounts payable and accrued expenses ..............................................         449         (498)
        Deferred revenue ...................................................................         212         (128)
                                                                                                 -------      -------
           Net cash used in operating activities ...........................................      (1,694)      (2,593)
Cash flows from investing activities:
   Repayment of note receivable ............................................................          --          805
                                                                                                 -------      -------
           Net cash provided by investing activities .......................................          --          805
Cash flows from financing activities:
   Proceeds from issuance of common shares, net of issuance costs ..........................       1,247           --
   Proceeds from convertible redeemable preferred stock, net of cash held in escrow of 1,387          --        2,143
   Borrowings under credit facility, term loans, notes payable .............................         772           --
   Repayments of term loans, credit facility and notes payable .............................        (319)        (513)
                                                                                                 -------      -------
           Net cash provided by financing activities .......................................       1,700        1,630
Effect of exchange rate changes on cash ....................................................           4           (2)
Net increase (decrease) in cash and cash equivalents .......................................          10         (160)
Cash and cash equivalents:
   Beginning of period .....................................................................          19          199
                                                                                                 -------      -------
   End of period ...........................................................................     $    29      $    39
                                                                                                 =======      =======
(in thousands)
(unaudited)

 
 
Three Months Ended
March 31,
 
 
 
2008
 
 
2007
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 
$
(485
)
 
$
(529
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
3
 
 
 
2
 
Stock compensation expense
 
 
129
 
 
 
--
 
Changes in assets and liabilities:
 
 
 
 
 
 
 
 
Trade accounts receivable
 
 
409
 
 
 
1
 
Assets and liabilities – discontinued operations
 
 
15
 
 
 
1
 
Prepaid expenses and other assets
 
 
22
 
 
 
(36
)
Accounts payable and accrued expenses
 
 
(266
)
 
 
(48
)
Deferred revenue
 
 
624
 
 
 
224
 
Net cash provided by (used in) operating activities
 
 
451
 
 
 
(385
)
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
Purchases of equipment
 
 
(2
)
 
 
(6
)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
Proceeds from the issuance of common stock
 
 
--
 
 
 
500
 
Borrowings under credit facility, term loans, notes payable
 
 
45
 
 
 
--
 
Repayments of term loans, credit facility and notes payable
 
 
(673
)
 
 
--
 
Net cash provided by (used in) financing activities
 
 
(628
)
 
 
500
 
Effect of exchange rate changes on cash
 
 
(3
)
 
 
(1
)
Net increase (decrease) in cash and cash equivalents
 
 
(182
)
 
 
108
 
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Beginning of period
 
 
250
 
 
 
310
 
End of period
 
$
68
 
 
$
418
 


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

                                      F-35


                              LEVEL 8 SYSTEMS,

F-29
Table of Contents

CICERO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                 (IN THOUSANDS)
                                   (UNAUDITED)


                                                            FOR THE SIX MONTHS
                                                              ENDED JUNE 30,
                                                           2004            2003
                                                         -------        -------
Net loss .........................................       $(7,430)       $(5,464)
Other comprehensive income, net
(in thousands)
(unaudited)

 
 
Three Months Ended
March 31,
 
 
 
2008
 
 
2007
 
Net loss
 
$
(485
)
 
$
(529
)
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
 
(6
)
 
 
(1
)
Comprehensive loss
 
$
(491
)
 
$
(530
)
Non-Cash Investing and Financing Activities:

During March 2008, the Company issued 1,417,264 of tax:
    Foreign currency translation adjustment ......             4             (2)
                                                         -------        -------
Comprehensive loss ...............................       $(7,426)       $(5,466)
                                                         -------        -------

               common stock for the conversion of debt and interest of $362,000 to a group of investors who had acquired the short term promissory note due to SDS Merchant Fund.


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

                                      F-36


                              LEVEL 8 SYSTEMS,

F-30
Table of Contents

CICERO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (amounts in thousands, except per share data)
 (unaudited)

NOTE 1.   INTERIM FINANCIAL STATEMENTS

The accompanying financial statements for the three months ending March 31, 2008 and 2007 are unaudited, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC").  Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles of the United States of America have been condensed or omitted pursuant to those rules and regulations.  Accordingly, these interim financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Level 8 Systems,Cicero Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December 31, 2003.2007, filed with the SEC on March 31, 2008.  The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for other interim periods or for the full fiscal year.  In the opinion of management, the information contained herein reflects all adjustments necessary for a fair statement of the interim results of operations.  All such adjustments are of a normal, recurring nature. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation.

The year-end condensed balance sheet data was derived from audited financial statements in accordance with the rules and regulations of the SEC, but does not include all disclosures required for financial statements prepared in accordance with generally accepted accounting principles of the United States of America.

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries.  All of the Company's subsidiaries are wholly owned for the periods presented.

LIQUIDITY



Liquidity

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company has incurred a losslosses of $10,006$1,975,000 and $18,182$2,997,000 in the past two years2007 and 2006, respectively, and has experienced negative cash flows from operations for each of the past three years. For the sixthree months ended June 30, 2004,March 31, 2008, the Company incurred a loss of $7,430$485,000 and had a working capital deficiency of $7,835.$6,330,000. The Company'sCompany’s future revenues are largelyentirely dependent on acceptance of a newly developed and marketed product, Cicero,Cicero® software, which has had limited success in commercial markets to date. Accordingly, there is substantial
doubt that the Company can continue as a going concern. In order to address
these issues and to obtain adequate financing for the Company's operations for
the next twelve months, the Company is actively promoting and expanding its
Cicero related product line and continues to negotiate with customers that have
expressed an interest in the Cicero technology. The Company is experiencing
difficulty increasing sales revenue largely because of the inimitable nature of
the product as well as customer concerns about the financial viability of the
Company. The Company is attempting to solve the former problem by improving the
market's knowledge and understanding of Cicero through increased marketing and
leveraging its limited number of reference accounts. The Company is attempting
to address the financial concerns of potential customers by pursuing strategic
partnerships with companies that have significant financial resources although
the Company has not experienced significant success to date with this approach.
Additionally, the Company is seeking additional equity capital or other
strategic transactions in the near term to provide additional liquidity. There
can be no assurance that management will be successful in executing these
strategies as anticipated or in a timely manner or that increased revenues will
reduce further operating losses. If the Company is unable to significantly
increase cash flow or obtain additional financing, it will likely be unable to
generate sufficient capital to fund operations for the next twelve months and
may be required to pursue other means of financing that may not be on terms
favorable to the Company or its stockholders. These factors among others may
indicate thatraise substantial doubt about the Company will be unableCompany’s ability to continue as a going concern for a reasonable period of time.

The financial statements presented herein do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.  As discussed in Notes 3In order to address these issues and 8,to obtain adequate financing for the Company’s operations for the next twelve months, the Company recently completedis actively promoting and expanding its Cicero®-related product line and continues to negotiate with significant customers who have expressed interest in the Cicero® software technology. The Company is experiencing difficulty increasing sales revenue largely because of the inimitable nature of the product as well as customer concerns about the financial viability of the Company. Cicero® software is a private
placementnew “category defining” product in that most Enterprise Application Integration (EAI) projects are performed at the server level and Cicero®’s integration occurs at the desktop without the need to open and modify the underlying code for those applications being integrated. Many companies are not aware of this new technology or tend to look toward more traditional and accepted approaches. The Company is attempting to solve the former problem by improving the market’s knowledge and understanding of Cicero® software through increased marketing and leveraging its common stock wherein it raised $1,247limited number of new capital.
Management expects that it will be ablereference accounts while enhancing its list of resellers and system integrators to assist in the sales and marketing process.  Additionally, the Company plans to raise additional capital andor enter into other strategic transactions to continue to fund operations and also expects that increased revenues will reduce its operating losses in future periods, however, there can be no assurance that management'smanagement’s plan will be executed as anticipated. USE OF ACCOUNTING ESTIMATES


                                      F-37

F-31
Table of Contents

Use of Accounting Estimates

The preparation of financial statements in conformity with accounting principals generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual amounts could differ from these estimates.

STOCK-BASED COMPENSATION

The


Stock-Based Compensation

During 2006, the Company has adopted the disclosure provisions of SFAS No. 123 and has applied
Accounting Principles Board Opinion(revised 2004) (“SFAS No. 25 and related Interpretations in123R”), “Share-Based Payment”, which addresses the accounting for its stock-based compensation plans. Had compensation costpayment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the Company's stock option plan been determinedenterprise or (b) liabilities that are based on the fair value atof the grant
datesenterprise’s equity instruments or that may be settled by the issuance of such equity instruments.  In January 2005, the SEC issued Staff Accounting Bulletin 107, which provides supplemental implementation guidance for awards under the plan consistent with the method required by SFAS No. 123,123R.  SFAS No. 123R eliminates the Company's net lossability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and diluted net loss per common share would have
been the pro forma amounts indicated below.


                                                                        SIX MONTHS ENDED JUNE 30,
                                                                           2004         2003
                                                                         -------      -------
                                                                              (unaudited)

Net loss applicable to common stockholders .........................     $(7,430)     $(5,464)
Less: Total stock-based employee compensation expense under
  fair value based method for all awards, net of related tax effects        (461)        (315)
                                                                         -------      -------
Pro forma loss applicable to common stockholders ...................     $(7,891)     $(5,779)
                                                                         =======      =======
Earnings per share:

Basic and diluted, as reported .....................................     $ (0.22)     $ (0.31)
Basic and diluted, pro forma .......................................     $ (0.24)     $ (0.33)
instead generally requires that such transactions be accounted for using a fair-value-based method.  The fair value of the Company's stock-based awards to employees was estimated as
of the date of the grant usingCompany uses the Black-Scholes option-pricing model usingto determine the following weighted-average assumptionsfair-value of stock-based awards under SFAS No. 123R, consistent with that used for pro forma disclosures under SFAS No. 123, “Accounting for Stock-Based Compensation”.  The Company has elected to use the modified prospective transition method as permitted by SFAS No. 123R and, accordingly, prior periods have not been restated to reflect the impact of SFAS No. 123R.  The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options that are ultimately expected to vest as the requisite service is rendered beginning on the first day of the Company’s year ended December 31, 2006.  Stock-based compensation expense for awards granted prior to 2006 is based on the grant-date fair-value as determined under the pro forma provisions of SFAS No. 123.  The Company issued 150,000 options in the first quarter of 2008 of which 50,000 were vested immediately.  The Company recognized $120,000 in stock-based compensation expense for the quarterthree months ended June 30, 2004 as
follows:


Expected life (in years)...................                     4.26 years
Expected volatility........................                         112.57%
Risk free interest rate....................                           4.00%
Expected dividend yield....................                              0%


March 31, 2008.  The Company also recognized $9,000 in stock-based compensation expense for the 549,360 restricted shares of stock reserved for Mr. John Broderick, the Company’s CEO, in accordance with his 2007 employment agreement.

The following table sets forth certain information as of June 30, 2004,March 31, 2008 about shares of Common Stockthe Company’s common stock, par value $.001 (the “Common Stock”), outstanding and available for issuance under the Company'sCompany’s existing equity compensation plans: the Cicero Inc. 2007 Employee Stock Option Plan, the Cicero Inc. (formerly Level 8 Systems, Inc.) 1997 Stock Option Incentive Plan, the 1995 Non-Qualified Option Plan and the Outside Director Stock Option Plan.  The Company'sCompany’s stockholders approved all of the Company's Equity Compensation Plans.

                                                                        SHARES
                                                                        ------

OutstandingCompany’s stock-based compensation plans.


 
 
Shares
 
Outstanding on January 1, 2008
 
 
2,529,025
 
Granted
 
 
150,000
 
Exercised
 
 
--
 
Forfeited
 
 
(68,812
)
Outstanding on March 31, 2008
 
 
2,610,213
 
 
 
 
 
 
Weighted average exercise price of outstanding options
 
$
1.28
 
Shares available for future grants on March 31, 2008
 
 
1,917,107
 

Options to purchase shares of  common  stock  are  excluded  from  the calculation  of diluted  earnings per share when their  inclusion  would have an anti-dilutive effect on January 1, 2004 ...............................        5,625,878
Granted ......................................................        2,567,754
Exercised ....................................................          (47,754)
Forfeited ....................................................         (616,241)
Outstandingthe calculation.  No options were included for the three month period ended March 31, 2008 and 2007. Basic earnings per common share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the respective period.  Diluted earnings per common share are computed by dividing net income by the weighted average number of shares of common stock and dilutive potential common shares outstanding during the respective period. The weighted average number of common shares is increased by the number of dilutive potential common shares issuable on June 30, 2004 .................................        7,529,637
Weightedthe exercise of options less the number of common shares assumed to have been purchased with the proceeds from the exercise of the options pursuant to the treasury stock method; those purchases are assumed to have been made at the average exercise price of outstanding options .......       $     1.70
Shares available for future grants on June 30, 2004 ..........        2,159,552


                                      F-38
the common stock during the respective period.  The average price of Cicero common stock during the three months ending March 31, 2008 and March 31, 2007 was $0.20 and $1.09, respectively.

F-32
Table of Contents

NOTE 2.   RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003,December 2007, the FASB issued InterpretationSFAS No. 46141 (Revised 2007), “Business Combinations” (SFAS 141R”).  SFAS 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, research and development assets and restructuring costs.  In addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income taxes.  SFAS 141R is effective for fiscal years beginning after December 15, 2008.  The adoption of the provisions of SFAS 141R is not expected to have a material effect on the Company’s financial position, results of operations, or FIN 46 "Consolidation
of Variable Interest Entities", an interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements". cash flows.

In October 2003,December 2007, the FASB issued FASB Staff Position FIN 46-6, "Effective DateSFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, An Amendment of FASB InterpretationARB No. 46, Consolidation51,”  SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of Variable Interest Entities" deferringa subsidiary.  It also amends certain of ARB 51’s consolidation procedures for consistency with the requirements of SFAS 141R.  SFAS 160 is effective date
for applyingfiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The statement shall be applied prospectively as of the beginning of the fiscal year in which the statement is initially adopted.  The adoption of the provisions of FIN 46SFAS 160 is not expected to have a material effect on the Company’s financial position, results of operations, or cash flows.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for public entities' interestsFinancial Assets and Financial Liabilities – an amendment of FASB Statement 115. The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in variable
interestreported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Most of the provisions of this statement apply only to entities that elect the fair value option; however, the amendment to FASB Statement 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. The Company does not believe adoption of this statement will have a material impact on its financial statements.

In September 2006, the SEC issued the Staff Accounting Bulletin 108 (“SAB 108”), to address diversity in practice in quantifying financial statement misstatements.  SAB 108 requires that the Company quantify misstatements based on their impact on each of its financial statements and related disclosures.  SAB 108 is effective for fiscal years ending after November 15, 2006.  The Company has adopted SAB 108 effective as of December 31, 2006.  The adoption of this bulletin did not have a material impact on our financial position, results of operations, or potential variable interest entities created before
February 1, 2003cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”.  SFAS No. 157 provides guidance for using fair value to measure assets and liabilities.  It also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings.  SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances.  SFAS No. 157 is effective for financial statements of interim or annual periods that endissued for fiscal years beginning after DecemberNovember 15, 2003. FIN 46 establishes accounting guidance for
consolidation of variable interest entities that function2007 and is required to supportbe adopted by the activities of the primary beneficiary. In December 2003, the FASB issued FIN 46
(revised December 2003), "Consolidation of Variable Interest Entities." This
revised interpretation is effective for all entities no later than the end ofCompany in the first reporting period that ends after March 15, 2004.quarter of 2008.  The Company has no
investment in or contractual relationship or other business relationship with a
variable interest entity and thereforeis currently evaluating the effect that the adoption of this interpretation did
notSFAS No. 157 will have any impact on its consolidated financial position, or results of
operations. However, if the Company enters into any such arrangement with a
variable interest entity in the future or an entity with which we have a
relationship is reconsidered based on guidance in FIN 46 to be a variable
interest entity, the Company's consolidated financial position or results of operations, might be materially impacted.

or cash flows.

F-33
Table of Contents

NOTE 3.   ACQUISITIONS

In January 2004, the Company acquired certainSHORT TERM DEBT

Notes payable, short-term debt, and liabilities of Critical Mass
Mail, Inc., d/b/a Ensuredmail, a federally certified encryption software
company. The Company has classified this acquisition in the Messaging and
Application segment. Under the termsnotes payable to related party consist of the purchase agreement, the Company
issued 2,027,027 shares of common stock at a price of $0.37. The total purchase
price of the assets and certain liabilities being acquired was $750, plus
certain liabilities and has been accounted for by the purchase method of
accounting. The Company agreed to register the common stock for resale under the
Securities Act of 1933, as amended.

The purchase price was allocated to the assets acquired and liabilities assumed
based on the Company's estimates of fair value at the acquisition date. The
Company assessed the net realizable value of the Ensuredmail software technology
acquired and determined the purchase price exceeded the amounts allocated to the
software technology and liabilities acquired by approximately $587. This excess
of the purchase price over the fair values of the assets acquired less
liabilities assumed was allocated to goodwill and charged to the Statement of
Operations for the period ended March 31, 2004.

NOTE 4. SOFTWARE PRODUCT TECHNOLOGY

following (in thousands):

 
 
March 31, 2008
 
 
December 31, 2007
 
Note payable, related party (a)
 
$
94
 
 
$
49
 
Notes payable (b)
 
 
464
 
 
 
1,186
 
 
 
$
558
 
 
$
1,235
 

(a)
In February 2008, the Company entered into a short term note payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The note bears interest at 10% per year and is unsecured. At March 31, 2008, the Company was indebted to Mr. Steffens in the amount of $45,000.

In accordance with FASB 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed", the Company completed an assessment of the
recoverability of the Cicero product technology as of June 30, 2004. This
assessment was performed due to the Company's continued operating losses and the
limited software revenue generated by the Cicero technology over the past twelve
to eighteen months. Currently, the Company is in negotiations with customers to
purchase licenses, which would have a significant impact on the cash flows from
the Cicero technology and the Company. Since the negotiations have been in
process for several months and expected completion of the transactions has been
delayed, the Company has reduced its cash flow projections. Historical cash
flows generated by the Cicero technology do not support the long-lived asset and
accordingly the Company has impaired the excess of the unamortized book value of
the technology in excess of the expected net realizable value as of June 30,
2004. This charge, in the amount of $2,844, has been recorded as software
amortization.

Also in accordance with FASB 86, "Accounting for the Costs of Computer Software
to Be Sold, Leased, or Otherwise Marketed", the Company completed an assessment
of the recoverability of the Ensuredmail product technology, as of June 30,
2004. This assessment was completed due to the Company's revised cash flow
projections from software revenue. These revised cash flow projections do not
support the long-lived asset and accordingly the Company has impaired the excess
of the unamortized book value of the technology in excess of the expected net
realizable value as of June 30, 2004. This charge, in the amount of $154, has
been recorded as software amortization.

NOTE 5. RESTRUCTURING CHARGES

At June 30, 2003, the Company's accrual for restructuring was $515, which was
primarily comprised of excess facility costs, which the Company believed
represented its remaining cash obligations for the restructuring changes. In
August 2003, the Company settled litigation relating to these excess facility
costs. Accordingly, the Company reversed the restructuring balance during the
third quarter of 2003. Under the terms of the settlement agreement, the Company
agreed to assign the note receivable from the sale of Geneva to EM Software
Solutions, Inc., with recourse equal to the unpaid portion of the note
receivable should the note obligor, EM Software Solutions, Inc., default on
future payments. The unpaid principal portion of the note receivable assigned
was approximately $432 and matures December 2007. The Company assessed the
probability of liability under the recourse provisions using a probability
weighted cash flow analysis and has recognized a long-term liability in the
amount of $131.


                                      F-39



NOTE 6. SHORT TERM CONVERTIBLE NOTES

In March 2004, the Company converted a promissory note into a convertible loan
agreement with Mark and Carolyn Landis, who are related by marriage to Anthony
Pizi, the Company's Chairman and Chief Executive Officer, in the amount of $125.
Under the terms of the agreement, the loan is convertible into 446,429 shares of
our common stock and warrants to purchase 446,429 shares of our common stock
exercisable at $0.28. The warrants expire in three years.

Also in March 2004, the Company entered into convertible loan agreements with
two other individual investors, each in the face amount of $50. Under the terms
of the agreement, each loan is convertible into 135,135 shares of our common
stock and warrants to purchase 135,135 shares of our common stock at $0.37 per
share. The warrants expire in three years.

On April 12, 2004,November 2007, the Company entered into a convertible promissoryshort term note payable with Anthony Pizi, the Company's Chairman and Chief Executive Officer.Mr. Steffens for various working capital needs. The Note in
the face amount of $100, bears interest at 1%6% per monthyear and is convertibleunsecured. At March 31, 2008, the Company was indebted to Mr. Steffens in the amount of $40,000.

From time to time the Company entered into promissory notes with one of the Company’s directors and the former Chief Information Officer, Anthony Pizi.  The notes bear interest at 12% per annum. The Company was indebted to Anthony Pizi in the amount of $9,000 at both dates.

(b)
The Company does not have a revolving credit facility and from time to time has issued a series of short term promissory notes with private lenders, which provide for short term borrowings, both secured by accounts receivable and unsecured.  In addition, the Company has settled certain litigation and agreed to issue a series of promissory notes to support its obligations in the aggregate principal amount of $88,000. The notes bear interest between 10% and 36% per annum.

NOTE 4.                      LONG-TERM DEBT

Long-term loan and notes payable to related party consist of the following (in thousands):

 
 
March 31, 2008
 
 
December 31, 2007
 
Term loan (a)
 
$
821
 
 
$
1,021
 
Note payable; related party (b)
 
 
300
 
 
 
300
 
Other long-term debt
 
 
1
 
 
 
2
 
 
 
$
1,122
 
 
$
1,323
 


(a)
In October 2007, the Company, in conjunction with Blue Phoenix Solutions, retired the note payable to Bank Hapoalim and entered into a new note with Blue Phoenix Solutions in the principal amount of $1,021,000 with interest at LIBOR plus 1% (approximately 5.86% at December 31, 2007) maturing in December 2011. Interest is payable quarterly.

(b)
In October 2007, the Company entered into a long-term note with John L. (Launny) Steffens, the Chairman of the Board of Directors, as part of the restructuring of the note payable to Bank Hapoalim.  The note bears interest of 3% and matures in October 2009.  The Company was indebted to Mr. Steffens in the amount of $300,000 at both dates.

NOTE 5.   STOCKHOLDER’S EQUITY

In March 2008, the Company was notified that a group of investors including two members of the Board of Directors, acquired a short term promissory note due SDS Merchant Fund in the principal amount of $250,000. The note is unsecured and bears interest at 10% per annum. In March, our Board of Directors approved a resolution to convert this debt plus accrued interest into common stock of the Company at a conversion rateCompany. The total principal and interest amounted to $361,827 and was converted into 1,417,264 shares of $0.37 per share. In
addition,common stock. Mr. Pizi was granted 270,270 warrants to purchaseJohn Steffens, the Company's common
stock at $0.37 per share. These warrants expire three years from the date of
grant.

In May 2004, the Company entered into convertible loans aggregating $185 from
several investors includingCompany’s Chairman, acquired 472,516 shares and Mr. Bruce Miller, also a member of our Board of Directors, acquired 472,374 shares.

F-34
Table of Contents

In October 2007, the Company'sCompany completed a private sale of shares of its common stock to a group of investors, four of which are members of our Board of Directors. Under the terms of the agreements the loans bear interest at 1% per month and are
convertible into an aggregate of 578,125 shares of the Company's common stock
and warrants to purchase an aggregate of 578,125 shares of our common stock
exercisable at $0.32. The warrants expire in three years.

In June 2004, the Company entered into a convertible promissory note with
Anthony Pizi, the Company's Chairman and Chief Executive Officer. The Note, in
the face amount of $112, bears interest at 1% per month and is convertible into
560,000 shares of the Company's common stock and warrants to purchase 560,000
shares of our common stock at $0.20 per share. Also in June 2004, Mr. Pizi
entered into a second convertible promissory note in the face amount of $15
which is convertible into 90,118 shares of the Company's common stock and
warrants to purchase 90,118 shares of the Company's common stock at $0.17 per
share. These warrants expire three years from the date of grant.

Also in June 2004, the Company entered into a convertible loan agreement with
Mark and Carolyn Landis, who are related by marriage to Anthony Pizi, the
Company's Chairman and Chief Executive Officer, in the amount of $125. Under the
terms of the agreement, the loan bears interest at 1% per month and is
convertible into 781,250 shares of our common stock and warrants to purchase
781,250 shares of the Company's common stock exercisable at $0.16. The warrants
expire in three years.

These obligations are included in Short-term debt on the Company's Balance Sheet
as of June 30, 2004.


                                      F-40



NOTE 7. SENIOR CONVERTIBLE REDEEMABLE PREFERRED STOCK

On March 19, 2003, the Company completed a $3,500 private placement of Series D
Convertible Redeemable Preferred Stock ("Series D Preferred Stock"), convertible
at a conversion ratio of $0.32 per share of common stock into an aggregate of
11,031,250 shares of common stock. As part of the financing, the Company has
also issued warrants to purchase an aggregate of 4,158,780 shares of common
stock at an exercise price of $0.07 per share ("Series D-1 Warrants"). On
October 10, 2003, the Company, consistent with its obligations, also issued
warrants to purchase an aggregate of 1,665,720 shares of common stock at an
exercise price the lesser of $0.20 per share or market price at the time of
exercise ("Series D-2 Warrants"). The Series D-2 Warrants became exercisable on
November 1, 2003 because the Company failed to report $6,000 in gross revenues
for the nine-month period ended September 30, 2003. Both existing and new
investors participated in the financing. The Company also agreed to register the
common stock issuable upon conversion of the Series D Preferred Stock and
exercise of the warrants for resale under the Securities Act of 1933, as
amended. Under the terms of the financing agreement, a redemption event may
occur if any one person, entity or group shall control more than 35% of the
voting power of the Company's capital stock. The Company allocated the proceeds
received from the sale of the Series D Preferred Stock and warrants to the
preferred stock and detachable warrants on a relative fair value basis,
resulting in the allocation of $2,890 to the Series D Preferred Stock and $640
to the detachable warrants. Based upon the allocation of the proceeds, the
Company determined that the effective conversion price of the Series D Preferred
Stock was less than the fair value of the Company's common stock on the date of
issuance. The beneficial conversion feature was recorded as a discount on the
value of the Series D Preferred Stock and an increase in additional paid-in
capital. Because the Series D Preferred Stock was convertible immediately upon
issuance, the Company fully amortized such beneficial conversion feature on the
date of issuance.

As part of the financing, the Company and the lead investors have agreed to form
a joint venture to exploit the Cicero technology in the Asian market. The terms
of the agreement required that the Company deposit $1,000 of the gross proceeds
from the financing into escrow to fund the joint venture. The escrow agreement
allows for the immediate release of funds to cover organizational costs of the
joint venture. During the quarter ended March 31, 2003, $225 of escrowed funds
was released. Since the joint venture was not formed and operational on or by
July 17, 2003, the lead investors have the right, but not the obligation, to
require the Company to purchase $1,000 in liquidation value of the Series D
Preferred Stock at a 5% per annum premium, less their pro-rata share of
expenses. The Company and the lead investor have mutually agreed to extend the
escrow release provisions until September 30, 2004.

Another condition of the financing required the Company to place an additional
$1,000 of the gross proceeds into escrow, pending the execution of a definitive
agreement with Merrill Lynch providing for the sale of all rights, title and
interest to the Cicero technology. Since a transaction with Merrill Lynch for
the sale of Cicero was not consummated by May 18, 2003, the lead investors have
the right, but not the obligation, to require the Company to purchase $1,000 in
liquidation value of the Series D Preferred Stock at a 5% per annum premium.
During the second quarter of 2003, $390 of escrowed funds was released. In
addition, the Company and the lead investor agreed to extend the escrow release
provisions until the end of July 2003 when all remaining escrow monies were
released to the Company.

NOTE 8. STOCKHOLDERS EQUITY

As described in Note 3, Acquisitions, in January 2004, the Company acquired
substantially all of the assets and assumed certain liabilities of Critical Mass
Mail, Inc., d/b/a Ensuredmail, a federally certified encryption software
company. Under the terms of the purchase agreement, the Company issued 2,027,027
shares of common stock at a price of $0.37 per share. The total purchase price
of the assets acquired and liabilities assumed, was $750 and has been accounted
for by the purchase method of accounting.

Also in January 2004, and simultaneously with the asset purchase of Critical
Mass Mail, Inc., the Company completed a Securities Purchase Agreement with
several new investors as well as certain investors of Critical Mass Mail, Inc.,
wherein the Company raised $1,247 through the sale of 3,369,192 shares of common
stock at a price of $0.37 per share. As part of the financing, the Company has
also issued warrants to purchase 3,369,192 shares of the Company's common stock
at an exercise price of $0.37. The warrants expire three years from the date of
grant.

In October 2003, the Company entered into a Securities Purchase Agreement with
several investors wherein the Company agreed to sell 1,894,444sold 2,169,312 shares of its common stock and issue 473,611 warrants to purchase the Company's common stock
at a price of $0.45for $0.2457 per share for a total of $853$533,000, receiving cash proceeds of $383,000 and converting a note in proceeds. This offering
closedprincipal amount of $150,000. Participating in this consortium were Mr. John L. (Launny) Steffens, the Company’s Chairman, and Messrs. Bruce Miller, Don Peppers, and Bruce Percelay, members of the Board.  Mr. Steffens converted the principal amount of his short term notes with the Company of $250,000 for 1,017,501 shares of common stock.  Mr. Miller invested $20,000 for 81,400 shares of common stock, Mr. Peppers acquired 101,750 shares for a $25,000 investment and Mr. Bruce Percelay acquired 40,700 shares for a $10,000 investment.

In August 2007, the Company issued 2,756,173 options and recognized $650,000 in stock-based compensation expense for fiscal 2007.  The Company also recognized $36,000 in stock-based compensation expense for the 549,360 restricted shares of stock reserved for Mr. John Broderick, the Company’s CEO, in accordance with his 2007 employment agreement.

In February 2007, the Company completed a private sale of shares of its common stock to a group of investors, three of which are members of our Board of Directors. Under the terms of that agreement, the Company sold 3,723,008 shares of its common stock for $0.1343 per share for a total of $500,000. Participating in this consortium were Mr. Mark Landis, the Company’s former Chairman, and Mr. Bruce Miller, who is a Board member. Mr. Landis acquired 74,460 shares for a $10,000 investment and Mr. Miller acquired 148,920 shares for a $20,000 investment.  In May 2007, Mr. John L. (Launny) Steffens was elected Chairman of the Board of Directors.  Prior to his election, Mr. Steffens had participated in the private sale of shares acquiring 1,006,379 shares for an investment of $135,157.

In December 2006, the Company completed its Plan of Recapitalization, approved by its stockholders at a Special Stockholders Meeting held on October 15, 2003. The warrants expireNovember 16, 2006. Results of the Plan included a reverse stock split at a ratio of 100:1; change of the Company’s name from Level 8 Systems, Inc. to Cicero Inc.; increased the authorized common stock of the Company from 85 million shares to 215 million shares;  converted existing preferred shares into a new Series A-1 Preferred Stock; converted and cancelled senior reorganization debt in three years from the dateaggregate principal amount of grant.

$2.3 million into 3,438,473 shares of common stock; converted the aggregate principal amount of $3.9 million of convertible bridge notes into 30,508,448 shares of common stock; converted each share of Series A3 Preferred Stock into 4.489 shares of Series A-1 Preferred Stock; converted each share of Series B3 Preferred Stock into 75 shares of Series A-1 Preferred Stock; converted each share of Series C Preferred Stock into 39.64 shares of Series A-1 Preferred Stock; converted an aggregate principal amount of $1.1 million of Series D Preferred Stock, recorded as mezzanine financing, into 53 shares of Series A-1 Preferred Stock; and converted an aggregate principal amount of $1 million of convertible promissory notes into 1,591 shares of Series A-1 Preferred Stock.  As of March 31, 2008 the Company had 1,544 shares of Series A-1 Preferred Stock outstanding.

NOTE 9.6.   INCOME TAXES

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards  No.  109, "Accounting for Income Taxes." The Company's effective tax rate differs from the statutory rate primarily due to the fact that no income tax benefit was recorded for the net loss for the first quarterthree months of fiscal year 20042008 or 2003.2007.  Because of the Company's recurring losses, the deferred tax assets have been fully offset by a valuation allowance.


                                      F-41

NOTE 10.7.   LOSS PER SHARE

Basic loss per share is computed based upon the weighted average number of common shares outstanding.  Diluted lossearnings/(loss) per share is computed based upon the weighted average number of common shares outstanding and any potentially dilutive securities.  Potentially dilutive securities outstanding during the periods presented include stock options, warrants and preferred stock.

The following table sets forth the reconciliation

F-35
Table of net loss to loss available
to common stockholders:


                                                                SIX MONTHS ENDED
                                                                    JUNE 30,
                                                              2004          2003
                                                            --------      --------

Net loss, as reported .................................     $ (7,430)     $ (5,464)
Accretion of preferred stock ..........................           --           640
                                                            --------      --------
Loss applicable to common stockholders, as adjusted ...     $ (7,430)     $ (6,104)
                                                            ========      ========

 Basic and diluted loss per share:
   Loss per share continuing operations ...............     $  (0.22)     $  (0.31)
   Loss per share discontinued operations .............           --            --
                                                            --------      --------
   Net loss per share applicable to common shareholders     $  (0.22)     $  (0.31)

 Weighted common shares outstanding - basic and diluted       33,063        19,460



                                      F-42
Contents

The following table sets forth the potential shares that are not included in the diluted net loss per share calculation because to do so would be anti-dilutive for the periods presented:

                                                             JUNE 30,
                                                       2004           2003
                                                    ----------     ----------
Stock options, common share equivalent ...........   7,529,637      5,575,207
Warrants, common share equivalent ................  16,172,208      9,367,794
Preferred stock, common share equivalent .........  14,062,137     18,135,407
                                                    ----------     ----------
                                                    37,763,982     33,078,408
                                                    ==========     ==========


Accretion of the preferred stock arises as a result of the beneficial conversion
feature realized in the sale of preferred stock.


 
 
March 31,
 
 
 
2008
 
 
2007
 
Stock options, common share equivalent
 
 
2,610,213
 
 
 
45,315
 
Warrants, common share equivalent
 
 
422,456
 
 
 
309,285
 
Preferred stock, common share equivalent
 
 
1,543,618
 
 
 
1,763,482
 
 
 
 
4,576,287
 
 
 
2,118,082
 


NOTE 11.8.   SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION

Based upon the current business environment in which the Company operates, the economic characteristics of its operating segments and management’s view of the business, a revision in terms of aggregation of its segments was appropriate. Therefore the segment discussion outlined below clarifies the adjusted segment structure as determined by management under SFAS No. 131. All prior year amounts have been restated to conform to the new reporting segment structure.

Management makes operating decisions and assesses performance of the Company'sCompany’s operations based on one reportable segment, the following reportableSoftware product segment.  Prior to this change the Company had segregated into two separate segments: Desktop Integration segment and Messaging. The Messaging business has always been an immaterial part of the Company’s overall business and Application Engineeringgenerally all its sales efforts are focused on the Cicero product. As such, the Company has elected to combine the two products into one reportable segment.

The principalSoftware product in the Desktop Integration segment is Cicero. Cicerocomprised of the Cicero® product and the Ensuredmail product.  Cicero® is a business integration software product that maximizes end-user productivity, streamlines business operations and integrates disparate systems and applications.

The products that comprise the Messaging and Application Engineering segment is
Geneva Integration Broker and the encryption technology products, Email
Encryption Gateway, Software Development Kit (SDK), Digital Signature Module,
Business Desktop, and Personal Desktop.

Segment data includes a charge allocating all corporate-headquarters costs to
each of its operating segments based on each segment's proportionate share of
expenses. The Company evaluates the performance of its segments and allocates
resources toapplications, while renovating or rejuvenating older legacy systems by making them based on earnings (loss) before interest and other
income/(expense), taxes, and in-process research and development.

While segment profitability should not be construed as a substitute for
operating income or a better indicator of liquidity than cash flows from
operating activities, which are determined in accordance with accounting
principles generally acceptedusable in the United States of America, itbusiness processes.  Ensuredmail is included
herein to provide additional information with respect to our ability to meet our
future debt service, capital expenditure and working capital requirements.
Segment profitability is not necessarily a measure of our ability to fund our
cash needs. The non-GAAP measures presented may not be comparable to similarly
titled measures reported by other companies.

an encrypted email technology that can reside on either the server or the desktop.

The table below presents information about the reported segmentssegment for the sixthree months ended June 30, 2004March 31, 2008 and 2003:


                                                        MESSAGING AND
                                               DESKTOP    APPLICATION
                                             INTEGRATION  ENGINEERING    TOTAL
                                             -----------  -----------    -----

2004:

Total revenue ...........................     $   305      $    28      $   333
Total cost of revenue ...................       4,958          214        5,172
Gross margin (loss) .....................      (4,653)        (186)      (4,839)
Total operating expenses ................       1,959          238        2,197
Segment profitability (loss) ............     $(6,612)     $  (424)     $(7,036)

2003:

Total revenue ...........................     $   275      $    45      $   320
Total cost of revenue ...................       2,252           73        2,325
Gross margin (loss) .....................      (1,977)         (28)      (2,005)
Total operating expenses ................       2,736          143        2,879
Segment profitability (loss) ............     $(4,713)     $  (171)     $(4,884)


                                      F-43


A reconciliation of total segment operating expenses to total operating expenses
for the six months ended June 30:

                                                            SIX MONTHS ENDED
                                                                 JUNE 30,

                                                           2004            2003
                                                          ------          ------
Total segment operating expenses ...............          $2,197          $2,879
Loss on disposal of assets .....................              --             486
Impairment of intangible assets ................             587              --
                                                          ------          ------
Total operating expenses .......................          $2,784          $3,365
                                                          ======          ======

2007 (in thousands):

 
 
Three months ended
March 31,
 
 
 
2008
 
 
2007
 
Total revenue
 
$
470
 
 
$
232
 
Total cost of revenue
 
 
240
 
 
 
167
 
Gross margin
 
 
230
 
 
 
65
 
Total operating expenses
 
 
706
 
 
 
533
 
Segment loss
 
$
(476
)
 
$
(468
)

A reconciliation of total segment profitability (loss) to loss before provision for income taxes for the quartersthree months ended June 30:

                                                           SIX MONTHS ENDED
                                                                JUNE 30,

                                                          2004            2003
                                                         -------        -------
Total segment profitability (loss) ...............       $(7,036)       $(4,884)
Change in fair valueMarch 31 (in thousands):

 
 
Three Months Ended
March 31,
 
 
2008
 
 
2007
 
Total segment profitability (loss)
 
$
(476
)
 
$
(468
)
Interest and other income/(expense), net
 
 
(9
)
 
 
(61
)
Total loss before income taxes
 
$
(485
)
 
$
(529
)

F-36
Table of warrant liability ........           198            107
Loss on disposal of assets .......................            --           (486)
Impairment of intangible assets ..................          (587)            --
Interest and other income/(expense), net .........            11           (135)
                                                         -------        -------
Total loss before income taxes ...................       $(7,414)       $(5,398)
                                                         =======        =======

The following table presents a summary of assets by segment:

                                                                  JUNE 30,

                                                            2004           2003
                                                           ------         ------
Desktop Integration ..............................         $   21         $6,553
Messaging and Application Engineering ............             --             --
                                                           ------         ------
Total assets .....................................             21         $6,553
                                                           ======         ======


Contents

NOTE 12.9.   CONTINGENCIES

Litigation. 

Various lawsuits and claims have been brought against the Companyus in the normal course of our business.

In October 2003, the Company waswe were served with a summons and complaint in Superior Court of North Carolina regarding unpaid invoices for services rendered to the Company by one of its vendors.our subcontractors.  The amount in dispute iswas approximately $200$200,000 and is included in accounts payable. On May 12,Subsequent to March 31, 2004, we settled this litigation was settled.litigation.  Under the terms of the settlement agreement, the Companywe agreed to pay a total of $189$189,000 plus interest over a twenty-month19-month period ending DecemberNovember 15, 2005. The current portion of this NoteCompany is in the amountprocess of $117 is included in Short Term Debt onnegotiating a series of payments for the accompanying balance sheet.

In March 2004, the Company was served with a summons and complaint in Superior
Courtremaining liability of North Carolina regarding a security deposit for a sublease in Virginia.
The amount in dispute is approximately $247. The Company disagrees with this
allegation although it has reserved for this contingency.


                                      F-44
$80,000.

Under the indemnification clause of the Company'sCompany’s standard reseller agreements and software license agreements, the Company agrees to defend the reseller/licensee against third party claims asserting infringement by the Company'sCompany’s products of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/licensee.

On August 5, 2004, the Company was notified that it was in default under an
existing lease agreement for office facilities in Princeton, New Jersey. The
amount

F-37
Table of the default is approximately $65. The Company does not plan on curing
the default and will vacate the premises. The Company has estimated its
liability for future lease payments and recorded a charge in the amount of $98
in the accompanying Statement of Operations. The Company has secured
approximately 1,300 square feet of new office space located at 1433 State
Highway 34, Farmingdale, New Jersey under a short term lease.



                                      F-45
Contents

PART II   INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

      

Item 13:
Other Expenses of Issuance and Distribution

The following table sets forth the costs and expenses to be paid in connection with the common stock being registered, all of which will be paid by Level 8 Systems,Cicero Inc. (on behalf of itself and the selling stockholders) in connection with this offering.  All amounts are estimates except for the registration fee.

              SEC Registration Fee............................         $   641
              Accounting Fees and Expenses....................          20,000
              Legal Fees and Expenses.........................          30,000
              Miscellaneous...................................           1,359
              Total...........................................       $  52,000


ITEM 14: INDEMNIFICATION OF DIRECTORS AND OFFICERS

      

SEC Registration Fee(as paid)
 
$
50
 
Accounting Fees and Expenses
 
 
5,000
 
Legal Fees and Expenses
 
 
30,000
 
Miscellaneous
 
 
1,500
 
Total
 
$
36,550
 


Item 14:
Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law permits indemnification of directors, officers, employees and agents of corporations for liabilities arising under the Securities Act of 1933, as amended.

The registrant'sregistrant’s certificate of incorporation and bylaws provide for indemnification of the registrant'sregistrant’s directors and officers to the fullest extent permitted by Section 145 of the Delaware General Corporation Law. Statutory Provisions Section 102(b)(7) of the Delaware General Corporation Law enables a corporation in its certificate of incorporation to eliminate or limit the personal liability of members of its board of directors to the corporation or its stockholders for monetary damages for violations of a director'sdirector’s fiduciary duty of care. The provision would have no effect on the availability of equitable remedies, such as an injunction or rescission, for breach of fiduciary duty. In addition, no provision may eliminate or limit the liability of a director for breaching his duty of loyalty, failing to act in good faith, engaging in intentional misconduct or knowingly violating a law, paying an unlawful dividend or approving an illegal stock repurchase, or obtaining an improper personal benefit.

Section 145 of the Delaware General Corporation Law empowers a corporation to indemnify any person who was or is a party to or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, against expenses (including attorney'sattorney’s fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. No indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for expenses which the court shall deem proper. Additionally, a corporation is required to indemnify its directors and officers against expenses to the extent that the directors or officers have been successful on the merits or otherwise in any action, suit or proceeding or in defense of any claim, issue or matter.

An indemnification can be made by the corporation only upon a determination that indemnification is proper in the circumstances because the party seeking indemnification has met the applicable standard of conduct as set forth in the Delaware General Corporation Law. The indemnification provided by the Delaware General Corporation Law shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. A corporation also has the power to purchase and maintain insurance on behalf of any person, whether or not the corporation would have the power to indemnify him against such liability. The indemnification provided by the Delaware General Corporation Law shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of the person. The Company'sregistrant’s certificate of incorporation limits a director'sdirector’s liability for monetary damages to our companythe registrant and ourits stockholders for breaches of fiduciary duty except under the circumstances outlined in the Delaware General Corporation Law as described above.


                                      II-1

Table of Contents

The registrant'sregistrant’s certificate of incorporation extends indemnification rights to the fullest extent authorized by the Delaware General Corporation Law to directors and officers involved in any action, suit or proceeding where the basis of the involvement is the person'sperson’s alleged action in an official capacity or in any other capacity while serving as a director or officer of the registrant.

ITEM 15: RECENT SALES OF UNREGISTERED SECURITIES

      

Item 15:
Recent Sales of Unregistered Securities

In June 2004,March 2008, the Company entered intowas notified that a convertiblegroup of investors including two members of the Board of Directors acquired a short term promissory note with
Anthony Pizi, the Company's Chairman and Chief Executive Officer ("Mr. Pizi").
The note, in the face amount of $112, bears interest at 1% per month and is
convertible into 560,000 shares of the Company's common stock and warrants to
purchase 560,000 shares of the Company's common stock at $0.20 per share. Also
in June 2004, Mr. Pizi entered into a second convertible promissory note in the
face amount of $15 which is convertible into 90,118 shares of the Company's
common stock and warrants to purchase 90,118 shares of the Company's common
stock at $0.17 per share. These warrants expire three years from the date of
grant.

      Also in June 2004, the Company entered into a convertible loan agreement
with Mark and Carolyn Landis, who are related by marriage to Mr. Pizi, in the
amount of $125. Under the terms of the agreement, the loan bears interest at 1%
per month and is convertible into 781,250 shares of the Company's common stock
and warrants to purchase 781,250 shares of the Company's common stock
exercisable at $0.16. The warrants expire in three years from the date of grant.

      In May 2004, the Company entered into convertible loans aggregating $185
from several investors including a member of the Company's Board of Directors.
Under the terms of these agreements, the loans bear interest at 1% per month and
are convertible into an aggregate of 578,125 shares of the Company's common
stock and warrants to purchase an aggregate of 578,125 shares of the Company's
common stock exercisable at $0.32. The warrants expire in three years from the
date of grant.

      In April 2004, the Company entered into a convertible loan agreement with
Mr. Pizidue SDS Merchant Fund in the principal amount of $100,000. Under the terms$250,000. The note is unsecured and bears interest at 10% per annum. In March, our Board of Directors approved a resolution to convert this debt plus accrued interest into common stock of the agreement,
the loan is convertibleCompany. The total principal and interest amounted to $361,827 and was converted into 270,2701,417,264 shares of common stock. Mr. John Steffens, the Company'sCompany’s Chairman, acquired 472,516 shares and Mr. Bruce Miller, also a member of our Board of Directors, acquired 472,374 shares.  The issuance of shares of common stock and
warrants to purchase 270,270 shares ofin the Company's common stock exercisable at
$0.37. The warrants expire in three yearstransaction was exempt from the date of grant. These shares
were issued in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act"“Act”), for
transactionspursuant to Section 4(2) thereof.

In October 2007, we agreed to restructure a promissory note payable to Bank Hapoalim and guaranty by an issuer not involvingBluePhoenix Solutions. Under a public offering.

      On March 1, 2004,new agreement with BluePhoenix, we made a principal reduction payment to Bank Hapoalim in the amount of $300,000. Simultaneously, BluePhoenix paid $1,671,000 to Bank Hapoalim, thereby discharging that indebtedness. The Company and BluePhoenix entered into a consulting services agreementnew promissory note in the amount of $1,021,000, bearing interest at LIBOR plus 1.0% and maturing on December 31, 2011. In addition, BluePhoenix acquired 2,546,149 shares of our common stock in exchange for $650,000 paid to Bank Hapoalim to retire that indebtedness. In March 2008, we amended the terms of its Note Payable with Mr. Ralph F. Martino.BluePhoenix Solutions. Under the terms of the agreement,original note, the Company was to make a principal reduction payment in the amount of $350,000 on January 30, 2009. The Company and BluePhoenix agreed to issue 66,667accelerate that principal payment to March and April 2008 in return for a conversion of $50,000 into 195,848 shares per month, up to an aggregate of 200,001the Company’s common stock. In March, the Company paid $200,000 plus accrued interest and in April, the Company paid $100,000 plus accrued interest.  The issuance of shares of common stock as compensation for services rendered overin the following three-month
period. These shares were issued in reliance upontransaction was exempt from the exemption from
registration provided by Section 4(2) of the Securities Act.

      On March 1, 2004, the Company entered intoAct of 1933, as amended (the “Act”), pursuant to Section 4(2) thereof.

In October 2007, we completed a reseller/consulting agreement
with Pyxislink.private sale of shares of its common stock to a group of investors, four of which are members of our Board of Directors. Under the terms of thethat agreement, the Company agreed to issue
warrants to purchase 25,000we sold 2,169,311 shares of our common stock for $0.2457 per share for a total of $533,000.  The issuance of shares of common stock quarterly, overin the following
four quarters. The warrants are exercisable for five yearstransaction was exempt from the issue date
and the exercise price is $0.38 per share. These shares were issued in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act.

      In January 2004, the Company acquired substantially all of the assets and
certain liabilities of Critical Mass Mail, Inc., d/b/a Ensuredmail ("Critical
Mass"), a federally certified encryption software company. Under the terms of
the purchase agreement, the Company issued 2,027,027 shares of common stock at a
price of $0.37. These shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended (the “Act”), pursuant to Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder.

      Alsothere under, based upon the fact that each investor was an “accredited investor” as suck term definied in January 2004,Rule 501(a) of Regulation D.

In October 2007, we entered into a Long Term Promissory Note in the amount of $300,000 with Mr. John L. Steffens, our chairman.  The note bears interest at 3% per annum and simultaneouslymatures on October 30, 2009.  In order to bring the interest rate on the note in compliance with the assetarm’s length regulations, we also issued 188,285 warrants to purchase of
Critical Mass, the Company completed a common stock financing round in which the
Company raised $1,247 of capital from several new investors as well as certain
investors of Critical Mass . The Company sold 3,369,192 shares ofour common stock at a price of $0.37 per share. As part of the financing, the Company has also
issued warrants to purchase 3,369,192 shares of the Company's common stock at an
exercise price of $0.37.$0.18 each.  The warrants expire three yearsin 10 years.  The issuance of the warrants in this transaction was exempt from the date of grant.
These shares were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder.


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      On March 19, 2003, the Company1933, as amended (the “Act”), pursuant to Section 4(2) thereof.

In February 2007, we completed a $3.7 million private placement
of Series D Convertible Preferred Stock ("Series D Preferred Stock"),
convertible at a conversion ratio of $0.32 per share of common stock into an
aggregate of 11,578,125 shares of common stock. As part of the financing, the
Company has also issued warrants to purchase an aggregate of 4,364,952 shares of
common stock at an exercise price of $0.07 per share ("Series D-1 Warrants"). On
October 10, 2003, the Company, consistent with its obligations, also issued
warrants to purchase an aggregate of 1,665,720 shares of common stock at an
exercise price of the lesser of $0.20 per share or market price at the time of
exercise ("Series D-2 Warrants"). The Series D-2 Warrants became exercisable on
November 1, 2003 because the Company failed to report $6,000 in gross revenues
for the nine-month period ended September 30, 2003. Both existing and new
investors participated in the financing. The Company also agreed to register the
common stock issuable upon conversion of the Series D Preferred Stock and
exercise of the warrants for resale under the Securities Act. Under the terms of
the financing agreement, a redemption event may occur if any one person, entity
or group shall control more than 35% of the voting power of the Company's
capital stock. The Company allocated the proceeds received from the sale of the
Series D Preferred Stock and warrants to the preferred stock and detachable
warrants on a relative fair value basis, resulting in the allocation of $2,890
to the Series D Preferred Stock and $640 to the detachable warrants. Based upon
the allocation of the proceeds, the Company determined that the effective
conversion price of the Series D Preferred Stock was less than the fair value of
the Company's common stock on the date of issuance. The beneficial conversion
feature was recorded as a discount on the value of the Series D Preferred Stock
and an increase in additional paid-in capital. Because the Series D Preferred
Stock was convertible immediately upon issuance, the Company fully amortized
such beneficial conversion feature on the date of issuance. These shares were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act and Rule 506 of Regulation D promulgated thereunder.

      On December 31, 2002, the Company issued an aggregate of 1,462,801
warrants to purchase common stock to the holders of Series A3 Preferred Stock
and Series B3 Preferred Stock. These shares were issued pursuant to our
agreement with such stockholders to issue warrants upon the closing of the sale
of Series C Preferred Stock on August 14, 2002. The warrants are exercisable at
$0.40 per share and are exercisable for 5 years. Such warrants were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act. The Company did not receive any proceeds from the issuance of
the warrants. When the warrants are exercised, the Company expects to use the
proceeds from the exercise for general corporate purposes.

      On October 25, 2002, the Company effected an exchange of all of our
outstanding shares of Series A2 Convertible Redeemable Preferred Stock ("Series
A2 Preferred Stock") and Series B2 Convertible Redeemable Preferred Stock
("Series B2 Preferred Stock") and related warrants for an equal number of shares
of newly created Series A3 Convertible Redeemable Preferred Stock ("Series A3
Preferred Stock") and Series B3 Convertible Redeemable Preferred Stock ("Series
B3 Preferred Stock") and related warrants. This exchange was made to correct a
deficiency in the conversion price from the prior exchange of Series A1 and B1
Preferred Stock and related warrants for Series A2 and B2 Preferred Stock and
related warrants on August 29, 2002. The conversion price for the Series A3
Preferred Stock and the conversion price for the Series B3 Preferred Stock
remain the same as the previously issued Series A1 and A2 Preferred Stock and
Series B1 and B2 Preferred Stock, at $8.333 and $12.531, respectively. The
exercise price for the aggregate 753,640 warrants relating to the Series A3
Preferred Stock was increased from $0.38 to $0.40 per share which is a reduction
from the $1.77 exercise price of the warrants relating to the Series A1
Preferred Stock. The exercise price for the aggregate 1,047,382 warrants
relating to the Series B3 Preferred Stock was increased from $0.38 to $0.40 per
share which is a reduction from the $1.77 exercise price of the warrants
relating to the Series B1 Preferred Stock. The adjusted exercise price was based
on the closing price of the Company's Series C Convertible Redeemable Preferred
Stock and warrants on August 14, 2002, plus $0.02, to reflect accurate current
market value according to relevant Nasdaq rules. This adjustment was made as
part of the agreement under which the holders of the Company's Preferred Stock
agreed to waive their price-protection anti-dilution protections to allow the
Company to issue the Series C Preferred Stock and warrants without triggering
the price-protection anti-dilution provisions and excessively diluting its
common stock. The shares issued pursuant to the exchange agreement were issued
in reliance upon the exemption from registration provided by Section 3(a)(9) of
the Securities Act.


                                      II-3



      On August 29, 2002, the Company entered into an exchange agreement with
its existing preferred shareholders. Under the terms of the agreement, the
holders of the Series A1 and Series B1 4% convertible redeemable preferred stock
and related common stock warrants received an equal number of preferred shares
of the new Series A2 and Series B2 convertible redeemable preferred stock and
related warrants. The conversion price of both the Series A1 and Series B1
preferred stock remained the same. The exercise price for the warrants received
in the exchange was reduced to $0.38 per share. A total of 1,801,022 warrants
were exchanged. The shares issued pursuant to the exchange agreement were issued
in reliance upon the exemption from registration provided by Section 3(a)(9) of
the Securities Act.

      On August 14, 2002, the Company completed a $1.6 million private placement
of Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock"),
convertible at a conversion ratio of $0.38 per share of common stock into an
aggregate of 4,184,211 shares of common stock. As part of the financing, the
Company has also issued warrants to purchase an aggregate of 1,046,053 shares of
common stock at an exercise price of $0.38 per share. As consideration for the
$1.6 million private placement, the Company received approximately $1.4 million
in cash and allowed certain debt holders to convert approximately $200,000 of
debt to equity. Mr. Pizi converted $150,000 of debt owed to Mr. Pizi into shares
of Series C Preferred Stock and warrants. Both existing and new investors
participated in the financing. These shares were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder.

      On June 27, 2002, the Company issued 60,901 shares of common stock to a former executive officergroup of investors, three of which are member of our Board of Directors.  Under the company as partterms of that agreement, we sold 3,723,007 shares of our common stock for $0.1343 per share for a separation agreement. These
shares were issued in reliance on the exemption from registration provided by
Section 4(2)total of the Securities Act$500,000.  The issuance of 1933.

      On January 16, 2002, the Company issued 141,658 shares of common stock to
a former resellerin this transaction was exempt from the registration requirements of the company as part of a settlement agreement with that
company. These shares were issued in reliance upon the exemption from
registration provided byAct pursuant to Section 4(2) of the Securities Actthereof and Rule 506 of Regulation D promulgated thereunder.

      On January 16, 2002,there under, nased upon the Company entered intofact that each investor was an “accredited investor” as such term is definied in Ruke 501(a) of Regulation D.

From July through December 2006, we issued several Convertible Bridge Notes with a Securities Purchase
Agreement with severalconsortium of investors, wherein the Company agreed to sell up to
3,000,000 sharesincluding certain members of its common stock and warrants. The common stock was valued
at $1.50 per share and warrants to purchase additional shares were issued with
an 14 exercise priceour Board of $2.75 per share. This offering closed on January 16,
2002. Of the 3,000,000 shares, the Company sold 2,381,952 shares of common stock
forDirectors.  We raised a total of $3.5 million and granted 476,396 warrants to purchase$3,915,000.  The issuance of the Company's common stock at an exercise price of $2.75 per share. The warrants
expireConvertible Bridge Notes in three yearsthis transaction was exempt from the dateregistration requirements of grant and have a call feature that forces
exercise if the Company's common stock exceeds $5.50 per share. These shares
were issued in reliance upon the exemption from registration provided byAct pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.

      On January 3, 2002, the Company entered into a purchase agreement with
MLBC, Inc., an affiliate of Merrill Lynch. Pursuant to the Purchase Agreement,
the Company issued 250,000 shares of its common stock to MLBC, Inc. These shares
were issued in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act of and Rule 506 of Regulation D promulgated
thereunder.

      In December 2001, the Company issued 141,658 shares of common stock to a
former reseller of the company as part of a settlement agreement with that
company. These shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder.

      In October 2001, the Company entered into an exchange agreement with its
existing preferred shareholders.thereof.  Under the terms of the agreement,Convertible Bridge Notes, the holders converted their notes into a total of 30,508,448 shares of our common stock upon the effectiveness of the Series A and Series B 4% convertible redeemable preferred stock and
related common stock warrants received an equal numberPlan of preferred sharesReorganization approved by our stockholders in November 2006.  The issuance of the new Series A1 and Series B1 convertible redeemable preferred stock and
related warrants. The conversion price of both the Series A1 and Series B1
preferred stock was reduced by 16.7% and 50% respectively, which increased the
number of sharesshare of common stock to be issued upon conversionin this transaction was exempt from the registration requirements of the preferred
shares by 1,428,512 shares to a total of 3,782,519 shares. Additionally, the
exercise price for the warrants received in the exchange was reduced to $1.77
per share and the call prices have been reduced accordingly to $5.00 per share
for the Series A1 warrants and $7.50 per share for the Series B1 warrants. At
total of 1,801,022 warrants were exchanged. The shares issuedAct pursuant to the
exchange agreement were issued in reliance upon the exemption from registration
provided by Section 3(a)(9)3(9) thereof.

Table of the Securities Act of 1933.


                                      II-4



      On May 21, 2001, the Company issued Arik Kilman, former CEO and Chairman
of the Company, 250,000 shares of common stock as part of Mr. Kilman's severance
agreement with the Company. These shares were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder.

ITEM 16: EXHIBITS AND Contents

Item 16:
Exhibits and Financial Statement Schedule

FINANCIAL STATEMENT SCHEDULE

      Financial Statement Schedules

      SCHEDULES

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

      Exhibits

      

EXHIBITS

The exhibits listed under here below are filed as part of this Form S-1:

EXHIBIT
NUMBER             DESCRIPTION
- ------             -----------

2.1            Asset Purchase Agreement, dated
Exhibit Number
Description
3.1
Certificate of Incorporation of Level 8 Systems, Inc., a Delaware corporation (“Level 8”), as amended and restated  December 29, 2006 (incorporated by reference to exhibit 3.1 to Level 8’s Form 8-K filed January 17, 2007).
3.2
Certificate of Designation relating to Series A1 Convertible Redeemable Preferred Stock (incorporated by reference to exhibit 3.2 to Level 8’s Form 8-K filed January 17, 2007).
3.3
Certificate of Designation relating to Series A3 Convertible Redeemable Preferred Stock, as amended December 29, 2006 (incorporated by reference to exhibit 3.3 to Level 8’s Form 8-K filed January 17, 2007).
3.4
Certificate of Designation relating to Series B3 Convertible Redeemable Preferred as amended December 29, 2006 (incorporated by reference to exhibit 3.4 to Level 8’s Form 8-K filed January 17, 2007).
3.5
Certificate of Designation relating to Series C Convertible Redeemable Preferred Stock as amended December 29, 2006 (incorporated by reference to exhibit 3.5 to Level 8’s Form 8-K filed January 17, 2007).
3.6
Certificate of Designation relating to Series C Convertible Redeemable Preferred Stock as amended December 29, 2006 (incorporated by reference to exhibit 3.5 to Level 8’s Form 8-K filed January 17, 2007).
3.7
Certificate of Designation relating to Series D Convertible Redeemable Preferred Stock as amended December 29, 2006 (incorporated by reference to exhibit 3.5 to Level 8’s Form 8-K filed January 17, 2007).
3.8
Certificate of Incorporation of Level 8 Systems, Inc., a Delaware corporation, as amended August 4, 2003 (incorporated by reference to exhibit 3.1 to Level 8’s Form 10-K filed March 31, 2004).
3.9
Bylaws of Level 8 Systems, Inc., a Delaware corporation (incorporated by reference to exhibit 3.2 to Level 8’s Form 10-K filed April 2, 2002).
3.10
Certificate of Designations, Preferences and Rights dated March 19, 2003 relating to Series D Convertible Redeemable Preferred Stock (incorporated by reference to exhibit 3.1 to Level 8's Form 8-K, filed March 31, 2003).
3.11
Certificate of Designation relating to Series A3 Convertible Redeemable Preferred Stock (incorporated by reference to exhibit 3.1 to Level 8’s Form 10-Q filed November 15, 2002).
3.12
Certificate of Designation relating to Series B3 Convertible Redeemable Preferred Stock (incorporated by reference to exhibit 3.1 to Level 8’s Form 10-Q filed November 15, 2002).
Table of December 13, 2002, by and
               among Level 8 Systems, Inc., Level 8 Technologies, Inc. and
               EMSoftware Solutions, Inc. (exhibits and schedules omitted but
               will be furnished supplementally to the Securities and Exchange
               Commission upon request) (incorporated by reference to exhibit
               2.1 to Level 8's Form 8-K filed December 30, 2002).

3.1            Contents
3.13
Certificate of Designation relating to Series C Convertible Redeemable Preferred Stock (incorporated by reference to exhibit 3.1 to Level 8’s Form 8-K filed August 27, 2002).
4.1
Registration Rights Agreement dated July 2006, by and among Level 8 Systems, Inc. and the Purchasers in the Senior  Placement listed on Schedule I thereto relating to the Security Purchasers Agreement  (incorporated by reference to exhibit 4.1 to the Company’s Form 10-K, filed March 31, 2008).
4.2
Registration Rights Agreement, dated January 2004, by and among Level 8 Systems, Inc. and the Purchasers in the January 2004 Private Placement listed on Schedule I thereto relating to the Security Purchasers Agreement  (incorporated by reference to exhibit 4.1 to Level 8’s Form 10-K/A filed April 21, 2004).
4.3
Registration Rights Agreement dated as of March 19, 2003, by and among Level 8 Systems, Inc. and the Purchasers listed on Schedule I thereto relating to the Series D Convertible Redeemable Preferred Stock (incorporated by reference to exhibit 4.1 to Level 8’s Form 8-K, filed March 31, 2003).
4.4
Registration Rights Agreement dated as of October 15, 2003, by and among Level 8 Systems, Inc. and the Purchasers in the October Private Placement listed on Schedule I thereto (incorporated by reference to exhibit 4.2 to Level 8’s Form 10-K, filed March 31, 2004).
4.5
Registration Rights Agreement, dated as of January 16, 2002, by and among Level 8 Systems, Inc. and the Purchasers in the January Private Placement listed on Schedule I thereto (incorporated by reference to exhibit 4.1 to Level 8's Form 8-K, filed January 25, 2002).
4.6
Registration Rights Agreement, dated as of January 3, 2002, between Level 8 Systems, Inc. and MLBC, Inc. (incorporated by reference to exhibit 4.1 to Level 8's Form 8-K, filed January 11, 2002).
4.7
Registration Rights Agreement, dated as of August 29, 2002, entered into by and between Level 8 Systems, Inc. and the holders of Series A2/A3 Preferred Stock and Series B2/B3 Preferred Stock (incorporated by reference to exhibit 10.4 to Level 8’s Form 8-K filed August 30, 2002).
4.7A
First Amendment to Registration Rights Agreement, dated as of October 25, 2002, entered into by and between Level 8 Systems, Inc. and the holders of Series A2/A3 Preferred Stock and Series B2/B3 Preferred Stock (incorporated by reference to exhibit 10.4 to Level 8’s Form 10-Q filed November 15, 2002).
4.8
Registration Rights Agreement, dated as of June 13, 1995, between Level 8 Systems, Inc. and Liraz Systems Ltd. (incorporated by reference to exhibit 10.24 to Across Data Systems, Inc.'s (Level 8's predecessor) Registration Statement on Form S-1, filed May 12, 1995, File No. 33-92230).
4.8A
First Amendment to Registration Rights Agreement, dated as of August 8, 2001, to the Registration Rights Agreement dated as of June 13, 1995, by and between Across Data Systems, Inc. (Level 8's predecessor) and Liraz Systems Ltd. (incorporated by reference to exhibit 4.1 to Level 8's Form 8-K, filed August 14, 2001).
4.9
Registration Rights Agreement, dated as of August 14, 2002, entered into by and between Level 8 Systems, Inc. and the investors in Series C Preferred Stock (incorporated by reference to exhibit 4.1 to Level 8’s Form 8-K filed August 27, 2002).
4.10
Form of Registration Rights Agreement, dated January 2004, by and among Level 8 Systems, Inc. and the Purchasers of Convertible Promissory Note (incorporated by reference to exhibit 4.2 to Level 8's Form 10-Q, filed May 12, 2004).
4.13
Form of Warrant issued to the Purchasers of Series D Preferred Stock dated as of March 19, 2003 (incorporated by reference to exhibit 4.2 to Level 8's Form 8-K, filed March 31, 2003).
Table of IncorporationContents
4.14
Form of Stock Purchase Warrant issued to Purchasers in the October 2003 Private Placement (incorporated by reference to exhibit 4.9 to Level 8’s Form 10-K, filed March31, 2004).
4.16
Form of Series A3 Stock Purchase Warrant (incorporated by reference to exhibit 10.2 of Level 8’s Form 10-Q filed November 15, 2002).
4.17
Form of Series B3 Stock Purchase Warrant (incorporated by reference to exhibit 10.3 of Level 8’s Form 10-Q filed November 15, 2002).
4.18
Form of Series C Stock Purchase Warrant (incorporated by reference to exhibit 10.2 to Level 8’s Form 8-K filed August 27, 2002)
4.19
Form of Long term Promissory Note Stock Purchase Warrant (incorporated by reference to exhibit 4.19 to the Company’s Form 10-K, filed March 31, 2008).
5.1
Legal Opinion of Golenbock Eiseman Assor Bell & Peskoe LLP (filed herewith).
10.1
Securities Purchase Agreement for Consortium IV (incorporated by reference to exhibit 10.1 to Cicero Inc.’s Form 10-K/A filed July 11, 2007).
10.2
Securities Purchase Agreement dated January 2004, by and among Level 8 Systems, Inc. and the Purchasers in the January 2004 Private Placement (incorporated by reference to exhibit 10.1 to Level 8’s Form 10-K/A filed April 21, 2004).
10.3
Securities Purchase Agreement dated March 2004, by and among Level 8 Systems, Inc. and the Purchasers of Convertible Promissory Note (incorporated by reference to exhibit 10.2 to Level 8's Form 10-Q, filed May 12, 2004).
10.3
Form of Convertible Promissory Note dated March 2004, by and among Level 8 Systems, Inc. and the Purchasers of Convertible Promissory Note (incorporated by reference to exhibit 10.3 to Level 8's Form 10-Q, filed May 12, 2004).
10.4
Securities Purchase Agreement dated as of March 19, 2003, by and among Level 8 Systems, Inc. and the Purchasers (incorporated by reference to exhibit 10.1 to Level 8's Form 8-K, filed March 31, 2003).
10.5
Securities Purchase Agreement dated as of October 15, 2003, by and among Level 8 Systems, Inc. and the Purchasers in the October Private Placement (incorporated by reference to exhibit 10.2 to Level 8’s Form 10-K, filed March 31, 2004).
10.6
Securities Purchase Agreement, dated as of January 16, 2002, by and among Level 8 Systems, Inc. and the Purchasers in the January Private Placement (incorporated by reference to exhibit 10.1 to Level 8's Form 8-K, filed January 25, 2002).
10.7
Purchase Agreement, dated as of January 3, 2002, between Level 8 Systems, Inc. and MLBC, Inc.  (incorporated by reference to exhibit 10.1 to Level 8's Form 8-K, filed January 11, 2002).
10.7A
Purchase Agreement, dated as of July 31, 2000, between Level 8 Systems, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 10.1 to Level 8's Form 8-K, filed August 11, 2000).
10.8
Securities Purchase Agreement, dated as of August 14, 2002, by and among Level 8 Systems, Inc. and the purchasers of the Series C Preferred Stock (incorporated by reference to exhibit 10.1 to Level 8’s Form 8-K, filed August 27, 2002).
10.9
Agreement, dated as of August 14, 2002, by and among Level 8 Systems, Inc. and the holders of Series A1/A2/A3 and B1/B2/B3 Preferred Stock, (incorporated by reference to exhibit 10.3 to Level 8’s Form 8-K filed August 27, 2002).
Table of Level 8 Systems, Inc., a Delaware
               corporation, as amended August 4, 2003 (incorporated by reference
               to exhibit 3.1 to Level 8's Form 10-K filed March 30, 2004).

3.2            BylawsContents
10.10
Exchange Agreement, dated as of August 20, 2002,  among Level 8 Systems, Inc., and the various stockholders identified and listed on Schedule I, thereto (incorporated by reference to exhibit 10.1 to Level 8’s Form 8-K filed August 30, 2002).
10.11A
First Amendment to Exchange Agreement, dated as of October 25, 2002, among Level 8 Systems, Inc., and the various stockholders identified and listed on Schedule I to that certain Exchange Agreement, dated as of August 29, 2002 (incorporated by reference to exhibit 10.1 to Level 8’s Form 10-Q filed November 15, 2002).
10.11B
Securities Purchase Agreement, dated as of June 29, 1999, among Level 8 Systems, Inc. and the investors named on the signature pages thereof for the purchase of Series A Preferred Stock (incorporated by reference to exhibit 10.1 to Level 8's Form 8-K, filed July 23, 1999).
10.11C
Securities Purchase Agreement, dated as of July 20, 2000, among Level 8 Systems, Inc. and the investors named on the signature pages thereof for the purchase of Series B Preferred Stock (incorporated by reference to Exhibit 10.1 to Level 8's Form 8-K, filed July 31, 2000).
10.12
Amended PCA Shell License Agreement, dated as of January 3, 2002, between Level 8 Systems, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to exhibit 10.2 to Level 8's Form 8-K, filed January 11, 2002).
10.12A
PCA Shell License Agreement between Level 8 Systems, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to exhibit 10.2 to Level 8’s Form 8-K, filed September 11, 2000).
10.12A
OEM License Agreement between Cicero Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated be reference to exhibit 10.12A to the Company’s Form 10-K, filed March 31, 2008).
10.12A
Software Support and Maintenance Schedule between Cicero Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated be reference to exhibit 10.12A to the Company’s Form 10-K, filed March 31, 2008).
10.15
Employment Agreement between Anthony Pizi and the Company effective January 1, 2007 (incorporated be reference to exhibit 10.15 to the Company’s Form 10-K, filed March 31, 2008).*
10.16
Employment Agreement between John P. Broderick and the Company effective January 1, 2007 (incorporated be reference to exhibit 10.16 to the Company’s Form 10-K, filed March 31, 2008).*
10.17
Lease Agreement for Cary, N.C. offices, dated November 7, 2003, between Level 8 Systems, Inc. and Regency Park Corporation (incorporated by reference to exhibit 10.17 to Level 8’s Form 10-K, filed March 31, 2004).
10.18
Level 8 Systems Inc. 1997 Stock Option Plan, as Amended and Restated (incorporated by reference to exhibit 10.2 to Level 8’s Registration Statement of Form S-1/A, filed September 22, 2000, File No. 333-44588).*
10.18A
Fifth Amendment to Level 8 Systems Inc. 1997 Stock Option Plan (incorporated by reference to exhibit 10.9A to Level 8’s Form 10-K filed April 2, 2002).*
10.18B
Seventh Amendment to Level 8 Systems Inc. 1997 Stock Option Plan (incorporated by reference to exhibit 10.14 B to Level 8’s Form 10-K, filed March 31, 2004).*
10.20
Lease Agreement for Cary, N.C. offices, dated March 31, 1997, between Seer Technologies, Inc. and Regency Park Corporation (incorporated by reference to exhibit 10.47 to Seer Technologies, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 1997, File No. 000-26194).
Table of Level 8 Systems, Inc., a Delaware corporation
               (incorporated by reference to exhibit 3.2 to Level 8's Form 10-K
               filed April 2, 2002).

3.3            Certificate of Designations, Preferences and Rights dated March
               19, 2003 relating to Series D Convertible Redeemable Preferred
               Stock (incorporated by reference to exhibit 3.1 to Level 8's Form
               8-K, filed March 31, 2003).

3.4            Certificate of Designation relating to Series A3 Convertible
               Redeemable Preferred Stock. (incorporated by reference to exhibit
               3.1 to Level 8's Form 10-Q filed November 15, 2002).

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

3.6            Certificate of designation relating to Series C Convertible
               Redeemable Preferred Stock (incorporated by reference to exhibit
               3.1 to Level 8's Form 8-K filed August 27, 2002).

4.1            Registration Rights Agreement dated as of March 19, 2003 by and
               among Level 8 Systems, Inc. and the Purchasers listed on Schedule
               I thereto relating to the Series D Convertible Redeemable
               Preferred Stock (incorporated by reference to exhibit 4.1 to
               Level 8's Form 8-K, filed March 31, 2003).

4.2            Registration Rights Agreement dated as of October 15, 2003 by and
               among Level 8 Systems, Inc. and the Purchasers in the October
               Private Placement listed on schedule I thereto (incorporated by
               reference to exhibit 4.2 to Level 8's Form 10-K filed March 30,
               2004).

4.3            Registration Rights Agreement, dated as of January 16, 2002, by
               and among Level 8 Systems, Inc. and the Purchasers in the January
               Private Placement listed on Schedule I thereto (incorporated by
               reference to exhibit 4.1 to Level 8's Report on Form 8-K, filed
               January 25, 2002).

4.4            Registration Rights Agreement, dated as of January 3, 2002,
               between Level 8 Systems, Inc. and MLBC, Inc. (incorporated by
               reference to exhibit 4.1 to Level 8's Report on Form 8-K, filed
               January 11, 2002).


                                      II-5



4.5            Registration Rights Agreement, dated as of August 29, 2002,
               entered into by and between Level 8 Systems, Inc. and the holders
               of Series A2/A3 Preferred Stock and Series B2/B3 Preferred Stock
               (incorporated by reference to exhibit 10.4 to Level 8's Form 8-K
               filed August 30, 2002).

4.5A           First Amendment to Registration Rights Agreement, dated as of
               October 25, 2002, entered into by and between Level 8 Systems,
               Inc. and the holders of Series A2/A3 Preferred Stock and Series
               B2/B3 Preferred Stock (incorporated by reference to exhibit 10.4
               to Level 8's Form 10-Q filed November 15, 2002).

4.7            Registration Rights Agreement, dated as of August 14, 2002,
               entered into by and between Level 8 Systems, Inc. and the
               investors in Series C Preferred Stock (incorporated by reference
               to exhibit 4.1 to Level 8's Form 8-K filed August 27, 2002).

4.8            Form of Registration Rights Agreement issued to Purchasers in the
               January 2004 Private Placement (incorporated by reference to
               exhibit 4.1 to Level 8's Form 10-Q filed May 12, 2004).

4.9            Form of Registration Rights Agreement issued to Purchasers of
               Convertible Promissory Note (incorporated by reference to exhibit
               4.2 to Level 8's Form 10-Q filed May 12, 2004).

4.10           Form of Stock Purchase Warrant issued to Purchasers in the
               January 2004 Private Placement (incorporated by reference to
               exhibit 4.3 to Level 8's Form 10-Q filed May 12, 2004).

4.11           Form of Stock Purchase Warrant issued to Purchasers of
               Convertible Promissory Note (incorporated by reference to exhibit
               4.4 to Level 8's Form 10-Q filed May 12, 2004).

4.12           Form of Warrant issued to the Purchasers in the Series D
               Preferred Stock transaction dated as of March 19, 2003
               (incorporated by reference to exhibit 4.2 to Level 8's Form 8-K,
               filed March 31, 2003).

4.12A          Form of Warrant issued to the Purchasers in the Series D
               Preferred Stock transaction dated as of March 19, 2003
               (incorporated by reference to exhibit 4.2 to Level 8's Form 8-K,
               filed March 31, 2003).

4.13           Form of Stock Purchase Warrant issued to Purchasers in the
               October 2003 Private Placement (incorporated by reference to
               exhibit 4.9 to Level 8's Form 10-K filed March 30, 2004).

4.14           Form of Stock Purchase Warrant issued to the Purchasers in the
               January Private Placement (incorporated by reference to exhibit
               10.2 to Level 8's Report on Form 8-K, filed January 25, 2002).

4.15           Form of Series A3 Stock Purchase Warrant (incorporated by
               reference to exhibit 10.2 of Level 8's Form 10-Q filed November
               15, 2002).

4.16           Form of Series B3 Stock Purchase Warrant (incorporated by
               reference to exhibit 10.3 of Level 8's Form 10-Q filed November
               15, 2002).

4.17           Form of Series C Stock Purchase Warrant (incorporated by
               reference to exhibit 10.2 to Level 8's Form 8-K filed August 27,
               2002).

5.1            Legal Opinion of Powell, Goldstein, Frazer & Murphy LLP.+

10.1           Form of Securities Purchase Agreement dated January 2004 by and
               among Level 8 Systems, Inc. and the Purchasers in the January
               Private Placement (incorporated by reference to exhibit 10.1 to
               Level 8's Form 10-Q filed May 12, 2004).

10.2           Form of Securities Purchase Agreement dated March 2004 by and
               among Level 8 Systems, Inc. and the Purchasers of Convertible
               Promissory Note (incorporated by reference to exhibit 10.2 to
               Level 8's Form 10-Q filed May 12, 2004).

10.3           Form of Convertible Promissory Note dated March 2004 by and among
               Level 8 Systems, Inc. and the Purchasers of Convertible
               Promissory Note (incorporated by reference to exhibit 10.3 to
               Level 8's Form 10-Q filed May 12, 2004).


                                      II-6



10.4           Securities Purchase Agreement dated as of March 19, 2003 by and
               among Level 8 Systems, Inc. and the Purchasers (incorporated by
               reference to exhibit 10.1 to Level 8's Form 8-K, filed March 31,
               2003).

10.5           Securities Purchase Agreement dated as of October 15, 2003 by and
               among Level 8 Systems, Inc. and the Purchasers in the October
               Private Placement (incorporated by reference to exhibit 10.2 to
               Level 8's Form 10-K filed March 30, 2004).

10.6           Securities Purchase Agreement, dated as of January 16, 2002, by
               and among Level 8 Systems, Inc. and the Purchasers in the January
               Private Placement (incorporated by reference to exhibit 10.1 to
               Level 8's Report on Form 8-K, filed January 25, 2002).

10.7           Securities Purchase Agreement, dated as of August 14, 2002, by
               and among Level 8 Systems, Inc. and the purchasers of the Series
               C Preferred Stock (incorporated by reference to exhibit 10.1 to
               Level 8's Form 8-K filed August 27, 2002).

10.8           Agreement by and among Level 8 Systems, Inc. and the holders of
               Series A1/A2/A3 and B1/B2/B3 Preferred Stock, dated as of August
               14, 2002 (incorporated by reference to exhibit 10.3 to Level 8's
               Form 8-K filed August 27, 2002).

10.9           Exchange Agreement among Level 8 Systems, Inc., and the various
               stockholders identified and listed on Schedule I, dated as of
               August 29, 2002 (incorporated by reference to exhibit 10.1 to
               Level 8's Form 8-K filed August 30, 2002).

10.9A          First Amendment to Exchange Agreement, dated as of October 25,
               2002, among Level 8 Systems, Inc., and the various stockholders
               identified and listed on Schedule I to that certain Exchange
               Agreement, dated as of August 29, 2002 (incorporated by reference
               to exhibit 10.1 to Level 8's Form 10-Q filed November 15, 2002).

10.9B          Securities Purchase Agreement, dated as of June 29, 1999, among
               Level 8 Systems, Inc. and the investors named on the signature
               pages thereof for the purchase of Series A Preferred Stock
               (incorporated by reference to exhibit 10.1 to Level 8's Form 8-K
               filed July 23, 1999).

10.9C          Securities Purchase Agreement, dated as of July 20, 2000, among
               Level 8 Systems, Inc. and the investors named on the signature
               pages thereof for the purchase of Series B Preferred Stock
               (incorporated by reference to Exhibit 10.1 to Level 8's Report on
               Form 8-K filed July 31, 2000).

10.10          Amended PCA Shell License Agreement, dated as of January 3, 2002,
               between Level 8 Systems, Inc. and Merrill Lynch, Pierce, Fenner &
               Smith Incorporated (incorporated by reference to exhibit 10.2 to
               Level 8's Form 8-K, filed January 11, 2002).

10.10A         PCA Shell License Agreement between Level 8 Systems, Inc. and
               Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated
               by reference to exhibit 10.2 to Level 8's Report on Form 8-K,
               filed September 11, 2000).

10.11          Promissory Note of Level 8 Systems, Inc., dated as of September
               28, 2001, among Level 8 Systems, Inc. and Bank Hapoalim
               (incorporated by reference to exhibit 10.2 to Level 8's Form 10-K
               filed April 2, 2002).

10.11          A Amendment to Promissory Note of Level 8 Systems, Inc., dated as
               of November 15,2003 among Level 8 Systems, Inc. and Bank Hapoalim
               (incorporated by reference to exhibit 10.10A to Level 8's Form
               10-K filed March 30, 2004).

10.12          Employment Agreement between Anthony Pizi and the Company
               effective January 1, 2004.* +

10.13          Employment Agreement between John P. Broderick and the Company
               effective January 1, 2004.* +


                                      II-7



10.14          Level 8 Systems Inc. 1997 Stock Option Plan, as Amended and
               Restated (incorporated by reference to exhibit 10.2 to Level 8's
               Registration Statement of Form S-1/A, filed September 22, 2000,
               File No. 333-44588).*

10.14A         Seventh Amendment to Level 8 Systems Inc. 1997 Stock Option Plan
               (incorporated by reference to exhibit 10.14B to Level 8's Form
               10-K filed March 30, 2004).*

10.15          Level 8's February 2, 1995 Non-Qualified Option Plan
               (incorporated by reference to exhibit 10.1 to Across Data
               Systems, Inc.'s (Level 8's predecessor) Registration Statement on
               Form S-1, filed May 12, 1995, File No. 33-92230).*

10.16          Lease Agreement for Cary, N.C. offices, dated November 7, 2003,
               between Level 8 Systems, Inc. and Regency Park Corporation
               (incorporated by reference to exhibit 10.17 to Level 8's Form
               10-K filed March 30, 2004).

10.17          Lease Agreement, dated February 23, 2001, between Level 8
               Systems, Inc. and Carnegie 214 Associates Limited Partnership
               (incorporated by reference to exhibit 10.15 to Level 8's Annual
               Report on Form 10-K, filed March 29, 2001).

16.1           Letter from Deloitte & Touche LLP regarding change of accountant
               (incorporated by reference to Exhibit 16 to Level 8's Current
               Report on Form 8-K, filed November 26, 2003).

21.1           List of subsidiaries of the Company. +

23.1           Consent of Margolis & Company LLP. +

23.2           Consent of Deloitte & Touche LLP. +

23.3           Consent of Powell, Goldstein, Frazer & Murphy LLP (included in
               exhibit 5.1 filed herewith). +

24.1           Power of Attorney (included on signature page). +



Contents
10.20A
Addendum #1 to the Lease Agreement for Cary, N.C. offices, dated July 6, 1998 (incorporated by reference to exhibit 10.58 to Seer Technology Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 1998, File No. 000-26194).
10.20B
Amendment to Lease Agreement for Cary, N.C. offices, dated January 21, 1999 (incorporated by reference to exhibit 10.21A to Level 8's Annual Report on Form 10-K for the fiscal year ended December 31, 1998).
10.21
Lease Agreement for Cary, N.C. offices, dated August 16, 2007, between Cicero Inc. and Regency Park Corporation (incorporated be reference to exhibit 10.21 to the Company’s Form 10-K, filed March 31, 2008).
10.22
Cicero Inc. 2007 Employee Stock Option Plan ( incorporated be reference to exhibit 10.22 to the Company’s Form 10-K, filed March 31, 2008).
10.23
Agreement and Promissory Note of Cicero Inc., dated October 30, 2007, among Cicero Inc. and BluePhoenix Solutions Ltd. ( incorporated be reference to exhibit 10.23 to the Company’s Form 10-K, filed March 31, 2008).
10.24
Promissory Note of Cicero Inc., dated October 29, 2007 among Cicero Inc. and John L. Steffens (incorporated be reference to exhibit 10.24 to the Company’s Form 10-K, filed March 31, 2008).
10.25
Securities Purchase Agreement, dated as of February 26, 2007, by and among Cicero Inc. and the Purchasers in the February Private Placement (incorporated be reference to exhibit 10.25 to the Company’s Form 10-K, filed March 31, 2008).
10.26
Securities Purchase Agreement, dated as of August 15, 2007, by and among Cicero Inc. and the Purchasers in the August Private Placement ( incorporated be reference to exhibit 10.26 to the Company’s Form 10-K, filed March 31, 2008).
21.1
List of subsidiaries of the Company (incorporated be reference to exhibit 21.1 to the Company’s Form 10-K, filed March 31, 2008).
23.1
Consent of Margolis & Company P.C. (filed herewith).
23.2
Consent of Golenbock Eiseman Assor Bell & Peskoe LLP (included in Exhibit 5.1).

*        Management contract or compensatory agreement.

+     Previously filed.


ITEM 17: UNDERTAKINGS

      (a) (1) 

Table of Contents

Item 17:
Undertakings

The undersigned registrant hereby undertakes toundertakes:

(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 this 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 and of the estimated maximum offering price 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 more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation“Calculation of Registration Fee"Fee” table in the effective registration statement; and

(iii) To include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this registration statement.


                                      II-8

(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 herein, 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 that remain unsold at the termination of the offering.

      Insofar as indemnification

(4) That, for liabilities arisingthe purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as amended, maypart of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be permitteddeemed to directors, officersbe part of and controlling
personsincluded in the registration statement as of the registrant pursuantdate it is first used after effectiveness.  Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to the foregoing provisions,a purchaser with a time of contract of sale prior to such first use, supersede or otherwise,
the registrant has been advisedmodify any statement that was made in the opinionregistration statement or prospectus that was part of the SECregistration statement or made in any such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification againstdocument immediately prior to such liabilities (other than the payment by the registrantdate of expenses incurred
or paid by a director, officer or controlling personfirst use.

Table 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 Act and will be governed by the final adjudication of
such issue.


                                      II-9
Contents

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Farmingdale,Cary, State of New Jersey,North Carolina, on August 20, 2004.



                                        LEVEL 8 SYSTEMS,June 24, 2008.

CICERO INC.


                                        By: /S/ ANTHONY C. PIZI
                                            ------------------------------------
                                            Anthony C. Pizi
                                            Chairman

By:   /s/John P. Broderick
John P. Broderick
Chief Executive Officer
Principal Accounting Officer


KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John L. Steffens and John P. Broderick, and each or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement or any registration statement for this offering that is to be effective upon filing pursuant to Rule 462(b) under the BoardSecurities Act of 1933, and Chief Executive Officer


                                     II-10
to file the same, with all exhibits thereto and other documents in connection therewith, with the Securites and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises,a s fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this amendment to the registration statement has been signed by the following persons in the capacities and on the dates indicated.



          SIGNATURE                                           TITLE                                      DATE
          ---------                                           -----                                      ----

  /S/ ANTHONY C. PIZI                       
Signature
Title
Date
      /s/  John L. Steffens
John L. Steffens
Chairman of the Board and 
June 24, 2008
     /s/  John P. Broderick
 John P. Broderick
Chief Executive Officer/Chief Financial Officer       August 20, 2004
- --------------------------------------      (Principal
(Principal Executive Officer)
June 24, 2008
     /s/  Mark Landis
 Mark Landis
Director
June 24, 2008
     /s/  Anthony C. Pizi


  /S/ JOHN P. BRODERICK *                   Chief Financial and Operating Officer                   August 20, 2004
- -------------------------------------       (Principal Accounting Officer)
John P. Broderick


  /S/ NICHOLAS HATALSKI *                   Director                                                August 20, 2004
- -------------------------------------
Nicholas Hatalski


  /S/ BRUCE HASENYAGER *                    Director                                                August 20, 2004
- -------------------------------------
Bruce Hasenyager


  /S/ KENNETH NEILSEN *                     Director                                                August 20, 2004
- -------------------------------------
Kenneth Neilsen


  /S/ JAY KINGLEY *                         Director                                                August 20, 2004
- -------------------------------------
Jay Kingley


* By: /S/ ANTHONY C. PIZI
          ---------------------------
          
Anthony C. Pizi
          Attorney-in-Fact
 Director
June 24, 2008
    /s/ Bruce Hasenyager
Bruce Hasenyager
Director
June 24, 2008
    /s/ Jay Kingley
Jay Kingley
Director
June 24, 2008
    /s/ Bruce D. Miller
Bruce D. Miller
Director
June 24, 2008
    /s/ Charles Porciello
Charles Porciello
Director
June 24, 2008
    /s/ Bruce Percelay
Bruce Percelay
Director
June 24, 2008
    /s/ John W. Atherton
John W. Atherton
Director
June 24, 2008
    /s/ Don Peppers
Don Peppers
Director
June 24, 2008