SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

Filed by the Registrant ý

Filed by a Party other than the Registrant ¨

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¨	Preliminary Proxy Statement

ý	Definitive Proxy Material

¨	Definitive Additional Materials

¨	Soliciting Material Pursuant to Section 240.14a-12

¨	Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e) (2))

Level 8 Systems, Inc.

(Name of Registrant as Specified in its Charter)

(Name of Person(s) Filing Proxy Statement if other than the Registrant)

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ý	No fee required.

¨	Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.

Title of each class of securities to which transaction applies:

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¨	Fee paid previously with preliminary materials.

¨	Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

~~214 Carnegie Center; Suite 303~~

~~Princeton, New Jersey 08540~~

Amount Previously Paid: _______________________

Form, Schedule or Registration Statement No.: _______________________

Filing Party: ____________________________________________

Date Filed: ___________________________________________

~~June 27, 2003~~

LEVEL 8 SYSTEMS, INC.

NOTICE OF SPECIAL STOCKHOLDERS’ MEETING TO BE HELD

November 16, 2006 at 11:00 a.m.

Dear ~~Stockholder:~~

Stockholder of Level 8 Systems, Inc.:

You are cordially invited to attend a Special Stockholders’ Meeting, which will be held at 11:00 a.m. on November 16, 2006 at the ~~2003 Annual Meeting~~Courtyard by Marriott Raleigh Cary, 102 Edinburgh Drive South, Cary, North Carolina 27518.

We are holding the special meeting to vote on the following proposals:

To amend the Amended and Restated Certificate of Incorporation of the Company (“Certificate of Incorporation”) to change its name to Cicero Inc.;

To take all steps necessary to effect a reverse split of the Common Stock of the Company at a ratio within a range of 20:1 to 100:1 as determined by the Board of Directors of the Company;

To amend the Certificate of Incorporation to increase the authorized shares of Common Stock of the Company from eighty-five million (85,000,000) to two hundred fifteen million (215,000,000); and

To amend the conversion prices of all of the outstanding shares of Series A-3, B-3, C and D preferred stock of the Company, eliminate the authorization and designations of those series of preferred stock and convert them into a new Series A-1 preferred stock.

The proxy statement fully describes these proposals. Implementation of any of Proposals 2, 3 or 4 is conditioned on approval of all of Proposals 2, 3 and 4.

Only stockholders of record at the close of business on October 1, 2006 will be entitled to vote at the special meeting and any postponements or adjournments of the meeting.

		BY ORDER OF THE BOARD OF DIRECTORS

		John Broderick
		Chief Executive Officer

		Dated: October 17, 2006

LEVEL 8 SYSTEMS, INC.

To the Stockholders of Level 8 Systems, Inc. (the “Company”) to be held at the Carnegie Center, Building 101, Princeton, New Jersey on July 30, 2003, at 10:00 a.m., local time. I sincerely hope that you will be able to attend the meeting, and I look forward to seeing you.

~~The attached Notice of Annual Meeting and Proxy Statement describe the formal business to be transacted at the meeting. We also will report on the operations~~:

On behalf of the ~~Company during the past year, as well as on our plans for the future.~~

~~We are including with this Proxy Statement a copy~~Board of ~~the Company’s Annual Report on Form 10-K. It contains information on the Company’s operations, markets, products and services as well as the Company’s audited financial statements.~~

Please take this opportunity to become involved in the affairs of the Company. Each of the issues covered by the Proxy Statement is important to position the Company for growth. We hope you will take time to carefully consider each matter.

Whether or not you expect to be present at the meeting, please complete, date, sign and mail the enclosed proxy in the envelope provided. Returning the proxy does NOT deprive you of your right to attend the meeting and vote your shares in person. If you attend the meeting, you may withdraw your proxy and vote your own shares.

~~Sincerely,~~

~~Anthony C. Pizi~~

~~Chairman of the Board~~

~~LEVEL 8 SYSTEMS, INC.~~

~~214 Carnegie Center; Suite 303~~

~~Princeton, New Jersey 08540~~

~~_____________________________~~

~~NOTICE OF ANNUAL MEETING OF STOCKHOLDERS~~

~~To be held on July 30, 2003~~

~~_____________________________~~

~~Notice is hereby given that the Annual Meeting of Stockholders~~Directors of Level 8 Systems, Inc. (the ~~“Company”~~“Company”), I am writing to you to solicit your vote by means of a proxy to approve an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect the following four actions (collectively referred to as the “Recapitalization”), all of which shall occur substantially simultaneously: Each of these actions is listed below and each is being presented for stockholder approval. Implementation of any of items 2, 3 or 4 is conditioned on approval of all items 2, 3 and 4. All of items 2, 3 and 4 must be approved or the Recapitalization will not occur.

1. To change the name of the Company to Cicero Inc.;

2. To take all steps necessary to effect a consolidation (a/k/a a reverse split) of the common stock of the Company at a ratio within a range of 20:1 to 100:1 (the “Reverse Stock Split Ratio”) as determined by the Board of Directors of the Company;

3. To increase the number of authorized shares of common stock of the Company from eighty-five million (85,000,000) to two hundred fifteen million (215,000,000) shares; and

4. To amend the conversion prices at which all of the outstanding shares of Series A-3, B-3, C and D preferred stock of the Company convert into shares of common stock of the Company and then convert such outstanding shares into a single series of Series A-1 preferred stock of the Company with each share converting into such number of shares of Series A-1 preferred stock as set forth in the second table below (and to eliminate the authorization and designations of such Series A-3, B-3, C and D preferred stock):

Series of Preferred Stock	Current Conversion Price		Amended Conversion Price

Series A-3	$	8.33	$	3.50

Series B-3	$	12.53	$	4.00

Series C	$	0.38	$	0.25

Series D	$	0.32	$	0.20

Existing Series Preferred Stock		Number of Shares of Series A-1 Preferred Stock
	Series A-3		0.0142857
	Series B-3		0.125
	Series C		0.20
	Series D		0.25

If the Recapitalization is approved, the current common stockholders of the Company would suffer substantial dilution. On a fully diluted basis, the current common stockholders, who own 54.6% of the Company, will own only 1.7% of the Company upon completion of the Recapitalization. This dilution will occur in large part due to the following:

the automatic conversion of convertible bridge notes into shares of common stock,

the conversion of convertible promissory notes into shares of Series A-1 preferred stock (subject to the election of the convertible promissory noteholders, of which the holders of 95% have agreed to convert),

the automatic exercise of existing warrants of the Company and the issuance by the Company and automatic exercise of additional warrants to investors who have recently lent funds to the Company, evidenced by senior reorganization notes, and

to a lesser extent, the reduction to be effected pursuant to the Recapitalization to the conversion rates of the convertible promissory notes and existing preferred stock of the Company.

The substantial dilution would result in a change of control of the Company to the extent that the current common stockholders of the Company will no longer own more than fifty percent of the voting stock of the Company. The substantial dilution of the current common stockholders would be accompanied by a substantial increase in the holdings of the security holders who hold warrants, convertible bridge notes or both and who consist largely of the preferred stockholders who received warrants in connection with their shares of preferred stock and private placement participants, as well as the convertible promissory noteholders of the Company, to the extent they elect to convert their notes into preferred stock. Following the Recapitalization, current preferred stockholders would hold 0.6% of the Company, compared with 9.7% prior to the Recapitalization. As a result, the economic consequences to stockholders will be significant. For a more detailed description of the transactions which constitute the Recapitalization, please see the “THE RECAPITALIZATION.”

Immediately following the Recapitalization, the Company’s capital stock would consist only of common stock and Series A-1 preferred stock, and other investor debt would be canceled, assuming all of the Company’s convertible promissory noteholders elect to convert. Management believes that the Recapitalization will have a positive impact on the future operations of Level 8 and its ability to raise additional capital needed to continue operations.

The Board of Directors has fixed the close of business on October 1, 2006 as the record date for the determination of shareholders entitled to vote on the Recapitalization. You are urged to vote, sign, date, and return the enclosed proxy as promptly as possible in the enclosed postage-prepaid envelope. The various elements of the Recapitalization are being presented for vote as a linked set of proposals. All of items 2, 3 and 4 must be approved for the Recapitalization to be effected and the implementation of any of these items is conditioned on approval of all of these other items. Please note that the failure to sign and return a Proxy will have the same effect as a vote against the Recapitalization. Please sign and return your Proxy today. In any case, your Proxy must be received by the special meeting date of November 16, 2006. If you have any questions, please feel free to call John Broderick at (919) 380-5000.

The Board has approved the Recapitalization and recommended the approval of the Recapitalization to the stockholders.

	BY ORDER OF THE BOARD OF DIRECTORS


	John Broderick
	Chief Executive Officer

	Dated: October 17, 2006

Level 8 Systems, Inc.

8000 Regency Pkwy, Suite 542

Cary, North Carolina 27518

PROXY STATEMENT

SOLICITATION OF PROXY

This Proxy Statement is being furnished to the stockholders of Level 8 Systems, Inc. ("Level 8" or the "Company"), in connection with the solicitation by the Board of Directors of the Company (the "Board of Directors") of votes from holders of outstanding shares of the Company's Common Stock, $0.001 par value (the "Common Stock"), and the Company’s Series A-3, B-3, C and D preferred stock (the “preferred stock”), with respect to the Recapitalization described in the form of Proxy of Stockholders (the "Proxy") delivered herewith.

This Proxy Statement and the accompanying form of Proxy are first being mailed to stockholders of the Company on or about October 23, 2006.

The Company will bear all costs and expenses relating to the solicitation of proxies, including the costs of preparing, printing and mailing to stockholders this Proxy Statement and accompanying materials. In addition to the solicitation of Proxies by mail, the directors, officers and employees of the Company, without receiving additional compensation therefor, may solicit Proxies personally or by telephone, facsimile transmission, e-mail or web posting. Arrangements will be made with brokerage firms and other custodians, nominees and fiduciaries representing beneficial owners of shares of the Common Stock for the forwarding of solicitation materials to such beneficial owners, and the Company will reimburse such brokerage firms, custodians, nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them in doing so.

THE BOARD OF DIRECTORS ASKS THAT YOU SIGN, DATE AND MAIL YOUR PROXY WITHOUT DELAY.

QUESTIONS AND ANSWERS ABOUT THE RECAPITALIZATION

The following questions and answers are provided for your convenience, and briefly address some commonly asked questions about the Recapitalization and related matters. You should carefully read this entire Proxy Statement, including each of the annexes.

Q:	*Why are we proposing the Recapitalization?*

Our board of directors believes that the Recapitalization would greatly simplify our capital and governance structures which would benefit all of our stockholders. The board believes that the simplified capital structure should make the Company more understandable and hence more attractive to potential investors and highly skilled employees. The simplified capital structure of the Company following the Recapitalization should also improve the Company’s ability to access the capital markets to pursue possible future equity and debt financings and acquisitions, and would provide a more transparent capital structure in which to value the Company. Finally, we believe that the Recapitalization will be helpful in retaining our attractiveness to our preferred stockholders and convertible promissory noteholders. See “THE RECAPITALIZATION—Reasons for the Recapitalization.”

Q:	*Does Level 8’s board of directors recommend that I vote for the Recapitalization resolutions?*

Our board of directors recommends that you vote for each of the four Recapitalization resolutions. You should read “THE RECAPITALIZATION—Reasons for the Recapitalization” for a discussion of the factors that our board of directors considered in deciding to recommend you vote FOR the Recapitalization proposals.

Q:	*How would the Recapitalization be effected?*

The Recapitalization would be effected by filing (i) a Certificate of Designations, Preferences and Rights of the Series A-1 Convertible Preferred Stock of the Company, (ii) a Certificate of Amendment to each of the Series of preferred stock to amend the conversion price of each series of preferred and to provide for their conversion into the Series A-1 preferred stock and (iii) the filing of the Amended and Restated Certificate of Incorporation of the Company. Please see Annex A for the proposed Certificate of Designations, Preferences and Rights of the Series A-1 Convertible Preferred Stock, Annex B for the proposed Certificate of Amendment to each series of preferred stock and Annex C for the Amended and Restated Certificate of Incorporation.

Q:	*What would happen to the shares of Common Stock in the Recapitalization?*

A:	Each share of Common Stock outstanding at the effective time of the Recapitalization would automatically be converted into such shares of Common Stock equal to one divided by the Reverse Stock Split Ratio, entitled to one vote per share.

Q:	*How and to what extent will my shares of common stock be diluted if the Recapitalization is approved?*

Holdings of our common stock will suffer substantial dilution if the Recapitalization is approved. On a fully diluted basis, the current common stockholders, who own 54.6% of the Company, will own only 1.7% of the Company upon completion of the Recapitalization. This dilution will occur in large part due to the following:

the automatic conversion of convertible bridge notes into shares of common stock;

the automatic exercise of existing warrants of the Company and the issuance by the Company and

automatic exercise of additional warrants to investors who have recently lent funds to the Company, evidenced by senior reorganization notes; and

to a lesser extent, the reduction to be effected pursuant to the Recapitalization to the conversion rates of the convertible promissory notes and existing preferred stock of the Company

This substantial dilution would result in a change of control of the Company to the extent that the current common stockholders of the Company will no longer own more than fifty percent of the voting stock of the Company.

Q:	*What interests in the Recapitalization are held by some directors and officers that may conflict with the interests of stockholders?*

Some of our executives, officers and directors own, or have options or warrants to acquire, shares of our capital stock and some of our directors are holders, or are affiliated with holders, of our preferred stock or debt. In addition, some of these executives, officers and directors hold Senior Reorganization Notes, Convertible Bridge Notes and warrants which upon approval of the Recapitalization will result in each holding additional shares of common stock of the Company. In particular, Anthony Pizi, our Chief Information Officer, who holds Convertible Bridge Notes, Senior Reorganization Notes and warrants which are automatically exercised upon approval of the Recapitalization, currently owns 4.6% of the common stock of the Company. Upon approval of the Recapitalization, he will own 4.9% of the common stock of the Company. Mark Landis, Chairman of the Board of the Company, and his spouse, Carolyn Landis, who are parents-in-law to Mr. Pizi, hold Convertible Bridge Notes, Senior Reorganization Notes and warrants which are automatically exercised upon approval of the Recapitalization. Mark and Carolyn Landis currently own 10.9% of the outstanding shares of common stock of the Company. Upon approval of the Recapitalization, they will own 17.5% of shares of common stock of the Company. For more information about the interests held by our executives, officers and directors and the impact on their holdings upon approval of the Recapitalization, please see “INTEREST OF CERTAIN PERSONS IN OR OPPOSITION TO MATTERS TO BE ACTED UPON.”

Q:	*What would happen to the shares of various series of preferred stock in the Recapitalization?*

A:	If the Recapitalization is completed, each share of preferred stock of the Company would be converted into the following number of shares of Series A-1 preferred stock of the Company:

Existing Series Preferred Stock		Number of Shares of Series A-1 Preferred Stock
	Series A-3		0.0142857
	Series B-3		0.125
	Series C		0.20
	Series D		0.25

No fractional shares of Common Stock would be issued to any holder. Holders would receive cash in lieu of fractional shares.

Q:	*What would happen to the convertible promissory notes in the Recapitalization?*

If the Recapitalization is completed, the outstanding convertible promissory notes may, at the option of the holder thereof, be converted into shares of Series A-1 preferred stock of the Company at prices ranging from $0.002 to $0.026. Approximately 95% of the outstanding convertible promissory notes have documented their consent to convert their notes into equity at these price ranges.

Q:	*What would happen to the senior reorganization notes in the Recapitalization?*

A:	Upon effectiveness of the Recapitalization, (i) holders of senior reorganization notes would receive and have

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 the extent of the balance of the exercise price, (ii) holders of existing warrants who advanced the exercise price of their warrants to Level 8 would have their existing warrants automatically exercised and (iii) those senior reorganization noteholders who loaned Level 8 the first $1,000,000 in respect of the exercise price of their warrants would receive early adopter warrants of Level 8 at a ratio of 2:1 for shares issuable upon exercise of each existing warrant exercised at the ~~Carnegie Center, Building 101, Princeton, New~~

~~Jersey~~special exercise price of $0.10 per share.

Q:	*What would happen to the convertible bridge notes in the Recapitalization?*

A:	Upon effectiveness of the Recapitalization, holders of convertible bridge notes would have their notes automatically converted into shares of Common Stock of the Company at conversion prices ranging from $0.00125 to $0.00133 as part of the Recapitalization.

Q:	*If the Recapitalization is completed, would our shares continue to be publicly traded?*

A:	Yes. If the Recapitalization is completed, the shares of Common Stock would continue to trade on the Over-the-Counter Bulletin Board. We intend to make application to change the symbol under which our shares trade to the symbol “CCRO”.

Q:	*If the Recapitalization is completed, would I still have the same voting rights as I do now?*

As a result of the Recapitalization, holders of Common Stock will have the same voting rights. Each share of Common Stock will continue to be entitled to one vote. Holders of Series A-1 preferred stock will be entitled to a number of votes equal to the number of shares of Common Stock into which the preferred stock is convertible. Holders of Series A-1 preferred stock will not be entitled to the same voting rights on some matters as holders of Series A-3, B-3, C or D preferred stock of the Company. For an explanation of these differences, please see “THE RECAPITALIZATION—Comparison of Preferred Stockholder Rights Before and After the Recapitalization.” Further, as a result of the Recapitalization, the current common stockholders of Level 8 would suffer substantial dilution. On a fully diluted basis, the current common stockholders, who own 54.6% of Level 8, will own only 1.7% of the Company upon completion of the Recapitalization. The substantial dilution would result in a change of control to the extent that the current common stockholders of Level 8 will no longer own more than fifty percent of the Common Stock of the Company after the Recapitalization.

Q:	*What protections for the minority stockholders of the Company would be in place if the Recapitalization is completed?*

A:	Other than those provided by law, the minority stockholders of the Company would receive no minority protections if the Recapitalization is completed.

Q:	*What are the federal income tax consequences to me of the Recapitalization?*

If the Recapitalization is approved, you as the holder of shares of the common stock or as the holder of shares of preferred stock (or both) would not recognize any gain or loss for U.S. federal income tax purposes as the result of the Recapitalization, except for any gain or loss that may result from your receipt of cash instead of a fractional share of common stock. Your tax basis in the shares of Common Stock after the Recapitalization would equal the basis of the common shares that you owned immediately prior the Recapitalization. Your tax basis in the shares of Series A-1 preferred stock received in the Recapitalization would equal the basis of the preferred shares that you owned immediately prior to the Recapitalization. The holding period for each share of common stock or Series A-1 preferred stock that you own immediately following the Recapitalization would include your holding period for the common or preferred shares prior to the Recapitalization, provided that the Level 8 share exchanged was held as a capital asset.

If you receive cash instead of a fractional share of common stock, you will be considered as having received the fractional share pursuant to the Recapitalization and then having exchanged the fractional share for cash

in redemption. As a result, you will generally recognize gain or loss equal to the difference between the amount of cash received and the basis in your fractional share as set forth above. Provided such fractional share was held as a capital asset, the gain or loss will be capital gain or loss and will be long term capital gain or loss if, as of the effective date of the recapitalization, your holding period for such fractional share is greater than one year. The deductibility of capital losses is subject to limitations.

If you are a non-corporate U.S. holder of common stock, you may be subject to information reporting and backup withholding at a 28% rate on ~~July 30, 2003~~any cash payments received in lieu of a fractional share. You will not be subject to backup withholding, however, if you (a) furnish a correct taxpayer identification number and certify that you are not subject to backup withholding on the Form W-9 or successor form included in the letter of transmittal to be delivered to the holders following the completion of the Recapitalization; or (b) are otherwise exempt from backup withholding.

Tax matters are complicated, and the tax consequences of the Recapitalization to you will depend on your particular tax situation. You should consult your tax advisor on the tax consequences of the Recapitalization to you. You should also read “THE RECAPITALIZATION—Federal Income Tax Consequences of the Recapitalization.”

Q:	*When do we expect to complete the Recapitalization?*

A:	If the Recapitalization is approved by Level 8’s stockholders, and assuming the satisfaction of the other conditions to the Recapitalization, it is anticipated that the Recapitalization will become effective as soon as practicable.

Q:	*Who is entitled to vote for the Recapitalization?*

A:	Only holders of record of Common Stock and preferred stock of Level 8 at the close of business October 1, 2006 may vote on the Recapitalization.

Q:	*What stockholder vote is required to approve the Recapitalization?*

The Recapitalization will require the approval of (i) the holders of a majority of voting power of the issued and outstanding shares of Level 8 Common Stock, Series A-3, B-3, C and D preferred stock (each voting on an as-converted basis) entitled to vote thereon, voting together as a single class, (ii) the holders of at least two-thirds of the issued and outstanding shares of Series D preferred stock entitled to vote thereon, voting as a single class with respect to the conversion into shares of Series A-1 preferred stock at the reduced conversion rates and the entire Recapitalization, and (iii) holders of at least 85% of the issued and outstanding shares of Series A-3, B-3 and C preferred stock entitled to vote thereon, each voting as a single class with respect to the conversion into shares of Series A-1 preferred shares at reduced conversion rates and together as a single class with respect to the entire Recapitalization.

Q:	*Are there any conditions that are required to be satisfied in order to consummate the Recapitalization?*

Yes. In addition to the receipt of the requisite votes, the Recapitalization is conditioned upon the approval of amendments to the convertible promissory notes, the senior reorganization notes, and the convertible bridge notes. We will likely solicit their approval by means of a consent obtained through our personal contact between now and the date of the special meeting in order to effect the Recapitalization as soon as possible thereafter if all approvals are obtained. Our failure to obtain a necessary approval will prevent the consummation of the Recapitalization.

Q:	*What is the status of the Registration Statement filed by Cicero Inc.?*

A:	During the pendency of the filing of the Registration Statement, Level 8 continued to experience working capital needs in excess of cash generated from operations. To continue to meet its obligations, the Company

raised funds through the sale of its convertible bridge notes. Because of the difficulty of raising funds while having a registration statement on file, even though not effective, on April 24, 2006, the Board of Directors approved the withdrawal of the registration statement and the registration statement was subsequently withdrawn from the SEC on May 18, 2006. In lieu of the recapitalization merger contemplated by the Registration Statement, the Board of Directors determined to effect a recapitalization of the Company pursuant to this Proxy Statement.

Q:	*What do I need to do now?*

A:	After you have carefully read this Proxy Statement, if you intend to vote for the Recapitalization, mail in your proxy no later than November 13, 2006.

Q:	*If my shares are held in “street name” by my broker, will my broker vote my shares for me?*

A:	Maybe. Your broker will vote your shares only if you provide instructions on how to vote. You should follow the directions provided by your broker. Without instructions, your shares will not be voted FOR the Recapitalization.

Q:	*If my shares are held in an IRA, who votes those shares?*

A:	You vote shares held by you in an IRA as though you held those shares directly.

Q:	*Can I change my vote after I have mailed my signed proxy?*

A shareholder who has executed and returned a Proxy may revoke it at any time prior to the time that the Company has received enough votes to approve the Recapitalization by filing with the Secretary of the Company, at the address first set forth above, a written notice of revocation bearing a later date than the Proxy being revoked. The failure to sign and return a Proxy will have the same effect as a vote against the Recapitalization. All Proxies must be received by the meeting date of November 16, 2006.

Q:	*Should I send in my stock certificate now?*

A:	No. Shortly after the Recapitalization is completed, the Company will send you written instructions for exchanging your stock certificates.

Q:	*Am I entitled to appraisal rights?*

A:	No. Stockholders of the Company will not be entitled to appraisal or dissenters rights under the laws of the State of Delaware by virtue of the actions proposed pursuant to the Recapitalization.

Q:	*Who should I call with questions or to obtain additional copies of this document?*

A:	You should call: Mr. John P. Broderick, Chief Executive Officer and Chief Financial Officer, 8000 Regency Pkwy., Ste 542, Cary, NC 27518 (919) 380-5000.

THE RECAPITALIZATION

The information contained in this Proxy Statement, unless otherwise indicated, assumes the Recapitalization and all transactions related to it, have occurred. When used in this Proxy Statement, unless otherwise indicated or the context otherwise requires, the terms “Company,” “we,” “our” and “us” refer to Level 8 Systems, Inc. and its subsidiaries.

General

If our stockholders approve the Recapitalization proposals, and all other conditions to the Recapitalization are satisfied or waived, (i) Level 8 would change its name to Cicero, Inc., (ii) the number of authorized shares of the Company would increase from 85 million to 215 million shares, (iii) each share of Common Stock of Level 8 outstanding immediately prior to the Recapitalization shall be converted into shares of Common Stock equal to one divided by the Reverse Stock Split Ratio, plus cash in lieu of any fractional share interest, (iv) each outstanding share of the various series of preferred stock of Level 8 will be converted into shares of Series A-1 preferred stock of the Company at ~~10:00 a.m.~~reduced conversion rates and prices, (v) Convertible Promissory Notes of Level 8 will be converted into shares of Series A-1 preferred stock at reduced conversion rates and prices, assuming the Convertible Promissory Noteholders elect to convert (currently, 95% of the Convertible Promissory Noteholders have agreed to convert), ~~local time,~~(vi) existing warrants held by investors who have lent the exercise price of such warrants to Level 8 will be deemed exercised at a reduced exercise price and additional warrants issued to such holders in connection with the loans made by them, evidenced by Senior Reorganization Notes, will be automatically cashlessly exercised for shares of Common Stock and those holders who lent Level 8 the first $1,000,000 will receive two additional Early Adopter Warrants for every existing warrant for which such holder lent Level 8 the exercise price, and (vii) $2,779,137 principal amount of Convertible Bridge Notes will convert into shares of Common Stock at conversion prices ranging from $0.00125 to $0.00133 per share as part of the Recapitalization.

Approval by the holders of each series of preferred stock voting as a single class, will be needed to approve the amendment to the certificate of incorporation to amend the conversion rate for that series of preferred stock as provided in this Proxy Statement. Approval by the holders of the Level 8 Series D preferred stock will also be needed to approve an amendment to the certificate of incorporation to cease to require that the Company redeem any or all of the Level 8 Series D preferred stock outstanding in the event of the Recapitalization.

All of Proposals 2, 3 and 4 must be approved for the Recapitalization to be effected and the implementation of any of these Proposals is conditioned on approval of all of these other Proposals.

Reasons for the Recapitalization

The discussion of the information and factors that the board of directors of Level 8 considered is not intended to be exhaustive but includes all material factors considered by the board in connection with the evaluation of the Recapitalization. Given the wide variety and complexity of these matters, the board of directors did not find it useful to, and did not attempt to, assign relative weights to these factors. In addition, the individual members of the board of directors may have given different weight to different factors.

The board of directors (including the five disinterested directors serving on the board) has unanimously approved the Recapitalization and has proposed it to the stockholders of Level 8 for the following ~~purposes:~~

reasons:

Simplified capital and governance structure. Both the simplified capital and governance structure resulting from the transaction should make the Company more understandable and hence more attractive to potential investors. Rather than the existing capital structure which involves multiple preferred shareholder offerings each with its own rights, ranks and privileges, the recapitalization will enable the company to merge all the preferred shareholdings into one new preferred offering thereby eliminating confusing and costly consent solicitations for items such as future equity raises as needed

Enhancement of our ability to access capital markets and engage in potential strategic alternative transactions. The simplified capital structure of the Company following the Recapitalization should also improve the Company’s ability to access the capital markets to pursue possible future equity and debt financings. In addition, the Recapitalization may enhance our ability to enter into possible future transactions, including acquisitions, on favorable terms.

Broaden the market for our Common Stock and make it more attractive to potential investors and highly skilled employees. We believe that the continued market price of Level 8’s Common Stock has and will continue to impair our acceptability to institutional investors, professional investors and other members of the investing public. Various brokerage house policies and practices tend to discourage individual brokers within those firms from dealing with low-priced stocks. In addition, the current price per share of our Common Stock may result in individual stockholders paying higher per-share transaction costs because fixed-price brokers’ commissions represent a higher percentage of the stock price on lower priced stock than fixed-price commissions on a higher priced stock.

We believe that one effect of the Recapitalization is that our stock price may increase over time. We further believe that a higher stock price could help us to attract and retain employees and other service providers. We believe that some potential employees and service providers are less likely to work for a company with a low stock price, regardless of the size of a company’s market capitalization. If the Recapitalization successfully increases the per share price of our Common Stock, we believe this increase will enhance our ability to attract and retain employees and service providers. However, while we believe that our Common Stock would trade at higher prices after the consummation of the Recapitalization, there can be no assurance that the increase in the trading price will occur, or, if it does occur, that it will equal or exceed the price that is the product of the market price of the Common Stock prior to the Recapitalization adjusted for the reverse split. In some cases, the total market capitalization of a company following a recapitalization is lower, and may be substantially lower, than the total market capitalization before the recapitalization. This may occur in the Recapitalization, since one aspect of the transaction is the automatic exercise of certain warrants and conversion of certain debt, which will result in a significant dilution of our Common Stock. In addition, there can be no assurance that the Recapitalization will result in a per share price that will attract brokers and investors who do not trade in lower priced stock or that it will increase our ability to attract and retain employees and other service providers.

Retain our attractiveness to our recent investors: Senior Reorganization Noteholders, Convertible Promissory Noteholders and preferred stockholders. The Company believes that the Senior Reorganization Noteholders, Convertible Promissory Noteholders and preferred stockholders represent a continuing potential source of financing and wish to encourage further investment by them and continued support by them. We have four series of preferred stock, as well as Convertible Promissory Notes, all of which are convertible into Level 8 Common Stock at conversion prices that no longer correspond to the Level 8 Common Stock price. We believe that the best way that we can retain our attractiveness to these investors is by reducing the conversion prices to be more in line with the current market price of the Common Stock. Additionally, maintaining multiple series of preferred stock with differing rights has become an administrative burden, costing Level 8 resources that it can ill afford.

Existing and proposed capital structure. Below is a table of our existing and proposed capital structure :

Common Stock	Existing Capital Structure		Proposed Capital Structure 20:1		Proposed Capital Structure 100:1
Issued and outstanding		48,039,947		132,488,117		26,497,621
Authorized and reserved for issuance		31,440,852		1,679,329		619,108
Authorized but unreserved		5,519,201		80,832,554		187,883,271
Total		85,000,000		215,000,000		215,000,000

Preferred Stock	Existing Capital Structure		Proposed Capital Structure 20:1		Proposed Capital Structure 100:1
Issued and outstanding:
Series A-3		1,571
Series B-3		30,000
Series C		991
Series D		1,061
Series A-1				8,817		1,764
Authorized and reserved for issuance:
Series A-3
Series B-3
Series C
Series D
Series A-1
Authorized but unreserved		9,966,377		9,991,183		9,998,236
Total		10,000,000		10,000,000		10,000,000

Background of the Recapitalization

In anticipation of a capital raise by Level 8, on June 23, 2004 senior management approached Brown Simpson Partners I, Ltd. (“BSP”), a holder of and our contact to holders of our Series A-3, B-3 and D preferred stock, to discuss such capital raise and the waiver of certain anti-dilution rights with respect to such anticipated capital raise. BSP suggested instead a recapitalization merger, citing our need for a complete reorganization and overhaul of our capital structure to facilitate investment. In connection with a suggested recapitalization merger, it was contemplated that BSP and other preferred stockholders would waive certain rights, including anti-dilution, liquidation preferences, seniority and other senior rights, in exchange for certain concessions on the conversion prices of the various series of our preferred stock. A series of negotiations occurred from July 2004 through September 2004 between senior management and BSP with respect to conversion rates and the percentage of ownership by common stockholders following the consummation of the recapitalization merger. The parties weighed factors such as the current conversion prices for each series of preferred stock in relation to the market, the dollar amount represented by such series, and the waiver of the stockholder rights noted above. In addition, consideration was given to inducing existing holders of our stock and warrants to invest more in the Company, and structuring a mechanism to minimize liquidity issues after the recapitalization merger due to our convertible promissory notes. The general approach suggested was to set the percentage ownership of holders of Common Stock, provide reduced conversion prices on the preferred stock in return for the waiver of certain rights, provide equity incentives for holders of our convertible promissory notes to convert, and provide greater relative ownership to our most recent investors.

Based on these conversations, and the structure proposed by BSP on behalf of holders of Series A-3, B-3 and D preferred stock, our senior management made an initial proposal to BSP. The key elements of such proposal was reducing the percentage ownership of the holders of our Common Stock from approximately 54.1% to approximately 2.2%, decreasing the percentage ownership of our preferred stock from approximately 9.6% to approximately 0.8%, and decreasing convertible debt from approximately 7.6% to approximately 7.2%. The Company and BSP reached an agreement with respect to these issues on October 27, 2004, and the Company structured the recapitalization merger in accordance with the agreed-upon figures. In such structure, the percentage ownership of the holders of Common Stock was reduced to 8.2%, and the percentage ownership of holders of preferred stock set at approximately 54% and holders of convertible notes at approximately 19%. The conversion price for the Series C preferred stock, which was the only series

of our preferred stock not represented by BSP, was determined in relation to the conversion price for the Series D preferred stock. However, the actual ownership percentages of the holders of such securities following the recapitalization merger was to be lower due to the dilution attributable to the issuance by Level 8, subsequent to agreeing on the capital structure with BSP, of $180,000 of Convertible Promissory Notes, $2,559,000 Senior Reorganization Notes and related warrants and $2,367,000 of Convertible Bridge Notes.

As of June 30, 2006, the Company had two holders of record of Series A-3 preferred stock; three holders of record of Series B-3 preferred stock; thirteen holders of record of Series C preferred stock and seven holders of record of Series D preferred stock. In addition, there are nine individual convertible promissory note holders.

In order to effectuate the recapitalization merger, Level 8, Inc. incorporated Cicero Inc. (“Cicero”) as a wholly owned subsidiary of Level 8 on December 17, 2004, exclusively for the purpose of merging with Level 8. On December 30, 2004, Level 8 and Cicero entered into an Agreement and Plan of Merger pursuant to which Level 8 would merge with and into Cicero, with Cicero being the surviving corporation. Under the merger agreement, Cicero would assume all assets and liabilities of Level 8, including obligations under Level 8’s existing indebtedness and contracts. On May 13, 2005, Cicero filed a Registration Statement on Form S-4 with the Securities and Exchange Commission which included a proxy statement to solicit stockholders to approve the terms of the merger agreement. On December 9, 2005, Cicero filed Amendment No. 1 to the Registration Statement to respond to comments received from the SEC. During the pendency of such filing, the Company continued to experience working capital needs in excess of cash generated from operations. To ~~elect six (6)~~continue to meet its obligations, the Company raised funds through the sale of its Convertible Bridge Notes. Because of the difficulty of raising funds while having a registration statement on file, even though not effective, on April 24, 2006, the Board of Directors approved the withdrawal of the registration statement and the registration statement was subsequently withdrawn from the SEC on May 18, 2006. In lieu of such recapitalization merger, the Board of Directors determined to effect the recapitalization of the Company pursuant to this Proxy Statement.

Recommendation of the Board of Directors

On April 24, 2006, based in part upon the recommendation of senior management, the board of directors unanimously:

declared that the Recapitalization was advisable and in the best interests of Level 8 and its preferred stockholders and common stockholders;

approved the adoption of an amended and restated certificate of incorporation and bylaws; and

directed that the adoption of the Recapitalization be submitted to a vote of the stockholders and recommended that the stockholders approve the Recapitalization.

Effect of the Recapitalization

At the effective time of the Recapitalization, each security of Level 8 will be converted into the number of shares of Common Stock or preferred stock of Level 8 as follows:

Each share of Common Stock will be converted into a share of Common Stock based upon the Reverse Stock Split Ratio;

Each share of Series A-3 preferred stock will be converted into 0.0142857 shares of Series A-1 preferred stock;

Each share of Series B-3 preferred stock will be converted into 0.0125 shares of Series A-1 preferred stock;

Each share of Series C preferred stock will be converted into 0.20 shares of Series A-1 preferred stock;

Each share of Series D preferred stock will be converted into 0.25 shares of Series A-1 preferred stock;

Convertible Promissory Notes may, at the option of the holder thereof (of which holders of 95% have agreed to convert), be converted into shares of Series A-1 preferred stock at conversion prices ranging from $0.002 to $0.026;

The senior secured notes of Level 8 (“Senior Reorganization Notes”) issued in the aggregate principal amount of $2,559,000 to holders of warrants of Level 8 who loaned to Level 8 the exercise price of their warrants and other investors who lent funds to Level 8 (“Senior Reorganization Noteholders”) in exchange for Senior Reorganization Notes and additional warrants, pursuant to note and warrant offerings in December 2004 ($1,615,000) and March 2005 ($944,000) (the “Note and Warrant Offerings”), will be cancelled and the existing warrants in respect of which the exercise price was loaned to Level 8, as evidenced by the Senior Reorganization Notes, will be exercised. Such warrant holders were offered a special one-time exercise price of the lesser of $0.10 per share and the original exercise price as part of the recapitalization merger. The exercise price of the warrants at that time ranged from $0.07 to $0.60;

The warrants of Level 8 (“Additional Warrants”) agreed to be issued to Senior Reorganization Noteholders in connection with their loans to Level 8, exercisable at $0.002 per share in the event of the consummation of the recapitalization merger, will automatically be deemed exercised, by applying the accrued interest on their Senior Reorganization Notes and by cashless exercise to the extent of the balance of the exercise price;

Senior Reorganization Noteholders who loaned Level 8 the first $1,000,000 in respect of the exercise price of their warrants, pursuant to the Note and Warrant Offering in December 2004, will receive warrants of Level 8 (“Early Adopter Warrants”) at a ratio of 2:1 for shares issuable upon exercise of each existing warrant exercised at the special exercise price (before adjustment by the reverse split exchange ratio) of $0.10 per share;

The convertible bridge notes (the “Convertible Bridge Notes”) held by convertible bridge noteholders (the “Convertible Bridge Noteholders”) who had loaned money to Level 8 as part of the September 2005 consortium note offering (the “Consortium Note Offering”) will be automatically converted into shares of Common Stock at conversion prices ranging from $0.00125 to $0.00133; and

Each option, warrant, purchase right, unit or other security of Level 8, including the Early Adopter Warrants, will remain outstanding with the number of shares of Common Stock issuable upon exercise of such security equal to one divided by the Reverse Stock Split Ratio of the number of shares such security was exercisable for prior to the Recapitalization, and the exercise price increased to the Reverse Stock Split Ratio times the exercise price prior to the Recapitalization.

PROPOSAL 1: CHANGE OUR NAME TO CICERO INC.

We propose to change the name of Level 8 Systems to Cicero, Inc. so that our name will be identical to the name of Level 8’s primary software product, Cicero. This will allow us to take advantage of the marketing campaign that has been undertaken utilizing the “Cicero” name. The name change to Cicero will eliminate confusion and will reflect the change in Level 8’s business focus. We believe that the new name has more advantages associated with it than with retaining the existing name. Implementation of this proposal is not conditioned on approval of any other proposal considered at the special meeting.

The affirmative vote of the holders of a majority of the outstanding shares of Common Stock entitled to vote at the meeting is necessary to approve this proposal. Abstentions will be treated as votes against the proposal and broker non-votes will have no effect on the voting results.

The board of directors recommends that stockholders vote FOR Proposal 1.

PROPOSAL 2: EFFECT A CONSOLIDATION (REVERSE STOCK SPLIT ) OF OUR COMMON STOCK AT A RATIO WITHIN A RANGE OF 20:1 TO 100:1 AS DETERMINED BY THE BOARD OF DIRECTORS OF THE COMPANY

Our Board of Directors has approved a resolution seeking approval for reverse stock split ratio within a range of 20:1 to 100:1 whereby each share of Common Stock currently issued and outstanding will be divided by the final reverse stock split ratio as determined by the Board of Directors and converted into fractional share of Common Stock. If the reverse stock split ratio as determined by the Board of Directors is 40:1, then each forty shares of Common Stock currently issued and outstanding will be converted into one share of common stock.

This proposal is part of our Recapitalization. The Recapitalization is conditioned on approval of all of Proposals 2, 3 and 4. Our implementation of any of Proposals 2, 3 or 4 is conditioned on the approval of all of Proposals 2, 3 and 4.

The proposed reverse stock split will affect all of our currently issued and outstanding Common Stock. While approval of the reverse stock split itself will not affect your current ownership stake in our Company, the approval of the Proposals constituting the Recapitalization, as previously discussed, will result in substantial dilution to our common stockholders. In particular, the dilution to the holders of our Common Stock will result from the automatic conversion of convertible bridge notes into shares of Common Stock, the conversion of convertible promissory notes into shares of Series A-1 preferred stock (subject to the election of the convertible promissory noteholders, of which the holders of 95% have agreed to convert), the automatic exercise of existing warrants of the Company and the issuance by the Company and automatic exercise of additional warrants to investors who have recently lent funds to the Company, evidenced by senior reorganization notes, and to a lesser extent, the reduction to be effected pursuant to the Recapitalization to the conversion rates of the convertible promissory notes and existing preferred stock of the Company.

Although there can be no assurance of the future effect on our stock price, the reverse stock split might increase the per share price of our common stock. Initially, the increase in our per share stock price would likely correspond to the reduction in the number of shares of our Common Stock that are outstanding and available for issuance.

Our Board of Directors approved this resolution in connection with the proposed Recapitalization because our Board of Directors feels that an increased per share stock price may have the effect of making our Common Stock more attractive to individuals as well as institutional investors in the future and this would also ultimately aid us if we sought listing on a more liquid market or exchange by increasing the per share price of our stock to meet that market’s or exchange’s minimum listing price.

Our Board of Directors feels that having our Common Stock listed on a more liquid market or exchange is in the best interests of the long-term success of the Company. As part of this resolution, the Board will have the authority to effect the reverse split in connection with the Recapitalization and will not effect the reverse stock split absent the implementation of the other integral parts of the Recapitalization.

The authorization of the reverse stock split will not be subject to the “going private” rules of the Securities and Exchange Act of 1934 because we do not anticipate a reduction in the number of stockholders following the reverse stock split below the level set forth in rules of the Securities and Exchange Act of 1934.

Selecting the Reverse Stock Split Ratio

The Board of Directors believes that stockholder approval of an exchange ratio range (rather than an exact exchange ratio) provides the Board of Directors with maximum flexibility to achieve the purposes of the reverse stock split. In connection with any determination to effect a reverse stock split, the Board of Directors will set the timing for such a split and select the specific ratio within the range. These determinations will be made by the Board of Directors to ~~serve~~create the greatest marketability of the Company's common stock based on prevailing market conditions at the time. In particular, the Board of Directors will select the reverse stock ratio based on the then prevailing trading price and trading volume for the ~~ensuing year~~Common Stock and ~~until their successors~~with an objective to achieve a manageable public float; the anticipated impact of the reverse stock split on the trading price of the Common Stock; the ability to attract additional financing from institutional investors and investment funds and prevailing general market and economic conditions. The Company has not determined a target price for the stock.

Certain Risks Associated with the Reverse Stock Split

While the Board of Directors believes that a higher stock price may help generate investor interest, there can be no assurances that the reverse stock split will result in a per share price that will attract institutional investors or investment funds or that such share price will satisfy the investing guidelines of institutional investors or investment funds. As a result, the trading liquidity of our common stock may not necessarily improve.

There can be no assurance that the market price per share of our common stock immediately after the reverse stock split will remain unchanged or increase in proportion to the reduction in the number of shares of common stock outstanding before the reverse stock split or otherwise. Accordingly, the total market capitalization of our common stock after the proposed reverse stock split may be lower than the market capitalization before the proposed reverse stock split and, in the future, the market price of our Common Stock following the reverse stock split may not exceed or remain higher than the market price prior to the proposed reverse stock split. In some cases, the market price of a company’s shares declines after a reverse stock split.

The market price of our Common Stock will also be based on our performance and other factors, some of which are ~~duly elected~~unrelated to the number of shares outstanding. Furthermore, the liquidity of our Common Stock could be adversely affected by the reduced number of shares that would be outstanding after the reverse stock split depending on the Reverse Stock Split Ratio selected by the Board of Directors.

Authorized Shares of Common Stock

The reverse split will affect our issued and ~~qualified;~~

outstanding shares, but will not effect the number of shares of common stock the Company is authorized to issue. An increase in the number of authorized but unissued shares of Common Stock is the subject of Proposal 3 and the effect of the approval of Proposals 2 and 3 as part of the Recapitalization would be to greatly increase the number of shares that would be authorized for issuance as compared to the number of shares issued and outstanding. The reverse stock split will result in an effective increase in the number of authorized, but unissued, shares of our Common Stock, which may be construed as having an anti-takeover effect. Although we are not proposing the reverse split for this purpose, we could, subject to the Board of Director’s fiduciary duties and applicable law, issue additional shares to purchasers who might oppose a hostile takeover bid. Such a use of these shares could render more difficult, or discourage, an attempt to acquire control of the Company through a transaction opposed by our Board.

~~2. To~~

Fractional Shares

We will not issue fractional shares of our common stock in connection with the proposed reverse stock split. Instead, in the event we effect the reverse stock split, any fractional share that results from the proposed reverse stock split will be paid in cash.

Appraisal Rights

No appraisal rights are available under Delaware law or our certificate of incorporation or bylaws if you dissent from or vote against the proposal to approve the reverse stock split. Other rights or actions may exist under Delaware law for stockholders who are harmed by reverse stock splits generally. Although the nature and extent of these rights or actions are uncertain and may vary depending upon the facts or circumstances, stockholder challenges to corporate action in general are related to the fiduciary responsibilities of corporate officers and directors and to the fairness of corporate transactions.

The board of directors recommends that stockholders vote FOR Proposal 2.

PROPOSAL 3: AMEND OUR CERTIFICATE OF INCORPORATION TO INCREASE AUTHORIZED AND UNISSUED SHARES OF COMMON STOCK

Our board of directors has approved, subject to stockholder approval, an amendment to ~~the Company’s~~our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of ~~common stock~~Common Stock from 60
~~million~~85,000,000 shares to ~~85 million and to authorize our Board of Directors to file such amendment;~~

~~3. If~~215,000,000 shares. Proposal 2 ~~is approved,~~relates to ~~amend~~a proposal to effect a reverse stock split within a range of 20:1 to 100:1 of the ~~Level 8 Systems, Inc. 1997 Stock Option Plan to~~Common Stock. The approval of Proposals 2 and 3 in the Recapitalization would substantially increase the number of shares ~~available for issuance thereunder from 6,500,000~~that we may issue because the increase in authorized shares would be coupled with the reverse stock split. The effect of upon completion of the Recapitalization would be an substantial increase in the number of shares that might be issued when compared to
~~10,000,000~~ the number of shares of ~~common stock;~~

Common Stock that will be issued and outstanding.

This proposal is part of our Recapitalization. The Recapitalization is conditioned on approval of all of Proposals 2, 3 and 4. ~~To ratify the appointment of Deloitte & Touche LLP as the Company's independent accountants for the fiscal year ending December 31, 2003; and~~

~~5. To transact such other business as may properly come before the meeting and any adjournment(s) thereof. The Board of Directors is not aware~~Our implementation of any of Proposals 2, 3 or 4 is conditioned on the approval of all of Proposals 2, 3 and 4.

As of October 1, 2006, approximately 8,119,172 shares of Common Stock have not been issued nor reserved for issuance. Some of this increase in the number of authorized shares is needed in order for us to effect the Recapitalization. We have no other ~~business~~plan, arrangement or understanding to
~~be presented to~~ issue a ~~vote~~substantial amount of the ~~stockholders at the Annual Meeting.~~

~~The close of business on June 26, 2003 has been fixed as the record date for determination of stockholders entitled to notice of and to vote at the meeting.~~

~~By Order of the Board of Directors,~~

~~John P. Broderick~~

~~Chief Financial Officer and Corporate Secretary~~

~~Princeton, New Jersey~~

~~June 27, 2003~~

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE IN ORDER THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING. NO POSTAGE IS NEEDED IF MAILED IN THE UNITED STATES.

~~LEVEL 8 SYSTEMS, INC.~~

~~214 Carnegie Center; Suite 303~~

~~Princeton, New Jersey 08540~~

~~PROXY STATEMENT~~

This Proxy Statement is furnished to stockholders in connection with the solicitation by the Board of Directors of Level 8 Systems, Inc., a Delaware corporation (the “Company”), of proxies in the accompanying form for use at the Annual Meeting of Stockholders of the Company to be held at the Carnegie Center, Building 101, Princeton, New Jersey at 10:00 a.m., local time, on July 30, 2003, and at any adjournment thereof (the “Annual Meeting”). This Proxy Statement and the accompanying Notice of Annual Meeting and Form of Proxy are being mailed to the Company’s stockholders on or about June 30, 2003.

~~VOTING~~

If a proxy in the accompanying form is duly executed and returned, the shares represented thereby will be voted at the Annual Meeting and, where a choice is specified, will be voted in accordance with the specification made. Any stockholder who gives a proxy may revoke it at any time before it is exercised by giving a later proxy, by attending the meeting and voting in person or by giving notice of revocation to the Company’s Secretary. Executed but unmarked proxies will be voted “~~FOR~~” each of the director nominees and proposals described in this Proxy Statement and in accordance with the best judgment of the proxy holders on any other matter that may properly come before the meeting.

The close of business on June 26, 2003 has been fixed by the Board of Directors as the record date for the determination of stockholders of the Company entitled to vote at the Annual Meeting. As of June 26, 2003, the Company had 20,010,653additional shares of common stock ~~which are each entitled~~but these additional shares will provide us with the flexibility to ~~one vote (the “Voting Common Stock”). Additionally the Company had 10,070~~conduct our business and plan for future events. The shares could be used for such general corporate purposes as stock splits, stock dividends, incentive awards, acquisitions and similar transactions.

The additional authorized shares of ~~Series A3 Convertible Redeemable Preferred~~Common Stock, ~~30,000~~if and when issued, would be part of the existing class of Common Stock and would have the same rights and privileges as the shares of ~~Series B3 Convertible Preferred~~Common Stock ~~1,390~~presently issued and outstanding. Although the additional shares of ~~Series C Convertible Redeemable Preferred~~Common Stock would not have any effect on the rights and ~~3,505~~privileges of our existing stockholders, the issuance of additional Common Stock, other than in connection with a stock split or stock dividend, may dilute the voting power of existing stockholders. In addition, the issuance of Common Stock may decrease any earnings or loss per share and the book value attributable to shares presently issued and outstanding.

In addition, the availability of additional authorized but unissued shares of ~~Series D Convertible Preferred~~Common Stock ~~outstanding, with each holder~~could have an anti-takeover effect. Although the board of ~~such stock being generally entitled~~directors has no present intention of doing so, new shares of Common Stock could be issued without stockholder approval to ~~vote on an as-converted basis together~~dilute the percentage ownership of current stockholders, thereby increasing the cost and difficulty of obtaining control of Level 8.

If the amendment to the Amended and Restated Certificate of Incorporation is approved, it will become effective upon its filing with the ~~holders~~Delaware Secretary of State, which will occur as soon as reasonably practicable after approval of the common stock, subject to certain conversion limitations. Taking into account the relevant restrictions on conversion, the holders of Series D Preferred Stock are entitled to vote a total of 3,489,211 shares on an as-converted basis, the holders of Series C Preferred Stock are entitled to vote a total of 3,288,816 shares on an as-converted basis, the holders of Series B3 Preferred Stock are entitled to vote a total of 1,650,707 shares on an as-converted basis and the holders of the Series A3 Preferred Stock are entitled to vote 1,161,535 shares on an as-converted basis (collectively, the “Preferred Voting Stock,” and, together with the Common Voting Stock, the “Voting Stock”).

~~Collectively, for purposes of calculating the presence of a quorum and whether a particular proposal has been approved, there are a total of 29,601,922shares of Voting Stock.~~

Recapitalization.

The presence, in person or by proxy, of at least a majority of the total number of outstanding shares of capital stock entitled to vote at the Annual Meeting is necessary to constitute a quorum at the Annual Meeting. Directors are elected by a plurality of votes cast. In general, approval of any matter by our stockholders requires the affirmative vote of the holders of a majority of the outstanding shares of ~~Voting~~Common Stock ~~that are present in person or represented by proxy and~~ entitled to vote at the ~~meeting. Accordingly,~~meeting is necessary to approve this proposal. Abstentions will be treated as votes against the proposal and broker non-votes will have no effect on the voting results.

The board of directors recommends that stockholders vote FOR Proposal 3.

PROPOSAL 4: AMEND THE CONVERSION PRICES OF OUR PREFERRED STOCK AND CONVERT THOSE SHARES INTO NEW SHARES OF PREFERRED STOCK

As discussed throughout this Proxy Statement, we propose to amend the conversion prices of our existing Series A-3, B-3, C, and D preferred stock and convert each of those shares into Series A-1 preferred stock as part of our proposed Recapitalization. If the Recapitalization is approved, our current Common Stock holders would suffer substantial dilution. On a fully diluted basis, our current Common Stock holders, who own 54.6% of the Company, will own only 1.7% of the Company upon completion of the Recapitalization.

Dilution to the Common Stock will occur in large part due to (i) the automatic conversion of convertible bridge notes into shares of Common Stock; (ii) the conversion of convertible promissory notes into shares of Series A-1 preferred stock (subject to the election of the convertible promissory noteholders), (iii) the automatic exercise of existing warrants of the Company and the issuance by the Company and automatic exercise of additional warrants to investors who have recently lent funds to the Company, evidenced by senior reorganization notes, and (iv) to a lesser extent, the reduction to be effected pursuant to the Recapitalization to the conversion rates of the convertible promissory notes and existing preferred stock of the Company. The Board of Directors has asked stockholders to approve the Recapitalization because of the perceived benefits to the Company and Proposal 4 is a necessary component of that Recapitalization. The Recapitalization will not occur if the ~~increase~~Proposals, including Proposal 4, are not approved by the holders of our Common Stock. The Recapitalization is also dependent on our ability to change, through the approval of the relevant holders, the terms of our Convertible Promissory Notes, Senior Reorganization Notes and Convertible Bridge Notes.

To provide a better understanding of the effect of this proposal, in ~~reserved~~addition to the information in other parts of this Proxy Statement, we have included the following table to illustrate the current and amended conversion prices for the Convertible Promissory Notes and the current and amended conversion rates for each series of preferred stock, as well as the Common Stock equivalents for each security. Each of such securities will be converted into the number of shares of Series A-1 preferred stock that corresponds to such number of shares of Common Stock issuable upon conversion of Convertible Promissory Notes and preferred stock based on the amended conversion price and rates set forth below.

Current and Amended Conversion Prices and Rates for

Convertible Promissory Notes and Preferred Stock

Security	Amount Invested		Current Conversion Price		Common Stock Issuable Pre-Capitalization		Amended Conversion Price		Common Stock Issuable Post -Capitalization Pre-Reverse Stock Split		Common Stock Issuable Post Reverse Stock Split 20:1		Common Stock Issuable Post Reverse Stock Split 100:1
Convertible Promissory Notes	$	150,000	$	0.37		405,405	$	0.026		5,769,231		288,462		33,231
Convertible Promissory Notes	$	185,000	$	0.32		578,125	$	0.023		8,043,478		402,174		80,938
Convertible Promissory Notes	$	125,000	$	0.28		446,429	$	0.02		6,250,006		312,500		62,500
Convertible Promissory Notes	$	112,000	$	0.20		560,000	$	0.014		8,000,000		400,000		78,400
Convertible Promissory Notes	$	15,320	$	0.17		90,118	$	0.012		1,276,667		68,833		12,617
Convertible Promissory Notes	$	125,000	$	0.16		781,250	$	0.011		11,363,636		568,182		113,636
Convertible Promissory Notes	$	100,000	$	0.10		1,000,000	$	0.0025		40,000,000		2,000,000		400,000
Convertible Promissory Notes	$	150,000	$	0.08		1,875,000	$	0.002		75,000,000		3,750,000		750,000
Convertible Promissory Notes	$	30,000	$	0.07		428,571	$	0.005		6,000,000		300,000		60,000
Series A-3 preferred stock	$	1,571,000	$	8.33		188,528	$	3.50		448,857		22,443		4,489
Series B-3 preferred stock	$	30,000,000	$	12.53		2,394,063	$	4.00		7,500,000		375,000		75,000
Series C preferred stock	$	991,000	$	0.38		2,607,895	$	0.25		3,964,000		198,200		39,640
Series D preferred stock	$	1,060,520	$	0.32		3,314,125	$	0.20		5,302,600		265,130		53,026

Current conversion prices reflect then-current market prices, with the exception of the Series A-3 and B-3 preferred stock, whose conversion rates were reduced in 2002 to then-current market prices in consideration of waiving anti-dilution protection in respect of certain capital raises. The current conversion prices for the Convertible Promissory Notes were determined by the board of directors by reference to the fair market value on the date of issue. The new conversion prices with respect to the Series A-3, B-3 and D preferred stock were negotiated with the holders of each series based upon such factors as the current conversion price in relation to the market, the dollar amount represented by such series and, waiver of anti-dilution, liquidation preferences, seniority and other senior rights. The conversion price for the Series C preferred stock was determined in relation to the conversion price for the Series D preferred stock. The board of directors determined the new 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 present holders of preferred stock. Among those rights being waived are anti-dilution protection, liquidation preferences and seniority. The conversion price for the Convertible Promissory Notes was reduced, based on such negotiations, to approximately one-fourteenth of the current conversion prices. One of the goals of the negotiations was to encourage the holders of Convertible Promissory Notes of Level 8 to convert in order to minimize liquidity issues after the recapitalization merger - now the Recapitalization.

The conversion price for the Convertible Bridge Notes was determined by the board of directors based on a pre-money valuation of Level 8 of $1,500,000, an amount in excess of the then-current market capitalization of Level 8, and an offering size of $1,000,000 (later extended to $2,250,000). However, since the recapitalization merger did not occur by October 31, 2005 or December 31, 2005, Level 8 agreed that the pre-money valuation of $1,500,000 would be lowered to $1,250,000 and $1,000,000, respectively, reducing the conversion price of the initial Convertible Bridge Notes to $0.00125.

Impact of Changes in Capital Structure. As a result of the automatic conversion of Convertible Bridge Notes into shares of Common Stock, the automatic exercise of existing warrants of Level 8 and the issuance by Level 8 and exercise of Additional Warrants and, to a lesser extent, the conversion of Level 8 convertible Promissory Notes and preferred stock into Series A-1 preferred stock at the conversion rates set forth above, the holders of Common Stock will suffer substantial dilution in their holdings.

The table below illustrates (i) the number of shares of Level 8 Common Stock or common equivalents and the percentage of equity held by holders of each class of security of Level 8, and by each person known to Level 8 to be the beneficial owner of 5% or more on a common equivalent basis prior to the Recapitalization (ii) the number of shares of Level 8 Common Stock or common equivalents and the percentage of equity held by holders of each class of security of Level 8, and by each person known to Level 8 to be the beneficial owner of 5% or more on a common equivalent basis if the Recapitalization is approved as proposed, and (iii) the number of shares of Common Stock or common equivalents held by holders of each class of security, and by each person known to Level 8 to be the beneficial owner of 5% or more of Level 8, on a common equivalent basis if the Recapitalization is approved as proposed.

	Ownership of Each Class of Security of Level 8 Using Current Conversion Rates					Ownership of Each Class of Security of Cicero Giving Effect to Recapitalization
	% Outstanding(1)			Number of Shares Outstanding		% Outstanding(1)(2)			Number of Shares Outstanding 20:1 (2)		Number of Share Outstanding 100:1 (2)

Common Stock - issued and outstanding		52.9	%		48,039,947		1.7	%		2,401,997		480,399
Common stock authorized for payables							0.3	%		404,500		80,900
Series A-1 Preferred Stock (1)							0.6	%		860,773		172,155
Series A-3 Preferred Stock		0.2	%		188,528
Series B-3 Preferred Stock		2.6	%		2,394,063
Series C Preferred Stock		2.9	%		2,607,895
Series D Preferred Stock		3.7	%		3,314,125
Senior Reorganization Notes		10.9	%		9,890,203		14.5	%		19,854,867		3,970,971
Early Adopter Warrants(3)							0.7	%		1,005,562		201,112
Non-lenders Warrants (4)		13.5	%		12,295,154		0.4	%		614,758		122,952
Stock Options (5)		6.5	%		5,900,897		0.4	%		551,000		110,200
Convertible Bridge Notes (6)							75.5	%		109,826,753		21,965,351
Convertible Promissory Notes		6.8	%		6,164,898		5.8	%		7,956,606		1,591,321
Total		100	%		90,795,710		100	%		143,476,816		28,695,361
Brown Simpson Partners I, Ltd.		6.5	%		5,936,921		4.3	%		6,143,363		1,228,673
Liraz Systems, Ltd.		7.0	%		6,426,869		0.5	%		715,789		143,158
Landis, Mark & Carolyn		10.8	%		9,954,575		17.5	%		25,087,261		5,017,452
Pizi, Anthony (7)		4.6	%		4,207,497		4.9	%		7,016,334		1,403,266
Broderick, John(6)		1.2	%		1,099,200		*			71,627		14,325
Atherton, John W.		-			-		0.5	%		744,928		148,986
Hasenyager, Bruce(7)		0.1	%		100,000		0.1	%		167,425		33,485
Kingley, Jay(7)		0.1	%		100,000		*			5,000		1,000
Miller, Bruce		0.8	%		705,629		3.9	%		5,609,202		1,121,840
Percelay, Bruce		-			-		3.6	%		5,136,364		1,027,273
Porciello, Charles		-			-		0.3	%		400,000		80,000
All current directors and executive officers as a group (9 persons)		17.6	%		16,166,901		30.8	%		44,238,141		8,847,626

(1)	Includes 22,443 shares of converted Series A3, 375,000 shares of converted B3, 198,200 shares of converted C and 265,130 shares of converted D.

(2)	The percentage and number of shares outstanding were computed based on the amount of the security to be converted into equity of Cicero due to the Recapitalization divided by the conversion rate applicable to such security.

(3)	The 1,005,562 Early Adopter Warrants are a part of the Senior Reorganization Notes, but are not automatically exercised upon agreement of the Recapitalization.

(4)	Warrants held by those who did not advance the exercise price of their warrants in exchange for Senior Reorganization Notes.

(5)	Includes all options granted and reserved for grant under Level 8’s stock option plan.

(6)	Convertible Bridge Notes in the amount of $2,779,137, convert into common shares of the Company only upon consummation of the Recapitalization. The conversion rates range from $0.00125 to $0.00133.

(7)	Includes 1,833,300 shares subject to stock options for Mr. Pizi, 1,099,200 shares subject to stock options for Mr. Broderick, and 100,000 shares subject to stock options each, for Messrs. Hasenyager and Kingley. All stock options are exercisable within sixty (60) days.

For further information concerning the effects of the changes to conversion rates and the Recapitalization with respect to affiliates, please see “Interest of Certain Persons in or Opposition to Matters to be Acted Upon.”

Note and Warrant Offering. From July 2004 to April 2005, Level 8 issued Senior Reorganization Notes in the aggregate principal amount of $2,559,000 to Senior Reorganization Noteholders who had loaned funds to Level 8 in exchange for Senior Reorganization Notes and Additional Warrants pursuant to the December and March Note and Warrant Offerings at a special one-time exercise price of $0.10 per share. When issued, the Senior Reorganization Notes were designed to yield warrants upon the approval of the recapitalization merger. However, due to the change in structure to the Recapitalization, the holders of the Senior Reorganization Notes are being asked to amend the “trigger” to the effectiveness of the Recapitalization, If so approved, upon the approval of the Recapitalization, Senior Reorganization Noteholders (i) will receive and have automatically exercised Additional Warrants exerciseable into shares of Common Stock, by applying the accrued interest on their Senior Reorganization Notes and by cashless exercise to the extent of the balance of the exercise price, (ii) if a holder of existing warrants who advanced the exercise price of their warrants to Level 8, will have their existing warrants automatically exercised and (iii) those Senior Reorganization Noteholders who loaned Level 8 the first $1,000,000 in respect of the exercise price of their existing warrants will receive Early Adopter Warrants of Level 8 at a ratio of 2:1 for shares issuable upon exercise of each existing warrant exercised at the special exercise price of $0.10 per share. The number of shares of Common Stock to which the Early Adopter Warrants are exercisable will be 0.05 of the number of shares of Level 8 Common Stock to which they are exercisable and the strike price of the Early Adopter Warrants will be $2.00 per share. As part of the Recapitalization, the Senior Reorganization Notes will be cancelled.

For information with respect to the participation in such offerings by certain directors and executive officers, see “Interest of Certain Persons in or Opposition to Matters to be Acted Upon.”

Convertible Promissory Notes. Level 8 has issued $992,320 aggregate principal amount of Convertible Promissory Notes. As of the date of this Proxy Statement, holders of $947,320 or 95.5% aggregate principal amount of the notes have agreed to convert their notes into shares of Series A-1 preferred stock upon the consummation of the Recapitalization. The approval of the holders of the other Convertible Promissory Notes will be sought after the Recapitalization. The conversion prices of all of the Convertible Promissory Notes converted will be reduced in connection with the Recapitalization by 1/14 of the prior conversion price. If all of the holders of all of the Convertible Promissory Notes convert their notes into shares of Series A-1 preferred stock, 7,956,606 shares of Common Stock of the Company will be issuable upon conversion of the shares of Series A-1 preferred stock into which the Convertible Promissory Notes are converted. The table preceding these paragraphs assumes the holders of the Convertible Promissory Notes will convert all of their notes.

Level 8 has entered into agreements with respect to the Convertible Promissory Notes with a variety of private lenders at various times. In 2004, Mark and Carolyn Landis purchased a total of $500,000 of convertible promissory notes at interest rates of 1% per month and are convertible upon the option of the noteholder into 4,102,679 shares of our Common Stock at conversion prices of $0.08 - $0.28 per share. Mr. Landis is chairman of our Board of Directors. Also in 2004, Mr. Anthony Pizi, Chief Information Officer and son-in-law to Mr. and Mrs. Landis purchased a total of $227,320

of convertible promissory notes at interest rates of 1% per month, convertible upon the option of the noteholder into 920,388 shares of our Common Stock at conversion prices of $0.17 - $0.20 per share. In April 2005, Mr. Bruce Miller, a member of our Board of Directors effective July 22, 2005, purchased $30,000 of Convertible Promissory Notes at interest rates of 1% per month, convertible upon the option of the noteholder into 428,571 shares of our Common Stock at a conversion price of $0.07 per share. In May 2004, Level 8 sold Convertible Promissory Notes aggregating $185,000 to several investors including a former member of the Company’s board of directors. Under the terms of these Convertible Promissory Notes, the notes bear interest at a rate of 1% per month and are convertible upon the option of the noteholder into an aggregate of 578,125 shares of Level 8 Common Stock and existing warrants to purchase an aggregate of 578,125 shares of Common Stock exercisable at $0.30 per share. In May 2004, Level 8 entered into agreements with respect to $50,000 Convertible Promissory Notes to private lenders. Under the terms of the Convertible Promissory Notes, the notes bear interest at 1% per month and are convertible upon the option of the noteholder into 135,135 shares of Level 8 Common Stock and existing warrants to purchase 135,135 shares of Level 8 Common Stock at an exercise price of $0.37 per share. The existing warrants expire three years from the date of grant.

For information with respect to the participation in such offerings by certain directors and executive officers, see “Interest of Certain Persons in or Opposition to Matters to be Acted Upon.”

Convertible Bridge Notes/Consortium Offering. Through July 2006, Level 8 issued $2,779,000 aggregate principal amount of 10% senior unsecured Convertible Bridge Notes due on the effective date of the recapitalization merger, but in any event, no later than November 1, 2006 as part of a series of Consortium Note Offerings. In addition, the Company may issue additional Convertible Bridge Notes as may be necessary for working capital purposes. When issued, the Convertible Bridge Notes were designed to convert upon the approval of the recapitalization merger. However, due to a change in structure to the Recapitalization, the holders of Convertible Bridge Notes are being asked to amend the “trigger” to the effective time of the Recapitalization. If so approved, upon the effectiveness of the Recapitalization, the Convertible Bridge Notes will automatically convert, to the extent of the principal and accrued interest then due and owing, into shares of Common Stock at conversion prices ranging from $0.00125 to $0.00133 prior as part of the Recapitalization. As a result, the $2,779,000 principal amount of Convertible Bridge Notes will be convertible into approximately 2,196,535,054 shares of Common Stock prior to the Reverse Stock Split Ratio.

In addition to the conversion set forth above, the Convertible Bridge Noteholders have certain immediate rights, including (i) to nominate a majority of the candidates to the Board of Directors; (ii) to create an Advisory Board to assist in the development of our policy and strategy for implementation by the board of directors and management; and (iii) to effect certain changes in management, including requiring the Company to launch a search for a highly qualified software executive to assume the permanent position of chief executive officer as financial conditions permit. As a result of the Consortium Note Offering, the Company will also be required by the Convertible Bridge Noteholders to develop a program to reduce operating expenses by approximately twenty (20%) from the levels existing prior to the Consortium Note Offering. The Company has already met this requirement. In addition, the Company will be required by the Convertible Bridge Noteholders to create an equity set-aside for incentivizing management of no less than 10% of the total shares outstanding on a fully diluted basis after completion of the Recapitalization. In the event the recapitalization merger was not declared effective by October 31, 2005, Level 8 agreed that the pre-money valuation of Level 8 of $1,500,000 be lowered to $1,250,000. In the event the recapitalization merger was not completed prior to December 31, 2005, the pre-money valuation of Level 8 then in place of $1,250,000 would be lowered to $1,000,000, and then if the Recapitalization is subsequently consummated, the conversion of the Convertible Bridge Notes would be reduced to $0.00125.

For information with respect to the participation in such offering by certain directors and executive officers, see “Interest of Certain Persons in or Opposition to Matters to be Acted Upon.”

Additional shares to be issued as a result of the Recapitalization. Upon approval of the Recapitalization, the Company has agreed to issue common shares as payment for services related to the Recapitalization. The Company has verbally agreed with Lemery Greisler LLC, its former legal advisor, that part of its legal fees incurred and directly attributable to the Recapitalization would be paid in Common Stock after the Recapitalization is effective. Specifically, under the ~~option plan~~terms of the agreement, the Company has agreed to issue 50,000 shares of Common Stock upon effectiveness of the Recapitalization, in respect of consultation concerning and preparation of filings made by and related documents for its Cicero subsidiary to effect the reorganization merger described under “THE RECAPITALIZATION - Background of the Recapitalization.” Additionally, the Company has agreed as part of the Recapitalization to award Brown Simpson Partners

I, Ltd. the sum of 50,000 shares of Common Stock as their compensation for providing financial advisory services, including with respect to, the structure and negotiation of the Recapitalization. For more information regarding the services provided by Brown Simpson, please see “The Recapitalization-Background of the Recapitalization.” The Company has also agreed to issue 125,400 shares of Common Stock, and 180,000 warrants at $0.04 per share, to the guarantor of our bank debt, pursuant to an existing agreement which requires that the Company pay down the outstanding bank debt by an amount equal to ten percent (10%) of equity raised, arising from the equity raised in connection with the conversion of the Senior Reorganization Notes.

Changes in Management. The Recapitalization will not result in any change in headquarters, business, jobs, management, location of any of our offices or facilities, number of employees, taxes, or assets, (other than as a result of the costs incident to the Recapitalization). None of our subsidiaries will be changing their capitalization in connection with the Recapitalization. There will be no new employment agreements for executive officers or other direct or indirect interest of the current directors or executive officers of Level 8 as a result of the Recapitalization.

Change in Name. The Recapitalization will effect a change in the name of the Company to Cicero, Inc. Level 8 has decided to change its name to Cicero in order have the same name as Level 8’s primary software product, Cicero. This will allow Level 8 to take advantage of the marketing campaign that has been undertaken utilizing the “Cicero” name. The name changeto Cicero will eliminate confusion and will reflect the change in Level 8’s business focus.

Conditions to the Recapitalization

Stockholder Approvals. The approval of the Recapitalization requires the favorable vote of (i) the holders of a majority of voting power of the issued and outstanding shares of Level 8 Common Stock and Series A-3, B-3, C and D preferred stock (each voting on an as-converted basis) entitled to vote thereon, voting together as a single class, (ii) the holders of at least two-thirds of the issued and outstanding shares of Series D preferred stock entitled to vote thereon, voting as a single class with respect to the conversion into shares of Series A-1 preferred stock at the reduced conversion rates and the ~~ratification~~entire Recapitalization and (iii) the holders of at least 85% of the ~~appointment~~issued and outstanding shares of ~~independent accountants~~Series A-3, B-3 and C preferred stock entitled to vote thereon, each ~~requires~~voting as a single class with respect to the conversion into shares of Series A-1 preferred stock at the reduced conversion rates and together as a single class with respect to the entire Recapitalization.

As of June 30, 2006, the directors and executive officers of Level 8 and their affiliates together own about 2.0% of Level 8 voting stock, including 0.9% of Common Stock outstanding, 1.1% of Level 8 Series C preferred stock.

Regulatory Approvals. To the Company’s knowledge, the only required regulatory or governmental approval or filing necessary in connection with the consummation of the Recapitalization will be the filing of the Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware.

Required Votes. The consummation of the Recapitalization is subject to receipt of the following approvals: (i) each holder of Senior Reorganization Notes shall approve an amendment to such holder’s Senior Reorganization Notes amending the triggering event of the conversion of the notes from approval of the recapitalization merger agreement to the effectiveness of the Recapitalization and amending the Early Adapter Warrants so that they are warrants to purchase shares of Common Stock of the Company, (ii) a majority of the holders of the Convertible Bridge Notes shall approve an amendment to all Convertible Bridge Notes amending the triggering event of the conversion of the notes from approval of the recapitalization merger agreement to the effectiveness of the Recapitalization and amending the conversion feature so that such Notes are convertible into shares of Series A-1 preferred stock of the Company, and (iii) a majority of the holders of Convertible Promissory Notes shall approve an amendment to all Convertible Promissory Notes amending the conversion feature so that such Notes are convertible into shares of Series A-1 preferred stock of the Company. Because of the relatively few numbers of holders of each of the Convertible Promissory Notes, Senior Reorganization Notes and Convertible Bridge Notes, we will likely solicit their approval by means of a consent obtained through personal contact with our executive officers or directors. However, we do not yet have a formal plan in place as to how this solicitation will occur although we expect to solicit these holders between the date of mailing of this Proxy Statement and the date of the special meeting in order to effect the Recapitalization as soon as possible thereafter if all approvals are obtained. Because the Recapitalization is conditioned on these approvals, our failure to obtain a necessary approval will prevent the consummation of the Recapitalization. If the necessary approvals are not obtained, we will have to consider what additional action we can take to recapitalize Level 8. As a result of our need to promptly consummate the Recapitalization because of our financial condition, it is expected that the Recapitalization will be effected within a few weeks of stockholder approval. Our failure to consummate the Recapitalization within that time will most likely mean that our effort has failed.

Effective Time

If approved by the requisite vote of Level 8 stockholders, it is anticipated that the Recapitalization will become effective at the time of the filing of the Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware. Upon approval of the requisite vote of Level 8 Stockholders, the Company would file in the following order with the Secretary of State of Delaware: the Certificate of Designations, Preferences and Rights of the Series A-1 Preferred Stock, a Certificate of Amendment to each of the Series of preferred stock to amend the conversion price of each series of preferred and to provide for their conversion into Series A-1 preferred stock, and the filing of the Amended and Restated Certificate of Incorporation. Please see Annex A for the proposed Certificate of Designations, Preferences and Rights of the Series A-1 Preferred Stock, Annex B for the proposed Certificate of Amendment to each series of preferred stock and Annex C for the Amended and Restated Certificate of Incorporation.

Dissenter’s Rights of Appraisals

Shareholders of the Company will not be entitled to appraisal or dissenters rights under the laws of the State of Delaware by virtue of the actions proposed pursuant to this Proxy Statement.

Listing

Following the Recapitalization, the Company intends to make application to change the name under which its Common Stock is listed on the OTCBB to “CCRO.”

Dividend Policy

We have never declared or paid any cash dividends on our Common Stock. We anticipate that all of our earnings will be retained for the operation and expansion of our business and do not anticipate paying any cash dividends for Common Stock in the foreseeable future.

Disclosure of Commission Position on Indemnification for Securities Act Liabilities

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

Exchange of Stock Certificates and Payment of Fractional Shares

If the Recapitalization is approved by our stockholders and the board of directors continues to believe that the Recapitalization is in the best interests of Level 8 and our stockholders, the reduction in the number of our shares of common and preferred stock that you hold will occur automatically on the date that we file the Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware without any further action on your part. As soon as practicable after the effective date of the Recapitalization, our transfer agent, American Stock Transfer, will mail transmittal forms to each holder of record of certificates representing the number of shares of our common and preferred stock that you previously held prior to the effectiveness of the Recapitalization.

After receipt of a transmittal form, you should surrender your old certificates and will receive in exchange certificates representing the number of shares of Common Stock that you will then hold. No stockholder will be required to pay a transfer or other fee to exchange his, her or its certificates. Stockholders should not send in certificates until they receive a transmittal form from Level 8’s transfer agent. In connection with the Recapitalization, our Common Stock will change its current CUSIP number. This new CUSIP number will appear on any new stock certificates issued representing shares of our post-Recapitalization Common Stock.

Common Stock Fractional Shares

If your number of shares of post-Recapitalization Common Stock includes a fraction, we will pay you, in lieu of issuing fractional shares, a cash amount (without interest) equal to the fair market value of such fraction of a share which would otherwise result from the Recapitalization, based upon the average of the closing bid prices of our Common Stock as reported on OTCBB during each of the five (5) trading days preceding the effective date of the Recapitalization. This cash payment represents merely a mechanical rounding off of the fractions resulting from the reverse split, and is not a separately bargained-for consideration. Similarly, no fractional shares will be issued on the exercise of our options, except as otherwise expressly specified in the documents governing such options.

As of the effective date of the Recapitalization, each certificate representing pre-Recapitalization shares of Common Stock of Level 8 will, until surrendered and exchanged as described above, be deemed cancelled and, for all corporate purposes, will be deemed to represent only the number of post-Recapitalization shares of Common Stock of the Company and the right to receive the amount of cash for any fractional shares as a result of the Recapitalization. It is very important for you to note that you will not be entitled to receive any dividends or other distributions payable by us after the Recapitalization is effective until you surrender and exchange your certificates. If we issue and pay any dividends or distributions, these amounts will be withheld, accumulate and be paid to you, without interest, once you surrender your

certificates for exchange. Level 8 does not currently anticipate making any dividend distributions in the foreseeable future.

Effect of Not Obtaining the Required Approval

If the Recapitalization fails to obtain the requisite approval, the Recapitalization will not be consummated and Level 8 will retain its existing capital structure. Additionally, the Additional Warrants and Early Adopter Warrants will lapse and not be exercisable. The Convertible Bridge Notes, Senior Reorganization Notes and convertible promissory notes will remain liabilities of Level 8. The board of directors assumes that the Senior Reorganization Noteholders will demand payment of the Senior Reorganization Notes if the Recapitalization is not approved.

Rights and Preferences of Series A-1 Preferred Stock

The holders of the Series A-1 preferred stock shall have the rights and preferences set forth in the Certificate of Designations to be filed with the Secretary of State of the State of Delaware upon the approval of the Recapitalization. The rights and interests of the Series A-1 preferred stock of the Company will be substantially similar to the rights interests of each of the series of 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 material terms of the new Series A-1 preferred stock of the Company are described below. Such description is not intended to be a complete description of the Series A-1 preferred stock of the Company. This description is qualified by reference to the form of the Certificate of Designations Preferences and Rights of Series A-1 Convertible Preferred Stock which is attached as Annex A, which is incorporated by reference in this Proxy Statement. You are urged to read the Certificate in its entirety. For a comparison of the rights of the existing preferred shares and the new Series A-1 Preferred Stock, see “—Comparison of Preferred Stockholder Rights Before and After the Recapitalization.”

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 a 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 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. As 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.

Comparison of Preferred Stockholder Rights Before and After the Recapitalization

The following is a comparison of the rights and preferences of the Level 8 Series A-3, B-3, C and D preferred stock, to the rights and preferences of Series A-1 preferred stock. The summary below is not intended to be relied upon as an exhaustive list of all differences or a complete description of the differences, and is qualified in its entirety by reference to our certificate of incorporation, applicable certificates of Designations and our bylaws.

Series A-3, B-3, C and D preferred stock		Series A-1 preferred stock

Voting Rights		Voting Rights

The holders of Common Stock and holder of each of the series of preferred stock are entitled to vote together jointly on all matters. Holders of preferred stock are entitled to a number of votes equal to the number of shares of Company Common Stock into which the preferred stock is convertible. So long as any shares of the preferred stock are outstanding, the approval of the holders of at least two-thirds (85% in the case of the Series A-3, B-3 and C preferred stock) and two-third (66% in the case of the Series D) of the outstanding shares of every series of preferred stock voting together as an individual class (and with respect to the altering of rights of a particular series of preferred stock, such series shall only vote if that particular series is affected) will be required in order for the Company to:		The holders of Common Stock and holders of the Series A-1 preferred stock are entitled to vote together jointly on all matters except as provided in the following paragraphs. Each of the holders of preferred stock is entitled to a number of votes equal to the number of shares of Common Stock into which the preferred stock is convertible. Until the closing by the Company of an additional $5,000,000 equity financing from institutional investors, approval of the holders of at least two-thirds of the outstanding shares of the Series A-1 preferred stock voting together separately as a class will be required for:

a) alter or change the rights, preferences or privileges of any series of the preferred stock; b) alter or change the rights, preferences or privileges of any capital stock of the Company so as to affect adversely any series of the preferred stock; c) create any securities that are superior in rank to any series of preferred stock; d) create any securities that are pari passu in rank to any series of preferred stock; e) increase the authorized number of shares of any series of preferred stock; f) issue any shares of securities that are superior		a) a merger, sale of all, or substantially all of the assets or intellectual property, recapitalization, or reorganization of the Company; b) the authorization or issuance of any equity security having any right, preference or priority superior to or on parity with the Series A-1 preferred stock. (excluding debt not convertible into any such senior or pari passu equity security); c) the redemption, repurchase or acquisition, directly or indirectly, through subsidiaries or otherwise, of any equity securities (other than the repurchase of equity securities of the Company at cost upon termination of employment or service pursuant to vesting agreements or stockholder agreements or a

or pari passu in rank to any series of preferred stock; g) issue any shares of preferred stock other than pursuant to the stock purchase agreement applicable to any particular series of preferred stock; h) redeem, or declare or pay any cash dividend or distribution on any securities that are junior in rank to any series of preferred stock; i) increase the par value of the Common Stock; j) issue any debt securities that would have any preference over any series of preferred stock upon the liquidation of the Company; k) cause the Company to issue securities such that it would exceed the issuance cap set forth in the certificate of Designations for each of the Series A-3 and B-3 preferred stock; or l) issue, grant or sell, or be deemed to have issued, granted or sold, any shares of Common Stock, or options, rights or warrants to purchase Common Stock at a price per share less than the conversion price then applicable to such series of preferred stock.		repurchase of the Series A-1 preferred stock) or the payment of dividends or other distributions on equity securities by the Company (other than on the Series A-1 preferred stock); d) any amendment or repeal of any provision of the Company’s certificate of incorporation or by-laws that would adversely affect the rights, preferences or privileges of the Series A-1 preferred stock; e) a significant change in the principal business of the Company as conducted by the Company at the time of the consummation of the closing of the Recapitalization; f) the making of any loan or advance to any entity other than in the ordinary course of business unless it is wholly owned by the Company; g) the making of any loan or advance to any person, including, without limitation, any employee or director of the Company or any subsidiary, except advances and similar expenditures in the ordinary course of business or under the terms of an employee stock or option plan approved by the board of directors; or h) the guarantee, directly or indirectly, of any indebtedness or obligations, except for trade accounts of any subsidiary arising in the ordinary course of business.

		The holders of a majority of the outstanding shares of the Series A-1 preferred stock shall be entitled to appoint two board observers who shall be entitled to receive all information received by the board of directors and to attend and participate without vote at meetings of the board of directors and its committees. At the option of the holders of a majority of the outstanding shares of the Series A-1 preferred stock, the holders of the Series A-1 preferred stock may temporarily or permanently exchange their board observer rights for two seats on the board of directors, each having one vote.

Board of Directors		Board of Directors

The holders of Common Stock and the holders of each of the series of preferred stock are entitled to vote together jointly to elect directors. A plurality of the votes of the shares present in person or represented by proxy at a meeting and entitled to vote for directors is required in order to elect a director.		The holders of Common Stock and the holders of the Series A-1 preferred stock are entitled to vote together jointly to elect directors. A plurality of the votes of the shares present in person or represented by proxy at a meeting and entitled to vote for directors is required in order to elect a director. The holders of the Series A-1 preferred stock shall be entitled, upon their election to do so, to elect two directors of the board of directors by a plurality of the votes of the shares present in person or represented by proxy at a meeting and entitled to vote for directors, voting separately as a class. Because the Company did not have aggregate .

		consolidated revenues of more than $1,500,000 as reflected on its financial statements for the six months ended December 31, 2004, the holders of the Series A-1 preferred stock would have had the right, but not the obligation, to elect a majority of the voting members of the board of directors. However, upon approval of the Recapitalization, such right of holders of the Series A-1 preferred stock to elect the majority of the board shall terminate as part of the Recapitalization

Dividends		Dividends

The holders of Series C and D 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 Series A-3 and B-3 preferred stock are not entitled to dividends unless declared by the board of directors.		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.

Redemption		Redemption

Series A-3, B-3 and C preferred stock is redeemable at the option of the Company at a redemption price of the original per share issuance price plus declared and unpaid dividends, if the following conditions are met: (i) less than 5% of the originally issued shares of that particular series are outstanding, and (ii) the price per share of the Company’s Common Stock is greater than $5.00 for Series C, $16.00 for Series A-3, and $25.06 for Series B-3 for at least 20 trading days. Series D preferred stock is redeemable at the option of the holder under certain circumstances such as bankruptcy, merger or change of control at a redemption price calculated pursuant to a formula set forth in the Certificate of Designations for the Series D preferred stock.		The Series A-1 preferred stock is not redeemable.

Conversion		Conversion

Series A-3, B-3, C and D preferred stock are each convertible at any time at the option of the holder. The initial conversion prices for each series are: Series A-3 $3.50 previously reduced from $8.333 per share; Series B-3 $4.00 previously reduced from $12.531 per share; Series C $.25 previously reduced from $0.38 per share; and Series D $.20 previously reduced from $0.32 per share.		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 of the Company 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 of the Company. The Series A-1 preferred stock is also convertible on a 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.

Anti-Dilution Protection		Anti-Dilution Protection

The Series C preferred stock conversion price shall be adjusted upon any dividends, stock splits, reverse stock splits, and the issuance by the Company to all common stockholders of rights to purchase Common Stock at a lower price than the conversion price, or the issuance to all common stockholders of any indebtedness or assets or rights to purchase any securities. The Series A-3 and B-3 preferred stock conversion price shall be adjusted upon any dividends, stock splits, reverse stock splits, and the issuance by the Company to all common stockholders of rights to purchase Common Stock at a lower price than the conversion price, or the issuance to all common stockholders of any indebtedness or assets or rights to purchase any securities. In addition, the conversion price shall be adjusted in the event that any Common Stock is sold at a lower price than the conversion price. The Series D preferred stock conversion price shall be adjusted upon any dividends, stock splits, reverse stock splits, merger, consolidation or other corporate changes, and the issuance by the Company to all common stockholders of distributions or spin-offs, or the issuance to all common stockholders of any rights to purchase the Company’s Common Stock.		The initial conversion ratio shall be adjusted in the event of any stock splits, stock dividends and other recapitalizations of the Company.

Liquidation Preference		Liquidation Preference

The holders of each series of preferred stock are entitled to a liquidation preference of $1,000 per share of preferred stock upon the liquidation of Level 8.		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.

Other Rights		Other Rights

The holders of Series A-3 and B-3 preferred stock are also entitled to receive warrants to purchase Common Stock upon either a subsequent financing or a loan from an unaffiliated lender. In addition, the occurrence of certain events will trigger a 14% per annum dividend that will accrue until such events are cured. Until the second anniversary of the issuance date of the Series D preferred stock, the holders of the Series D preferred stock have rights to participate on a pro rata basis in any subsequent issuances of securities by the Company, including common and preferred stock.		The holders of the Series A-1 preferred stock are not entitled to any additional rights except as may be set forth in the Certificate of Designation.

Dilutive Effects of Preferred Shareholdings		Dilutive Effects of Preferred Shareholdings

The Series A-3 and B-3 preferred stock conversion price shall be adjusted upon any dividends, stock splits, reverse stock splits, and the issuance by the Company to all common stockholders of rights to purchase Common Stock at a lower price than the conversion price, or the issuance to all common stockholders of any indebtedness or assets or rights to purchase any securities. In addition, the conversion price shall be adjusted in the event that any Common Stock is sold at a lower price than the conversion price.		The initial conversion ratio shall be adjusted in the event of any stock splits, stock dividends and other recapitalizations of the Company. No other anti-dilution protection is afforded the Series A-1 holders.

Under current conversion rates, holders of Series A-3, B-3, C and D preferred shares are eligible to receive 8,504,610 shares of the Company’s common stock. There are no current provisions entitling any class of preferred shareholdings or collective class of preferred shareholdings to any representation on the Company’s Board of Directors.		Under the amended conversion rates, post recapitalization, these same holders will be entitled to receive 860,773 shares of Cicero common stock. The holders of the Series A-1 preferred stock shall be entitled, upon their election to do so, to elect two directors of the board of directors by a plurality of the votes of the shares present in person or represented by proxy at a meeting and entitled to vote for directors, voting separately as a class.

Par Value of Capital Stock; Surplus; Capital

The additional paid in capital of the Company will be increased by $1,061,000 following the consummation of the Recapitalization and this is attributable to the conversion of the remaining shares of Level 8 Series D preferred stock into shares of Series A-1 preferred stock. The redemption provisions of the Level 8 Series D preferred stock are being waived as part of the Recapitalization and the accounting for the Level 8 Series D preferred stock as mezzanine financing is no longer applicable.

Under the terms of the Note and Warrant Offering, the Senior Reorganization Noteholders will receive additional warrants which will be automatically cashlessly exercised for 19,360,959 shares of Common Stock by applying the difference between the $0.002 exercise price and the average trading price of the Common Stock for the three days prior to the effective date of the Recapitalization. In addition, certain Senior Reorganization Noteholders exercised existing warrants that will convert to 582,010 shares of Common Stock. The Company will be required to allocate the proceeds received from the Note and Warrant Offering between the warrants exercised and the future warrants granted. We will employ the Black-Scholes valuation method to determine the fair value of the warrants exercised and the additional warrants issued. The Note and Warrant Offering amounted to approximately $2,559,000. Of that amount, approximately $979,000 represents the exercise price of existing warrants that was loaned to the Company for which the warrant 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 warrants granted to this tranche is approximately $359,000. The difference between the fair value of the additional warrants and the total invested in this tranche or $620,000 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 has determined that the fair value of the warrants granted to this tranche is approximately $33,000 and the beneficial conversion amount is $74,000. 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 $1,473,000. Using Black Scholes, the Company has determined that the fair value of the warrants granted to this tranche is approximately $665,000 and the beneficial conversion amount is $808,000. Based upon the allocation of the proceeds, we believe that the effective conversion price of the stock will be less than the fair value of the Company’s Common Stock on the date of issuance. Since this beneficial conversion feature

is immediately convertible upon issuance, the Company will fully amortize this beneficial conversion feature on the date of issuance.

Vote Required for Proposal 4

The affirmative vote of the holders of a majority of the outstanding shares of ~~Voting~~Common Stock ~~that are present in person or represented by proxy and~~ entitled to vote at the ~~meeting. However, Proposal 2, the amendment~~meeting is necessary to the Company’s Certificate of Incorporation to increa se the number of authorized shares of Common Stock, will require the affirmative vote of the majority of the issued and outstanding shares of Voting Common Stock voting as a single class and the affirmative vote of the majority of the Voting Stock. Since the Company does not have sufficient available shares of Common Stock to implement Proposal 3, the Board of Directors is seeking approval of both Proposals 2 and 3. If Proposal 2 is passed and Proposal 3 is not, the Board will likely increase the authorized shares, but will not increase the shares available under the Stock Option Plan. If Proposal 2 does not pass, the Board of Directors cannot increase the number of shares reserved under the Stock Option Plan and, accordingly, Proposal 3approve this proposal. Abstentions will be ~~abandoned even if it is approved by the stockholders.~~

Abstentions and broker non-votes (which occur when a broker holding shares for a beneficial owner does not vote on a particular proposal because the broker does not have discretionary voting power with respect to that item and has not received voting instructions from the beneficial owner) will be counted as shares present in the determination of whether the shares of Voting Stock represented at the meeting constitute a quorum. Directors are elected by plurality vote and therefore abstentions and broker non-votes have no effect on the election of directors in Proposal 1. Abstentions will count in the tabulation of votes cast on each of the other proposals and will have the same effecttreated as votes against ~~these proposals. Broker~~the proposal and broker non-votes ~~will count as present, but will not be deemed entitled to vote on proposals for which brokers do not have discretionary authority and, therefore,~~ will have no effect on the ~~proposal to ratify~~voting results.

The board of directors recommends that stockholders vote FOR Proposal 4.

INTEREST OF CERTAIN PERSONS IN OR OPPOSITION TO MATTERS TO BE ACTED UPON

When considering the ~~independent accountants, other than to reduce the affirmative votes needed to approve such proposal. In the case~~recommendation of ~~Proposals 2 and 3, however, broker non-votes will have the same effect as votes against such proposals.~~

~~Stockholder votes will~~Level 8’s board of directors, you should be ~~tabulated by persons appointed by the Board of Directors to act as inspectors of election for the Annual Meeting. All stockholder meeting proxies, ballots and tabulations~~aware that identify individual stockholders are kept secret, and no such document shall be available for examination, nor shall the identity or the vote of any stockholder be disclosed except as may be necessary to meet legal requirements under the laws of Delaware, the Company’s state of incorporation.

The expense of the solicitation of proxies will be borne by the Company. Following the original mailing of the proxy material, solicitation of proxies may be made by mail, telephone, telegraph, courier service or personal interview by certain of the regular employees of the Company, who will receive no additional compensation for their services. In addition, the Company will reimburse brokers and other nominees for their reasonable expenses incurred in forwarding soliciting material to beneficial owners.

~~BENEFICIAL OWNERSHIP OF SHARES~~

The following table sets forth information as of June 13, 2003 with respect to beneficial ownership of shares by (i) each person known to the Company to be the beneficial owner of more than 5% of the outstanding common stock, (ii) each of the Company’s directors, (iii) the executive officers of the Company named in the Summary Compensation Table (the “Named Executives”) and (iv) all currentsome directors and executive officers have interests in the Recapitalization, which may conflict with their interests as stockholders. Certain of our directors own, or have options or warrants to acquire, shares of our capital stock, and some of our directors are holders, or are affiliated with holders, of our preferred stock or debt. Accordingly, these directors may have interests in the ~~Company as a group. Unless otherwise indicated,~~Recapitalization that are different from, or are in addition to, your interests. These interests include:

Anthony Pizi, Chief Information Officer of Level 8, owns, as of June 30, 2006, 1,833,300 shares subject to stock options exercisable within sixty (60) days and 394,737 shares of Common Stock issuable upon conversion of Series C preferred stock. The exercise prices of the warrants before reduction to $0.10 are as follows: (i) 90,118 shares exercisable at $0.17 per share of Common Stock; (ii) 560,000 shares exercisable at $0.20 per share of Common Stock; and (iii) 185,624 shares exercisable at $0.32 per share of Common Stock. Mr. Pizi owns 223,330 shares of Level 8 Common Stock. Mr. Pizi holds convertible promissory notes amounting to $227,320 and convertible, at the option of the holder (as to which he has agreed to convert such notes), into 920,388 shares of Level 8 Common Stock, and 835,742 shares of Common Stock issuable upon the exercise of warrants issued in connection with such convertible promissory notes, prior to the Recapitalization. In addition, Mr. Pizi is separately owed $423,333 by Level 8, evidenced by a Senior Reorganization Note, which may be converted into warrants to purchase an additional 57,165,993 shares of Common Stock of Level 8 at an exercise price of $0.002 per share. These warrants are only issuable upon approval of the Recapitalization, and are to be automatically exercised in connection with the consummation of the Recapitalization. Mr. Pizi also holds, in connection with the Senior Reorganization Notes, 1,166,666 Early Adopter Warrants which, upon consummation of the Recapitalization, convert into 58,333 warrants at an exercise price of $2.00 per share of Common Stock. As part of the Senior Reorganization Notes Mr. Pizi advanced the adjusted exercise price of 450,000 warrants. Upon the consummation of the Recapitalization, Mr. Pizi will receive 23,750 shares of Common Stock representing the underlying shares supporting the warrant exercise. Mr. Pizi also holds $85,000 of Convertible Bridge Notes which bear interest at 10% and matured on September 15, 2005. Upon consummation of the Recapitalization, these notes will automatically convert into 3,400,000 shares of Common Stock. Mr. Pizi is a son-in-law of Mark and Carolyn Landis. The above conversions assumes a Reverse Stock Split Ratio of 20:1.

The table below illustrates the ~~address for each person listed is c/o Level 8 Systems, Inc., 214 Carnegie Center Suite 303, Princeton, New Jersey 08540.~~

Stock ownership information has been furnished to the Company by the named person. Beneficial ownership as reported in this section was determined in accordance with Securities and Exchange Commission regulations and includes shares as to which a person possesses sole or shared voting and/or investment power and shares that may be acquired on or before August 13, 2003 upon the exerciseholdings of ~~stock options. The chart is based on 19,749,078 shares outstanding~~Mr. Pizi as of June ~~13, 2003. Except as otherwise stated in~~30, 2006 on a common equivalent basis before and after the ~~footnotes below, the named persons have sole voting and investment power with regard to the shares shown as beneficially owned by such persons.~~

Recapitalization.

	~~Common Stock~~
~~Name of Beneficial Owner~~	~~No. of Shares~~	~~Percent of Class~~
~~MLBC, Inc. (1)~~	~~1,166,000 (2)~~	~~5.9%~~
~~Seneca Capital International, Ltd.(3)~~	~~1,369,611 (4)~~	~~6.9%~~
~~Seneca Capital, L.P.(5)~~	~~1,017,911 (6)~~	~~5.1%~~
~~Anthony C. Pizi~~	~~1,014,574 (7)~~	~~5.1%~~
~~John P. Broderick~~	~~280,274 (8)~~	~~1.4%~~
~~Frank G. Artale~~	~~53,333 (9)~~	*
~~Nicholas Hatalski~~	~~33,333 (10)~~	*
~~Kenneth W. Nielsen~~	~~33,333 (10)~~	*
~~Bruce W. Hasenyager~~	~~33,333 (10)~~	*
~~Jay R. Kingley~~	~~33,333 (10)~~	*
~~All current directors and executive officers as a group (8 persons)~~	~~1,481,513 (11)~~	~~7.5%~~

	Ownership of the Company
	Before the Recapitalization					After the Recapitalization				Ownership of the Company
	Share Ownership		Percentage			Share Ownership		Amount Invested		Share Ownership		Percentage (1)
Series C preferred stock		394,737		0.4	%		600,000	$	150,000
Series A-1 preferred stock(4)											555,082		0.4	%
Common Stock (2)(3)		223,330		0.3	%		223,330	$	18,333		6,293,217		4.4	%
Warrants(5)		835,742		0.9	%		360,742				18,037
Stock Options		1,833,300		2.0	%		1,833,300				91,665		*
Convertible Promissory Notes		920,388		1.0	%		10,501,647	$	227,320
Convertible Bridge Notes							68,000,000	$	85,000
Senior Reorganization Notes							58,332,659	$	423,333		58,333		*	%
Total		4,207,497		4.6	%		139,851,678	$	903,986		7,016,334		4.9	%

Represents less than ~~one percent of the outstanding shares.~~

~~(1)~~

~~The address of MLBC, Inc. is c/o Merrill Lynch & Co., Inc., Corporate Law Department, 222 Broadway- 17th Floor, New York, New York 10038.~~

~~(2)~~

~~MLBC, Inc. is an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated. See “Certain Relationships and Related Transactions.”~~

~~(3)~~

~~The address of Seneca Capital International, Ltd. is 527 Madison Avenue, 11th Floor, New York, New York 10022.~~

~~(4)~~

~~Includes 779,826 shares of common stock issuable upon conversion of Series B3 Preferred Stock and 589,785~~0.1%.

(1)

Includes all issued and outstanding shares of Common Stock, shares issuable upon conversion of preferred stock, shares issuable upon the exercise of options and warrants, shares issuable upon conversion of convertible promissory notes and shares issuable upon conversion of Convertible Bridge Notes. Does not include shares issuable upon exercise of options and warrants having exercise prices in excess of the fair market value of Level 8 Common Stock as of June 30, 2006.

(2)	The number of shares includes shares issued upon the exercise of warrants and shares purchased from Level 8. The amount invested does not include amounts paid to third parties in private or market transaction, if any.

(3)	Common Stock includes the conversion of $85,000 of Convertible Bridge Notes and $423,333 of Senior Reorganization Notes.

(4)	Series A-1 preferred stock includes the conversion of Level 8 Series C preferred stock and $227,320 of convertible promissory notes.

(5)	Mr. Pizi advanced the exercise price on 475,000 warrants which upon consummation of the Recapitalization will convert into 23,750 shares of Common Stock. The remaining warrants will be adjusted via the exchange ratio.

Mark Landis, Chairman of the Board of Level 8, and his spouse, Carolyn Landis, who are parents-in-law to Mr. Pizi, own, as of June 30, 2006, 117,594 shares of Common Stock issuable upon the exercise of warrants exercisable at $0.37 per share of Common Stock. Mr. and Mrs. Landis own 581,623 shares of Level 8 Common Stock, and hold convertible promissory notes amounting to $500,000 and convertible at the option of the holder (as to which he has agreed to convert such notes), into 4,102,679 shares of Level 8 Common Stock, and 5,102,679 shares of Common Stock issuable upon the exercise of warrants issued in connection with such convertible promissory notes, prior to the Recapitalization. The exercise prices of the warrants before reduction to $0.10 are as follows: (i) 1,875,000 exercisable at $0.08 per share of Common Stock; (ii) 2,000,000 shares exercisable at $0.10 per share of Common Stock; (iii) 781,250 shares exercisable at $0.16 per share of Common Stock; and (iv) 446,429 shares exercisable at $0.28 per share of Common Stock. In addition, the Landis’ are separately owed $327,860 by Level 8, evidenced by Senior Reorganization Notes, which may be converted into warrants to purchase an additional 44,234,523 shares of Common Stock of Level 8 at an exercise price of $0.002 per share. These warrants are only issuable upon approval of the Recapitalization, and are to be automatically exercised in connection with the consummation of the

Recapitalization. Mr. Landis also holds, in connection with the Senior Reorganization notes, 3,057,206 Early Adopter Warrants which, upon consummation of the Recapitalization, convert into 152,560 warrants at an exercise price of ~~$0.40.~~$2.00 per share of Common Stock. As part of the Senior Reorganization Notes Mr. ~~Douglas Hirsch exercises sole voting or dispositive power with respect to~~Landis advanced the ~~shares held~~adjusted exercise price of ~~record by Seneca Capital International, Ltd.~~

~~(5)~~

~~The address~~3,095,280 warrants. Upon consummation of ~~Seneca Capital L.P. is 527 Madison Avenue, 11th Floor, New York, New York 10022.~~

~~(6)~~

~~Includes 417,205~~the Recapitalization, Mr. Landis will receive 154,764 shares of ~~common stock issuable upon conversion~~Common Stock of ~~Series B3 Preferred Stock, 188,408~~the Company representing the underlying shares supporting the warrant exercise. Mr. Landis also holds $395,000 of Convertible Bridge Notes which bear interest at 10% per annum and matured on September 15, 2005. Upon consummation of the Recapitalization, these notes will automatically convert into 15,800,000 shares of Common Stock. The above conversions assumes a Reverse Stock Split Ratio of 20:1.

The table below illustrates the holdings of Mark and Carol Landis as of June 30, 2006 on a common ~~stock issuable upon conversion of Series A3 Preferred Stock~~equivalent basis before and ~~412,298~~after the Recapitalization.

	Ownership of the Company
	Before the Recapitalization					After the Recapitalization				Ownership of the Company
	Share Ownership		Percentage			Share Ownership		Amount Invested		Share Ownership		Percentage(1)
Series C preferred stock								$	100,000
Series A-1 preferred stock(4)											6,630,682		4.6	%
Common Stock (2)(3)		631,623		0.7	%		581,623	$	818,333		18,195,571		12.6	%
Warrants(5)		5,220,273		5.7	%		2,125,000				106,250		0.1	%
Convertible Promissory Notes		4,102,679		4.5	%		132,613,642	$	500,000
Convertible Bridge Notes (3)							292,000,000	$	345,000
Senior Reorganization Notes (3)							47,291,729	$	327,860		152,860		0.1	%
Total		9,954,575		10.9	%		474,611,994	$	2,091,193		25,085,363		17.5	%

* Represents less than 0.1%.

(1)

(2)	The number of shares includes shares issued upon the exercise of warrants and shares purchased in market transactions. The amount invested does not include amounts paid to third parties in private or market transaction, if any.

(3)	Common Stock includes the conversion of $365,000 of Convertible Bridge Notes and $327,860 of Senior Reorganization Notes.

(4)	Series A-1 preferred stock includes the conversion of $500,000 of convertible promissory notes.

(5)	Mr. Landis advanced the exercise price on 3,095,273 warrants which upon consummation of the Recapitalization will convert into 154,764 shares of Common Stock. The remaining warrants will be adjusted via the exchange ratio.

Bruce Miller, a director of Level 8, owns, as of June 30, 2006, convertible promissory notes amounting to $30,000, convertible at the option of the holder (as to which he has agreed to convert such notes) into 428,571 shares of Level 8 Common Stock. In addition, Mr. Miller is separately owed $77,706 by Level 8, evidenced by Senior Reorganization Notes, which may be converted into warrants to purchase an additional 11,456,727 shares of Common Stock of Level 8 at a purchase price of $0.002 per share. These warrants are

only issuable upon approval of the Recapitalization, and are to be automatically exercised in connection with the consummation of the Recapitalization. Mr. Miller also holds, in connection with the Senior Reorganization Notes, 954,116 Early Adopter Warrants which, upon consummation of the Recapitalization, convert into 47,706 warrants at an exercise price of ~~$0.40~~$2.00 per ~~share.~~share of Common Stock. As part of the Senior Reorganization Notes Mr. ~~Douglas Hirsch exercises sole voting or dispositive power~~Miller advanced the adjusted exercise price of 277,060 warrants. Upon consummation of the Recapitalization, Mr. Miller will receive 13,853 shares of Common Stock. Mr. Miller also holds $90,000 of Convertible Bridge Notes which bear interest at 10% per annum and matured on September 15, 2005 and June 30, 2006. Upon consummation of the Recapitalization, this note will automatically convert into 3,600,000 shares of Common Stock. Note all of the above conversions assumes a Reverse Stock Split Ratio of 20:1.

The table below illustrates the holdings of Bruce Miller as of June 30, 2006 on a common equivalent basis before and after the Recapitalization. The common stock issuable post reverse stock split assumes a reverse stock split ratio of 20:1.

	Ownership of the Company
	Before the Recapitalization					After the Recapitalization				Ownership of the Company
	Share Ownership		Percentage			Share Ownership		Amount Invested		Share Ownership		Percentage(1)
Series A-1 preferred stock(4)											300,000		0.2	%
Common Stock (2)(3)											5,261,496		3.7	%
Warrants(5)		277,058		0.3	%
Convertible Promissory Notes		428,571		0.5	%		6,000,000	$	30,000
Convertible Bridge Notes							72,000,000	$	90,000
Senior Reorganization Notes							11,179,669	$	77,706		47,706
Total		705,629		0.8	%		89,179,669	$	197,706		5,609,202		3.9	%

* Represents less than 0.1%.

(1)

(2)	The number of shares includes shares issued upon the exercise of warrants and shares purchased in market transactions. The amount invested includes only amounts paid upon the conversion of warrants.

(3)	Common Stock includes the conversion of $90,000 of Convertible Bridge Notes and $77,706 of Senior Reorganization Notes.

(4)	Series A-1 preferred stock includes the conversion of $30,000 of convertible promissory notes.

(5)	Mr. Miller advanced the exercise price on 227,058 warrants which upon consummation of the Recapitalization will convert into 13,853 shares of Common Stock.

Until July 22, 2005, but during the period when the terms of the Recapitalization were being negotiated, Nicholas Hatalski was a director of Level 8, and owned $25,000 of convertible promissory notes, convertible, at the option of the holder (as to which he has agreed to convert such notes), into 78,125 shares of Common Stock issuable upon the exercise of warrants issued in connection with such convertible promissory notes;

John Broderick, Chief Executive Officer and Chief Financial Offer of Level 8, owns $2,300 of Senior Reorganization Notes which may be converted into warrants to purchase 333,333 shares of Level 8 Common Stock at an exercise price of $0.002 per share, and options to purchase 1,099,200 shares of Common Stock under the Level 8 stock option plan that will convert into options to purchase Common Stock. Such warrants are only issuable upon approval of the recapitalization, and are to be automatically exercised in connection with the consummation of the recapitalization;

·	Bruce Hasenyager, a member of Level 8’s board of directors, holds $4,061 of Convertible Bridge Notes which bear interest at 10% and matured on September 15, 2005. Upon consummation of the Recapitalization, this note will automatically convert into 3,248,500 shares of Common Stock;

·	Charles Porciello, a member of Level 8’s board of directors, holds $10,000 of Convertible Bridge Notes which bear interest at 10% and matured on March 31, 2006. Upon consummation of the Recapitalization, this note will automatically convert into 8,000,000 shares of Common Stock;

Bruce Percelay, a member of Level 8’s board of directors, holds $1,300,000 of Convertible Bridge Notes which bear interest at 10% and matured on December 31, 2005 and June 30, 2006. Upon consummation of the Recapitalization, this note will automatically convert into 80,000,000 shares of Common Stock;

Rick Atherton, a member of Level 8’s board of directors, holds $15,000 of Convertible Bridge Notes which bear interest at 10% and matured on March 31, 2006. Upon consummation of the Recapitalization, this note will automatically convert into 12,000,000 shares of Common Stock. Mr. Atherton also holds $20,000 of Senior Reorganization Notes which upon consummation of the Recapitalization will convert into 2,898,560 shares of Common Stock;

·	Executive officers and directors hold options under the Level 8 stock option plan to purchase Level 8 Common Stock that will convert into options to purchase Common Stock. As of June 30, 2006, the exercise price of all such options exceeds the market value; and

·	Following the Recapitalization, the current members of Level 8’s board of directors will remain directors.

In addition, participants in the Note and Warrant Offerings hold a senior position with respect to indebtedness and liquidity. As a result of these interests, certain of our directors and officers may be more likely to approve the Recapitalization than stockholders generally.

Further, the Company entered into arrangements with certain other parties in connection with the Recapitalization. The Company has verbally agreed with Lemery Greisler LLC, its former legal advisor, that a portion of its legal fees incurred and directly attributable to the Recapitalization would be paid in Common Stock after the Recapitalization is effective. Specifically, under the terms of the agreement, the Company has agreed to issue 50,000 shares of Common Stock upon approval of the Recapitalization; and the Company has agreed as part of note purchase agreement to award Brown Simpson Partners I, Ltd. the sum of 50,000 shares of Common Stock as their compensation for providing financial advisory services with respect to the Recapitalization, including structuring and negotiating the terms of the Recapitalization. These shares ~~held~~are only issuable upon approval of ~~record by Seneca Capital L.P.~~

~~(7)~~

~~Includes 521,153 shares~~the Recapitalization.

FEDERAL INCOME TAX CONSEQUENCES OF THE RECAPITALIZATION

This section summarizes the material federal income tax consequences of the Recapitalization that are applicable to holders of Common Stock or preferred stock of the Company. This summary does not address all federal income tax consequences that may be relevant to a particular holder of Common Stock or preferred stock, or any foreign, state or local tax considerations. Accordingly, holders of Common Stock or preferred stock are urged to consult their own tax advisors as to the specific federal, foreign, state and local tax consequences to them as a result of the Recapitalization.

This summary does not address the tax treatment of special classes of holders of stock of the Company, including, for example: banks and other financial institutions; holders who are not United States persons (as defined in

the Code); tax-exempt entities; insurance companies; subchapter S corporations; dealers in securities or currencies; traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; holders who acquired our stock through the exercise of an employee stock option or warrants or otherwise as compensation; persons whose functional currency is not the United States dollar; U.S. expatriates; persons subject to the alternative minimum tax; or holders who have held, or will hold, stock ~~options exercisable~~as part of a “straddle”, hedging, or conversion transaction or a constructive sale for federal income tax purposes.

This discussion is based upon the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury Regulations, judicial authority and administrative rulings and practice, all as of the date hereof, all of which are subject to change, possible with retroactive effect. Any such change could affect the continuing validity of the statements and conclusions below. The Company has not nor will it request a ruling from the Internal Revenue Service regarding the tax consequences of the Recapitalization.

Assuming the Recapitalization is consummated in accordance with the terms described in this Proxy Statement, the Recapitalization would be treated as a reorganization within ~~sixty (60) days, 394,737~~the meaning of Section 368(a)(1)(e) of the Code. Accordingly, for federal income tax purposes: (i) no gain or loss would be recognized by the holders of shares of the Company Common Stock, the Company Series A-3, B-3, C, or D preferred stock upon approval of the Recapitalization, except for any gain or loss that may result from the receipt of cash instead of a fractional share of Common Stock; (ii) the aggregate tax basis of the shares received in the Recapitalization would be the same as the aggregate tax basis of the shares of Common Stock that that were held prior to the Recapitalization; (iii) the holding period of the shares of the Company after the Recapitalization would include the period for which the shares of Common Stock were held prior to the Recapitalization; (iv) the aggregate tax basis of the shares of Series A-1 preferred stock received in the Recapitalization would be the same as the aggregate tax basis of the shares of preferred stock (of all series) that were exchanged therefor in the Recapitalization; (v) the holding period of the shares of Series A-1 preferred stock received in the Recapitalization would include the period for which the shares of Level 8 preferred stock (of all series) that were exchanged therefor were held, provided such shares were held as a capital asset and (vi) holders who receive cash instead of a fractional share of Common Stock would be considered as having received the fractional share pursuant to the Recapitalization and then having exchanged the fractional share for cash in a redemption. As a result, such holders would generally recognize gain or loss equal to the difference between the amount of cash received and the basis in their fractional share as set forth above. The gain or loss would be capital gain or loss if such fractional share was held as a capital asset, and would be long term capital gain or loss if, as of the effective date of the Recapitalization, such holder’s holding period for such fractional share is greater than one year.

Non-corporate U.S. holders of Common Stock may be subject to information reporting and backup withholding at a 28% rate on any cash payments received in lieu of a fractional share. Such holders will not be subject to backup withholding, however, if they:

• furnish a correct taxpayer identification number and certify that they are not subject to backup withholding on the Form W-9 or successor form included in the letter of transmittal to be delivered to the holders following the completion of the recapitalization; or

• are otherwise exempt from backup withholding.

Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against that holder’s U.S. federal income tax liability, provided the required information or appropriate claim for refund is furnished to the Internal Revenue Service.

In addition, a holder who receives Common Stock or preferred stock as a result of the Recapitalization will be required to retain records pertaining to the Recapitalization and will be required to file with such holder's United States federal income tax return for the year in which the Recapitalization takes place a statement setting forth facts relating to the Recapitalization.

The Company should not recognize gain or loss for federal income tax purposes as a result of the Recapitalization.

EACH HOLDER SHOULD CONSULT HIS OR ITS TAX ADVISOR AS TO THE PARTICULAR FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF THE RECAPITALIZATION, IN LIGHT OF SUCH HOLDER’S SPECIFIC CIRCUMSTANCES.

ACCOUNTING TREATMENT OF THE RECAPITALIZATION

Once the Recapitalization is completed, the Recapitalization would be accounted for as an induced conversion, and accordingly, net income per share available to common stockholders would reflect a charge for the difference between the value of the shares of Common Stock issued to the holders of our Series A-3, B-3, C and D preferred stock and the convertible promissory notes and the value of the shares they would have otherwise been issued under the original conversion terms. The assets and liabilities would continue to be recorded at historical amounts following the Recapitalization. There would be no change in the carrying value of assets. Liabilities would be reduced by the Senior Reorganization Notes, convertible debt that converts upon the election of the holder and certain accounts payable that represent the costs of the Recapitalization, which would be settled through paid in capital upon the Recapitalization. The Series A-3, B-3, C and D preferred stock and the convertible promissory notes converted and the related paid in capital would be reclassified to Series A-1 preferred stock and Common Stock and paid in capital, consistent with the number of shares issued upon conversion. The Company anticipates the increase in stockholders equity to be approximately $6,951,000.

POSSIBLE ANTI-TAKEOVER EFFECTS OF THE INCREASE IN AUTHORIZED SHARES AND REVERSE STOCK SPLIT

If Proposal 2 is approved as part of our Recapitalization, we will have increased the number of shares of Common Stock from 85 million to 215 million. Many of these shares will be needed because of the Recapitalization but authorized and unissued shares of Common Stock will be available to be issued following the Recapitalization. If Proposal 3 is approved as part of our Recapitalization, we will effect a reverse stock split in the range of 20:1 to 100:1. Among other things, Proposals 2 and 3 must each be approved before the Recapitalization can occur. The effect of Proposals 2 and 3, taken together will be, when compared to the current numbers of authorized and issued shares of Common Stock, to significantly increase the number of authorized and unissued shares in relation to the number of shares issued and outstanding. In addition, there will remain authorized but unissued shares of preferred stock.

Our certificate of incorporation authorizes our board of directors to establish one or more series of preferred stock and, for any series of preferred stock, to determine the terms and rights of the series, including voting rights, conversion rates, and liquidation preferences. Although shares of Common Stock and preferred stock could be issued by the board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise, it is anticipated that such uses will be unlikely given that our certificate of incorporation contains few other anti-takeover provisions and our board has not felt the need to implement anti-takeover provisions in the past.

It is also true that the board of directors may make, adopt, alter, amend or repeal our bylaws but these same powers also rest with our stockholders.

The power of the board of directors to amend our bylaws and issue shares of Common Stock or preferred stock could reduce the ability of a third party to attempt a takeover of Level 8. That power could enable our board of directors to thwart a third party transaction that might have been welcomed by our independent stockholders and might have provided an above-market premium to our market price. However, there are no current plans or proposals to adopt other provisions or enter into other arrangements that might have material anti-takeover consequences.

UNAUDITED PRO FORMA FINANCIAL STATEMENTS

The following unaudited pro forma condensed consolidated balance sheet as of December 31, 2005 is based on Level 8’s audited consolidated balance sheet as of December 31, 2005 and gives effect to the transactions described below as if each had occurred on December 31, 2005. The unaudited pro forma condensed consolidated statement of operations as of December 31, 2005 has been derived from Level 8’s audited consolidated statement of operations for the year ended December 31, 2005. All conversions assumes a 20:1 reverse stock split ratio. Proposal 2 above seeks shareholder approval for a range of 20:1 to 100:1 with final determination made by the Company’s Board of Directors.

44,502,378 weighted average common shares outstanding of the Company as of December 31, 2005, will convert into 2,225,119 shares of the Company under the reverse split ratio within the recapitalization. See footnote (a) to the pro forma financial statements.

$2,559,000 of Senior Reorganization Notes as of December 31, 2005 will be cancelled, upon approval of the Recapitalization and existing warrants to purchase 11,640,203 shares of Common Stock in respect of which the exercise price was loaned to the Company will be automatically exercised at $0.10 per share and converted into 582,010 shares of Common Stock. Additionally, the Senior Reorganization Noteholders will be granted Additional Warrants to purchase 19,360,959 shares of Common Stock (less the number of shares to be applied to the cashless exercise) at an exercise price of $0.04 per share ($0.002 per share before the Recapitalization) and will be deemed issued and exercised. See footnote (b) to the accompanying pro forma financial statements.

As of December 31, 2005, the Company had entered into $1,760,000 of Convertible Bridge Notes. These Notes will automatically convert into shares of Common Stock upon effectiveness of the Recapitalization at a conversion rate of $0.025 resulting in 70,402,928 shares of Common Stock being issued. See footnote (c) to the accompanying pro forma financial statements.

$992,320 of convertible promissory notes will convert into 7,957 shares of Series A-1 preferred stock. At October 7, 2005, holders of $942,320 principal amount have agreed to convert upon effectiveness of the Recapitalization. This assumes that the remaining convertible promissory noteholders, having $50,000 principal amount of convertible promissory notes, elect to convert in the Recapitalization. See footnote (d) to the accompanying pro forma financial statements.

The Company has verbally agreed with one of its vendors that part of its legal fees incurred and directly attributable to the Recapitalization would be paid in Common Stock after the Recapitalization is effective. Specifically, under the terms of the agreement, the Company has agreed to issue 50,000 shares of Common Stock upon effectiveness of the Recapitalization. Accordingly, this transaction has been shown as a pro forma adjustment to accrued expenses and paid in capital on the accompanying pro forma balance sheet. See footnote (e) on the accompanying pro forma financial statements.

The Company has accrued $271,000 of interest on Senior Reorganization Notes which will be applied to the exercise price of the Additional Warrants that are granted upon consummation of the Recapitalization. See footnote (f) to the pro forma financial statements.

The Company has agreed to issue 125,400 shares of Common Stock, and 180,000 warrants at $0.04 per share, to the guarantor of our bank debt, pursuant to an existing agreement which requires that the Company pay down the outstanding bank debt by an amount equal to ten percent (10%) of equity raised, arising from the equity raised in connection with the conversion of the Senior Reorganization Notes. The Company has estimated the compensation expense for this transaction to be $50,000. See footnote (j) to the pro forma financial statements.

The Company has agreed as part of the Recapitalization to award Brown Simpson Partners I, Ltd. the sum of 50,000 shares of Common Stock as their compensation for assisting on the Recapitalization. These shares are only issuable upon approval of the Recapitalization. The Company will recognize stock compensation expense upon the issuance of these shares. See footnote (i) to the pro forma financial statements.

$45,000 of accrued interest on Convertible Bridge notes recognized during 2005 will be converted to equity on the pro forma balance sheet. See footnote (f) to the pro forma financial statements.

1,571 shares of Level 8 Series A-3 preferred stock will convert into 22 shares of Series A-1 preferred stock. See footnote (h) to the pro forma financial statements.

30,000 shares of Level 8 Series B-3 preferred stock will convert into 375 shares of Series A-1 preferred stock. See footnote (h) to the pro forma financial statements.

991 shares of Level 8 Series C preferred stock will convert into 198 shares of Series A-1 preferred stock. See footnote (h) to the pro forma financial statements.

1,060 shares of Level 8 Series D preferred stock will convert into 265 shares of Series A-1 preferred stock. See footnote (g) to the pro forma financial statements.

The pro forma information presented herein does not purport to be indicative of the financial position or results of operations that would have actually occurred had the transactions occurred on the dates indicated or that may occur in the future.

Level 8 Systems, Inc.

Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31, 2005

(in thousands, except per share amounts)

	Historical			Pro forma adjustments				Pro forma consolidated
Assets
Cash and cash equivalents		29							29
Assets of operations to be abandoned		131							131
Trade accounts receivable, net		18							18
Prepaid expenses and other assets		53							53
Total current assets		231							231
									0
Property and equipment, net		10							10
Total assets		241							241

Liabilities and Stockholders' (Deficit)
Senior reorganization debt		2,559			(2,559	)	(b)		0
Convertible bridge notes		1,760			(1,760	)	(c)		0
Short-term debt		3,481			(992	)	(d)		2,489
Accounts payable		2,528			(20	)	(e)		2,508
Accrued expenses:									0
Salaries, wages, and related items		1,036							1,036
Other		2,194			(316	)	(f)		1,878
Liabilities of operations to be abandoned		490							490
Deferred revenue		78							78
Total current liabilities		14,126			(5,647	)			8,479

Long-term debt		130							130
Senior converible preferred stock (Series D)		1,061			(1,061	)	(g)		0
Total current liabilities		15,317			(6,708	)			8,609
Stockholders' deficit									0
Preferred stock - A1		0			9		(g)		9
Common stock		48			45		(a)		93
Accumulated paid-in capital:
					2,559		(b)
					1,760		(c)
					992		(d)
					20		(e)
					271		(f)
					45		(f)
					20		(i)
					50		(j)
					3,389		(b,c,d)
					1,061		(g)
					(45	)	(a)
Additional paid-in capital		210,594			10,122				220,716
Accumulated other comprehensive loss		(3	)						(3	)
Accumulated deficit		(225,715	)		(3,459	)			(229,174	)
Stockholders' deficit		(15,076	)		16,830				(8,368	)
Total liabilities and stockholders' equity (deficit)		241			10,122				241

Level 8 Systems, Inc.

Unaudited Pro Forma Consolidated Statement of Operations For The Year Ended December 31, 2005

	Historical			Pro forma adjustments				Pro forma consolidated
Revenue:
Software	$	407						$	407
Maintenance		147							147
Services		231							231
Total operating revenue		785			-				785

Cost of revenue:
Software		16							16
Maintenance		350							350
Services		822							822
Total cost of revenue		1,188			-				1,188

Gross margin (loss)		(403	)		-				(403	)

Operating expenses:
Sales and marketing		627							627
Research and product development		891							891
General and administrative		1,137			20		(i)		1,157
Total operating expenses		2,655			20				2,675

Loss from operations		(3,058	)		(20	)			(3,078	)
Other income (charges):
Interest expense		(593	)						(593	)
Other expense		(30	)		(50	)	(j)		(80	)
		(623	)		(50	)			(673	)
Loss before (benefit) for income taxes		(3,681	)		(70	)			(3,751	)
Income tax (benefit) - foreign		-							-
Net loss	$	(3,681	)	$	(70	)		$	(3,751	)

Accretion of deemed dividends		-			3,389		(b,c,d)		3,389
Net loss applicable to common stockholders	$	(3,681	)	$	(3,459	)		$	(7,140	)
Net loss applicable to common stockholders - basic and diluted		(0.09	)						(0.08	)
Weighted average common shares outstanding - basic and diluted		44,502							92,976		(k)

(a)

As of December 31, 2005, the Company had 44,502,378 weighted average common shares, which under the terms of the Recapitalization, will be exchanged at a ratio of 2:1 for 2,225,119 shares of Common Stock. Those warrant holders who loaned the Company the first $1,000,000 of the exercise price on their loans will receive Early Adopter warrants at a ratio of 2:1 shares for 582,010 shares of Common Stock. The Company has verbally agreed with Lemory Greasler LLC, its former legal advisor, that part of its legal fees incurred and directly attributable to the Recapitalization would be issued 50,000 shares of Common Stock upon effectiveness of the Recapitalization. The Company has agreed to issue 125,400 shares of Common Stock, and 180,000 warrants at $0.04 per share, to the guarantor of our bank debt. The Company has agreed as part of the Recapitalization to award Brown Simpson Partners I, Ltd. the sum of 50,000 shares of Common Stock as

their compensation for assisting on the Recapitalization. The Senior Reorganization Notes, principal only, will automatically be cancelled and converted into 19,360,959 shares of Common Stock. Convertible Bridge Notes, principal only, in the amount of $1,760,000, will automatically be cancelled and converted into 70,402,928 shares of Common Stock.

(b)

$2,559,000 of Senior Reorganization Notes, which represents loans to the Company of the exercise price of 11,640,203 existing warrants, plus other loans, will be deemed cancelled upon approval of the Recapitalization and the underlying warrants will be exercised and exchanged for 582,010 shares of Common Stock. Further, loan holders will receive additional warrants to purchase 19,360,959 shares of Common Stock (less the number of shares to be applied to the cashless exercise of these additional warrants) at an exercise price of $0.04 per share will be deemed exercised. Additionally, those warrant holders who loaned the Company up to the first $1,000,000 of the exercise price on their loans will receive Early Adopter warrants at a ratio of 2:1 forshares issuable upon exercise of each existing warrant exercised at the special exercise price (before adjustment by the exchange ratio) of $0.10 per share. The Company has viewed the Note and Warrant Offering as three separate tranches for purposes of valuing the warrants issued. The initial tranche of approximately $979,0000 includes those warrant holders who exercised their existing warrants through a loan to the Company, are entitled to receive early adopter warrants and are also entitled to receive additional warrants. Using the Black Scholes formula, the Company has determined that the fair value of the warrants granted to this tranche is approximately $359,000. The difference between the fair value of the additional warrants and the total invested in this tranche or approximately $620,000 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 has determined that the fair value of the warrants granted to this tranche is approximately $33,000 and the beneficial conversion amount is $74,000. The third tranche consisted of investors who had no existing warrants and will only receive additional warrants upon effectiveness of the Recapitalization. The total investment in this tranche is approximately $1,473,000. Using Black Scholes, the Company has determined that the fair value of the warrants granted to this tranche is approximately $665,000 and the beneficial conversion amount is $808,000. The Company’s pro forma entries are as follows:

Senior Reorganization Notes	$	2,559,000
Paid-in Capital			$	2,559,000
Accumulated deficit	$	620,000
Paid-in Capital (beneficial conversion)			$	620,000
Accumulated deficit	$	74,000
Paid-in Capital (beneficial conversion)			$	74,000
Accumulated deficit	$	808,000
Paid-in Capital (beneficial conversion)			$	808,000

(c)

Convertible Bridge Notes, principal only, in the amount of $1,760,000, will automatically be cancelled and converted into 70,402,928 shares of Common Stock upon effectiveness of the Recapitalization. Using the Black Scholes formula, the Company has determined that the fair value of the stock resulting from the conversion of the Convertible Bridge Notes is approximately $462,000. The difference between the total of the Convertible Bridge Notes and the fair value of the stock received ($1,298,000), is treated as a beneficial conversion and immediately amortizable as the shares are immediately marketable. The Company’s pro forma entries are as follows:

Convertible Bridge Notes	$	1,760,000
Paid-in Capital			$	1,760,000
Accumulated deficit	$	1,298,000
Paid-in Capital (beneficial conversion)			$	1,298,000

(d)

Convertible Promissory Notes in the amount of $992,000 convert into 7,957 shares of Series A-1 preferred stock upon effectiveness of the Recapitalization. Holders of all but $50,000 principal amount of secured promissory notes have agreed to convert. The consent of the other holders will be sought after the date hereof. Utilizing the Black Scholes formula, the Company has determined that the fair value of the preferred stock amounts to $403,000. The difference between the fair value of the stock and the total of the Convertible Promissory Notes ($589,000) is treated as accretion of preferred stock and immediately amortizable as these shares are immediately marketable. The Company’s pro forma entries are as follows:

Convertible Promissory Notes	$	992,000
Series A-1 preferred stock			$	8,000
Paid in Capital			$	984,000
Accumulated deficit	$	589,000
Paid in Capital (accretion of preferred stock)			$	589,000

(e)

Represents conversion of accounts payable into 50,000 shares of Common Stock as payment for legal fees incurred and directly attributable to the Recapitalization. This pro forma adjustment assumes that the Recapitalization was effective on December 31, 2004 and as such, the Company would value the shares being issued at fair value on that date. The fair market value of Common Stock on December 31, 2005 was $0.02 and extrapolating for the fair value of Common Stock, using the exchange ratio of twenty shares for one share, the Company has estimated the fair value of stock on that date to be $0.40. The Company’s pro forma entry is as follows:

Accounts Payable		$	20,000
Paid-in Capital					$	20,000

(f)

The Company had accrued $271,000 of interest expense relating to Senior Reorganization Notes which upon effectiveness of the Recapitalization, will be applied to the exercise price of the Additional Warrants. $45,000 of accrued interest relating to Convertible Bridge Notes will be converted to equity. The Company’s pro forma entries are as follows:

Accrued Interest Expense	$	271,000
	$	45,000
Paid-in Capital			$	271,000
			$	45,000

(g)

Represents conversion of remaining shares of Series D preferred stock into 265 shares of Series A-1 preferred stock. Under the terms of the Recapitalization, each share of Level 8 Series D preferred stock will convert into 0.25 shares of Series A-1 preferred stock. The Company utilized the Black Scholes formula to determine if an accretion of preferred stock was created as a result of the exchange. Based upon that analysis, no accretion of preferred stock arose as a result of this exchange. The Company’s pro forma entry is as follows:

Senior Convertible preferred stock		$	1,061,000
Paid-in Capital					$	1,061,000

(h)

Represents the conversion of 1,571 shares of Series A-3 preferred stock into 22 shares of Series A-1 preferred stock, 30,000 shares of Series B-3 preferred stock into 375 shares of Series A-1 preferred stock, and 991 shares of Series C preferred stock into 198 shares of Series A-1 preferred stock. Under the terms of the Recapitalization, each share of Series A-3 preferred stock will convert into 0.0142857 shares of Series A-1 preferred stock and each share of Series B-3 preferred stock will convert into 0.0125 shares of Series A-1 preferred stock and, each share of Series C preferred stock will convert into 0.20 shares of Series A-1 preferred stock. The Company utilized the Black Scholes formula to determine if an accretion of preferred stock was created as a result of the exchange. Based upon that analysis, no accretion of preferred stock arose as a result of this exchange.

(i)

Represents the issuance of 50,000 shares of Common Stock as payment to Brown Simpson Partners I, Ltd. in accordance with the terms of the Recapitalization. These shares are contingent upon effectiveness of the Recapitalization and represents fees earned associated with the Recapitalization. This pro forma adjustment assumes that the Recapitalization was effective on December 31, 2004 and as such, the Company would value the shares being issued at fair value on that date. The fair market value of Common Stock on December 31, 2005 was $0.02 and extrapolating for the fair value of Common Stock, using the exchange ratio of one Level 8 share for $ 0.05 share, the Company has estimated the fair value of Common Stock on that date to be $0.40. The Company’s pro forma entry is as follows:

General and Administrative Expense		$	20,000
Paid in Capital					$	20,000

(j)

Represents the issuance of 124,500 shares of Common Stock for a third-party waiver of a payment obligation. Pursuant to an existing agreement with the guarantor of our bank debt, the Company is obligated to pay down the bank debt by an amount equal to ten percent (10%) of equity raised, arising from the equity raised in connection with the conversion of the Senior Reorganization Notes. The third party guarantor has agreed to waive this payment in return for the compensation. These shares are contingent upon approval of the Recapitalization and represents fees earned associated with the Recapitalization. This pro forma adjustment assumes that the Recapitalization was effective on December 31, 2005 and as such, the Company would value the shares being issued at fair value on that date. The fair market value of Common Stock on December 31, 2005 was $0.02 and extrapolating for the fair value of common stock, using the exchange ratio of 20:1, the Company has estimated the fair value of stock on that date to be $0.40. The Company’s pro forma entry is as follows:

Other Expense		$	50,000
Paid-in Capital					$	50,000

(k)	Basic weighted average Common Stock outstanding excludes any potentially anti-dilutive securities such as warrants and options to purchase Common Stock and preferred stock. The following table reconciles the weighted average common shares outstanding:

	Level 8 Systems		Issuances		.
Weighted average shares outstanding at December 31, 2005		44,502,378				1,799,084	(1)
Shares issued as part of Recapitalization				224,500		224,500	(2)
Automatic exercise of warrants whose exercise price was loaned to Level 8				11,640,200		582,010	(1)(3)
Issuance of Additional Warrants				19,360,959		19,360,959	(4)
Conversion of Convertible Bridge Notes				70,402,928		70,402,928	(5)
		44,502,378				92,975,516

(1)

Per the terms of the Recapitalization, the exchange ratio is 1 share of Level 8 Common Stock for 0.05 share of Common Stock.

(2)

Represents the issuance of a total of 224,500 shares of Common Stock as compensation directly related to the Recapitalization. See footnotes (e), (i) and (j) above.

(3)

Warrant holders who elected to lend the reduced exercise price of their warrants, will be deemed exercised upon effectiveness of the Recapitalization.

(4)

As part of the Company’s Note and Warrant Offering, those warrant holders who elected to loan the exercise price of their existing warrants as well as other investors, will receive additional warrants upon effectiveness of the Recapitalization.

(5)

The Company has issued $1,760,000 of Convertible Bridge Notes that convert into Common Stock upon effectiveness of the Recapitalization. The conversion ratio is $0.025.

OTHER MATTERS

Stockholder Proposals. Our stockholders may submit proposals that they believe should be voted on at our next annual meeting. Pursuant to Rule 14a-8 under the Securities and Exchange Act of 1934 (the Exchange Act) some stockholder proposals may be eligible for inclusion in our proxy statement for our next annual meeting. Stockholder proposals must be submitted, along with proof of ownership of our stock in accordance with Rule 14a-8(b)(2), to our offices: Level 8 Systems, Inc., 8000 Regency Parkway, Suite 542, Cary, North Carolina 27518, Attention: Corporate Secretary. Failure to deliver a proposal by this means may result in it not being deemed timely received. We must receive a submission no later than February 15, 2007. We strongly encourage any stockholder interested in submitting a proposal to contact us in advance of this deadline to discuss the proposal, and stockholders may want to consult counsel with regard to the detailed requirements of the securities laws. Submitting a stockholder proposal does not guarantee that it will be included in our proxy statement. The Audit Committee reviews all stockholder proposals and makes recommendations to our Board for action on these proposals.

If a stockholder does not want to submit a proposal for our next annual meeting for inclusion in our proxy statement under Rule 14a-8, the stockholder may submit the proposal a reasonable time before we mail our proxy material for our next annual meeting, this date to be determined and announced. The stockholder’s submission must be made by a registered stockholder on its behalf or on behalf of the beneficial owner of the shares and must include information concerning the proposal and information as to the stockholder’s ownership of our stock. If the stockholder does not also comply with the requirements of Rule 14a-4(c)(2) under the Exchange Act, we may exercise discretionary voting authority under proxies that we solicit to vote in accordance with our best judgment on any stockholder proposal. To make a submission or to request a copy of our bylaws, stockholders should contact us at Level 8 Systems, Inc., 8000 Regency Parkway, Suite 542, Cary, North Carolina 27518.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

Level 8 files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. Copies of these materials may be examined without charge at the public reference room at 100 F Street N.E., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference room. Any person, including any beneficial owners, to whom this proxy statement is delivered may also obtain these materials from us at no cost by directing a written or oral request to us at Level 8 Systems, Inc., 8000 Regency Pkwy, Suite 542, Cary, North Carolina 27518, Attention: John P. Broderick, Chief Executive Officer and Chief Financial Officer, or by telephone, (919) 380-5000, or at our website www.Level8.com. In addition, the Securities and Exchange Commission maintains a web site, http://www.sec.gov, which contains reports, proxy statements and other information regarding registrants, including Level 8, that file electronically with the Securities and Exchange Commission.

No persons have been authorized to give any information or to make any representations other than those contained in this proxy statement and, if given or made, such information or representation must not be relied upon as having been authorized by Level 8 or any other person. You should rely only on the information contained in this proxy statement or any supplement. You should disregard anything we stated in an earlier document that is inconsistent with what is in or incorporated by reference in this proxy statement.

You should assume that the information in this proxy statement or any supplement is accurate only as of the date on the front page of this Proxy Statement. Our business financial condition, results of operation and prospects may have changed since that date and may change again.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents previously filed with the Securities and Exchange Commission by Level 8 (file no. 000-26392) are incorporated by reference herein and shall be deemed a part hereof:

(a)

The Annual Report on Form 10-K for the fiscal year ended December 31, 2005, and

(b)

The Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006.

(c)

The Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2006.

Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Proxy Statement to the extent that a statement contained herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Proxy Statement.

The documents incorporated by reference herein shall be delivered concurrently with this Proxy Statement.

Annex A

CERTIFICATE OF DESIGNATIONS

PREFERENCES AND RIGHTS

SERIES A-1 CONVERTIBLE PREFERRED STOCK

LEVEL 8 SYSTEMS, INC.

(Pursuant to Section 151 of the Delaware General Corporation Law)

Level 8 Systems, Inc., a corporation organized and existing under the laws of the State of Delaware (the "CORPORATION"), hereby certifies that the Board of Directors of the Corporation (the "BOARD OF DIRECTORS" or the "BOARD") pursuant to authority of the Board of Directors as required by Section 151 of the Delaware General Corporation Law, and in accordance with the provisions of its Certificate of Incorporation and Bylaws, each as amended through the date hereof, if amended, has and hereby authorizes a series of the Corporation's previously authorized Preferred Stock, par value $.001 per share (the "PREFERRED STOCK"), and hereby states the Designations and number of shares, and fixes the relative rights, preferences, privileges, powers and restrictions thereof as follows:

I. DESIGNATIONS AND AMOUNT

The Designation of this series, which consists of 9,000 shares of Preferred Stock, is the Series A-1 Convertible Preferred Stock (the "SERIES A-1 PREFERRED STOCK"). The rights, preferences, restrictions and other matters relating to the Series A-1 Preferred Stock are as set forth herein.

II. DIVIDENDS

The holders of the Series A-1 Preferred Stock shall be entitled to receive dividends on the Series A-1 Preferred Stock, whether in cash, property or otherwise (other than dividends payable solely in shares of Common Stock), out of any assets legally available therefore, ratably with any declaration or payment of any dividend to holders of the Common Stock of the Corporation, when, as and if declared by the Board of Directors, in an amount per share equal to that which the holders would have been entitled to receive had they converted all of the shares of Series A-1 Preferred Stock into Common Stock immediately prior to the payment of such dividends (without giving effect to the limitations contained in Article IV.D).

III. CERTAIN DEFINITIONS

For purposes of this Certificate of Designations, the following terms shall have the following meanings:

A. "BUSINESS DAY" means any day, other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law, regulation or executive order to close.

B. "CLOSING BID PRICE" means, for any security as of any date, the last sales price of such security on the OTC Bulletin Board (the "OTC") or other trading market where such security is listed or traded as reported by Bloomberg Financial Markets (or a comparable reporting service of national reputation selected by the Corporation and reasonably acceptable to holders of a majority of the then outstanding shares of Series A-1 Preferred Stock ("MAJORITY HOLDERS") if Bloomberg Financial Markets is not then reporting closing bid prices

A-1

of such security) (collectively, "BLOOMBERG"), or if the foregoing does not apply, the closing bid price of such security on a national exchange or other trading market for such security as reported by Bloomberg, or, if no such price is reported for such security by Bloomberg, the average of the bid prices of all market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc., in each case for such date or, if such date was not a trading day for such security, on the next preceding date which was a trading day. If the Closing Bid Price cannot be calculated for such security as of either of such dates on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as reasonably determined by an investment banking firm selected by the Corporation and reasonably acceptable to the Majority Holders, with the costs of such appraisal to be borne by the Corporation.

C. "CONVERSION DATE" means, for any Optional Conversion (as defined below), the date specified in the notice of conversion in the form attached hereto (the "NOTICE OF CONVERSION"), so long as a copy of the Notice of Conversion is faxed (or delivered by other means resulting in notice) to the Corporation before 11:59 p.m., New York City time, on the Conversion Date indicated in the Notice of Conversion; PROVIDED, HOWEVER, that if the Notice of Conversion is not so faxed or otherwise delivered before such time, then the Conversion Date shall be the date the holder faxes or otherwise delivers the Notice of Conversion to the Corporation.

D. "CONVERSION RATIO" means one thousand (1,000) shares of the Corporation’s Common Stock for each share of Series A-1 Preferred Stock, and shall be subject to adjustment as provided herein.

E. "ISSUANCE DATE" means the effective date of the Recapitalization of Level 8 Systems, Inc. (“Level 8”) with and into the Corporation (the “Recapitalization”) pursuant to which various series of Level 8 Preferred Stock shall be exchanged for shares of the Corporation’s Series A-1 Preferred Stock.

IV. CONVERSION

A. Conversion at the Option of the Holder. Subject to the limitations on conversions contained in Paragraph D of this Article IV, each holder of shares of Series A-1 Preferred Stock may, at any time and from time to time, convert (an "OPTIONAL CONVERSION") each of its shares of Series A-1 Preferred Stock into a number of fully paid and non-assessable shares of Common Stock determined in accordance with the following Conversion Ratio:

Each share of Series A-1 Preferred will initially be convertible to one thousand (1,000) shares of the Corporation’s common stock, par value $0.001 per share (the “Common Stock”).

B. Mandatory Conversion. The Series A-1 Preferred Stock shall automatically be converted into Common Stock at the then applicable Conversion Ratio upon the occurrence of one of the following events:

(1) The Corporation consummates at least an additional $5,000,000.00 equity financing from institutional or strategic investors; and/or

(2) The Corporation having four (4) consecutive quarters of positive cash flow as reflected on the Corporation’s financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) and filed with the Securities and Exchange Commission (the “SEC”).

C. Mechanics of Conversion. In order to effect an Optional Conversion, a holder shall: (x) fax (or otherwise deliver) a copy of the fully executed Notice of Conversion to the Corporation (Attention: Secretary) and (y) surrender or cause to be surrendered the original certificates representing the Series A-1 Preferred Stock being converted (the "PREFERRED STOCK CERTIFICATES"), duly endorsed, along with a copy of the Notice of Conversion as soon as practicable thereafter to the Corporation. Upon receipt by the Corporation of a facsimile copy

A-2

of a Notice of Conversion from a holder, the Corporation shall promptly send, via facsimile, a confirmation to such holder stating that the Notice of Conversion has been received, the date upon which the Corporation expects to deliver the Common Stock issuable upon such conversion and the name and telephone number of a contact person at the Corporation regarding the conversion. The Corporation shall not be obligated to issue shares of Common Stock upon a conversion unless either the Preferred Stock Certificates are delivered to the Corporation as provided above, or the holder notifies the Corporation that such Preferred Stock Certificates have been lost, stolen or destroyed and delivers the documentation to the Corporation required by Article XV.B hereof.

(i) Delivery of Common Stock Upon Conversion. Upon the surrender of Preferred Stock Certificates accompanied by a Notice of Conversion, the Corporation (itself, or through its transfer agent) shall, no later than the later of (a) the third business day following the Conversion Date and (b) the business day following the date of such surrender (or, in the case of lost, stolen or destroyed certificates, after provision of indemnity pursuant to Article XV.B) (the "DELIVERY PERIOD"), issue and deliver (i.e., deposit with a nationally recognized overnight courier service postage prepaid) to the holder or its nominee (x) that number of shares of Common Stock issuable upon conversion of such shares of Series A-1 Preferred Stock being converted and (y) a certificate representing the number of shares of Series A-1 Preferred Stock not being converted, if any. Notwithstanding the foregoing, if the Corporation's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program, and so long as the certificates therefore do not bear a legend, and the holder thereof is not then required to return such certificate for the placement of a legend thereon, the Corporation shall cause its transfer agent to promptly electronically transmit the Common Stock issuable upon conversion to the holder by crediting the account of the holder or its nominee with DTC through its Deposit Withdrawal Agent Commission system ("DTC TRANSFER"). If the aforementioned conditions to a DTC Transfer are not satisfied, the Corporation shall deliver as provided above to the holder physical certificates representing the Common Stock issuable upon conversion. Further, a holder may instruct the Corporation to deliver to the holder physical certificates representing the Common Stock issuable upon conversion in lieu of delivering such shares by way of DTC Transfer.

(ii) Taxes. The Corporation shall pay any and all taxes that may be imposed upon it with respect to the issuance and delivery of the shares of Common Stock upon the conversion of the Series CA-1 Preferred Stock.

(iii) No Fractional Shares. If any conversion of Series A-1 Preferred Stock ~~and 98,684 shares~~would result in the issuance of ~~common stock issuable~~a fractional share of Common Stock, such fractional share shall be payable in cash based upon the ~~exercise~~ten (10) day average Closing Bid Price at such time, and the number of ~~warrants at an exercise price of $0.38 per share of common stock subject to adjustment.~~

~~(8)~~

~~Consists of 280,274 shares subject to stock options exercisable within sixty (60) days.~~

~~(9)~~

~~Consists of 53,333 shares subject to stock options exercisable within sixty (60) days.~~

~~(10)~~

~~Consists of 33,333 shares subject to stock options exercisable within sixty (60) days.~~

~~(11)~~

~~Includes shares issuable upon exercise of options and warrants exercisable within sixty (60) days as described in Notes 7-10.~~

~~EQUITY COMPENSATION PLAN INFORMATION~~

~~The following table sets forth certain information as of December 31, 2002, about~~ shares of Common Stock ~~outstanding~~issuable upon conversion of the Series A-1 Preferred Stock shall be the next lower whole number of shares. If the Corporation elects not to, or is unable to, make such a cash payment, the holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock.

(iv) Conversion Disputes. In the case of any dispute with respect to a conversion, the Corporation shall promptly issue such number of shares of Common Stock as are not disputed in accordance with subparagraph (i) above. If such dispute involves the calculation of the Conversion Ratio, and ~~available for issuance under~~such dispute is not promptly resolved by discussion between the ~~Company’s existing equity compensation plans: the Level 8 Systems, Inc. 1997 Stock Option Incentive Plan, the 1995 Non-Qualified Option Plan~~relevant holder and the ~~Outside Director Stock Option Plan. All~~Corporation, the Corporation shall submit the disputed calculations to an independent outside accountant via facsimile within three business days of receipt of the ~~Company’s Equity Compensation Plans were approved~~Notice of Conversion. The accountant, at the Corporation's sole expense, shall promptly audit the calculations and notify the Corporation and the holder of the results no later than three business days from the date it receives the disputed calculations. The accountant's calculation shall be deemed conclusive, absent manifest error. The Corporation shall then issue the appropriate number of shares of Common Stock in accordance with subparagraph (i) above.

(v) Adjustment for Dividends. On conversion of shares of Series A-1 Preferred Stock, any accrued but unpaid dividends thereon (pursuant to Article II or otherwise) attributable to the period from the Issuance Date to the Conversion Date with respect to the converted shares of Series A-1 Preferred Stock shall not be canceled, extinguished or forfeited, but rather to the extent of the funds legally available therefor shall be paid in full to the holder thereof by the ~~stockholders.~~

Plan Category

Number of Securities to be issued upon exercise of
outstanding options

Weighted-average
exercise price of
outstanding options
Number of securities remaining available under equity compensation plans (excluding securities reflected
in the first column)
Equity compensation plans approved by stockholders

3,834,379
$ 7.22

2,368,998
Equity compensation plans not approved by stockholders (1)

--
--
--
Total

3,834,379
$ 7.22
2,368,998

~~(1) The Company does not have any Equity Compensation Plans that were not approved by stockholders.~~

~~SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE~~

~~Section 16(a)~~payment of an amount of shares of Common Stock valued at 100% of the average Closing Bid Price of the Corporation's Common Stock for the five (5) trading days immediately preceding the Conversion Date; provided, however, that the Corporation shall pay such amount in cash if the holder provides the Corporation with ten (10) days prior written notice of its intention to be paid in cash, to the extent of the funds legally available therefor.

A-3

D. Limitations on Conversions. The conversion of shares of Series A-1 Preferred Stock shall be subject to the following limitations (each of which limitations shall be applied independently):

(i) Cap Amount. If the Corporation is prohibited by Rule 4350(i) of the National Association of Securities Dealers, Inc. ("NASD"), or any successor or similar rule, or the rules or regulations of any other securities exchange on which the Common Stock is then listed or traded, from issuing a number of shares of Common Stock upon conversion of Series A-1 Preferred Stock in excess of a prescribed amount (the "CAP AMOUNT") (without stockholder approval or otherwise), then the Corporation shall not issue shares upon conversion of Series A-1 Preferred Stock in excess of the Cap Amount. Assuming solely for purposes of this paragraph (D) that such Rule 4350(i) or similar rule is applicable, the Cap Amount shall mean 19.99% of the Common Stock outstanding on the dated of issuance of the Series A-1 Preferred Stock (subject to adjustment upon a stock split, stock dividend or similar event). The Cap Amount shall be allocated pro rata to the holders of Series A-1 Preferred Stock as provided in Article XV.C. In the event the Corporation is prohibited from issuing shares of Common Stock as a result of the operation of this subparagraph (i), the Corporation shall comply with Article VII.

(ii) Additional Restrictions on Conversion or Transfer. In no event shall a holder of shares of Series A-1 Preferred Stock of the Corporation have the right to convert shares of Series A-1 Preferred Stock into shares of Common Stock or to dispose of any shares of Series A-1 Preferred Stock to the extent that such right to effect such conversion or disposition would result in the holder or any of its affiliates together beneficially owning more than 4.99% of the outstanding shares of Common Stock. For purposes of this subparagraph, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities and Exchange Act of 1934, as amended, ~~requires the Company's officers, directors~~ and ~~persons who own more than ten percent of the Company's Common Stock (collectively, “Reporting Persons”) to file reports of ownership and changes~~Regulation 13D-G thereunder. The restriction contained in ~~ownership with the SEC and Nasdaq. Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file.~~

~~Based solely on its review of the copies of such reports received by it and written representations all Section 16(a) reports were timely filed except as follows: Mr. Hatalski did~~this subparagraph may not ~~timely file a Form 3 upon his appointment to the Board of Directors~~be altered, amended, deleted or changed in September 2002. Messrs. Hasenyager and Nielsen did not timely file a Form 3 upon their appointment to the Board of Directors in October 2002. Mr. Kingley did not timely file a Form 3 upon his appointment to the Board of Directors in November 2002. With the exception of Mr. Pizi who received no options, all the members of the Board of Directors failed to timely file a Form 4 reporting the receipt of options to purchase common stock in October 2002 except Mr. Kingley, who did not timely file for the receipt of options in November 2002. The filing deficiencies referenced above were not remedied until January 2003.

~~PROPOSAL 1: ELECTION OF DIRECTORS~~

The Board of Directors has nominated Anthony Pizi, Frank Artale, Nicholas Hatalski, Bruce Hasenyager, Kenneth Nielsen and Jay Kingley for election as directors at the 2003 Annual Meeting of Stockholders. All nominees currently are members of the Board of Directors. All nominees have consented to serve as directors if elected. Each of the directors elected at the 2003 Annual Meeting of Stockholders will serve until the 2004 Annual Meeting of Stockholders and until the election and qualification of his successor or until his earlier death, resignation or removal.

~~The affirmative vote of a plurality of the votes cast by~~any manner whatsoever unless the holders of ~~Voting Stock, voting together as~~ a ~~single class, will be required to elect each~~majority of the ~~nominees as a director of the Company for the ensuing year.~~

~~Vote to Elect Directors~~

~~Directors are elected by a plurality of the votes cast. It is the intention of the persons named as proxies to vote the proxies “~~~~FOR”~~ the election to the Board of Directors of the six nominees named above, unless a stockholder directs otherwise. In the event that a vacancy (which is not anticipated) arises among the nominees prior to the Annual Meeting, the proxy will be voted for the remaining nominees and may be voted for a substitute nominee designated by the Board of Directors.

~~THE BOARD OF DIRECTORS OF THE COMPANY, BY UNANIMOUS ACTION OF THE DIRECTORS, RECOMMENDS A VOTE “FOR” THE ELECTION OF THE NOMINEES NAMED IN THIS PROPOSAL.~~

~~Additional Information Concerning the Board of Directors and Director Nominees~~

~~Set forth below with respect to each nominee is his name, age, principal occupation and business experience for the past five years and length of service as a director of the Company, when applicable.~~

~~Anthony C. Pizi~~

~~Director since August 2000.~~

~~Age: 44~~

Mr. Pizi has served as Chairman of the Board of Directors and as Chief Technology Officer since December 1, 2000. He has served as Chief Executive Officer since February 1, 2001. Mr. Pizi has been a director since August 2000. Until December 2000, he 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.

~~Frank G. Artale~~

~~Director since June 2001.~~

~~Age: 37~~

Mr. Artale has been a director of Level 8 since June 2001. Since March 2002, Mr. Artale has served as CEO of Consera Software. Prior to that and since July 2000, Mr. Artale served as the Vice President and General Manager of the Windows Platform Division at Veritas Software Corporation (NASDAQ: VRTS) where his group is responsible for overall product strategy for Windows targeted software products. Prior to joining Veritas, Mr. Artale spent nine years at Microsoft Corporation where he held various positions including General Manager for systems management during the Windows 2000 project and Director of Program Management for Windows NT 4.0.

~~Nicholas Hatalski~~

~~Director since September 2002.~~

~~Age: 40~~

Mr. Hatalski has been a director of Level 8 since September 2002. Since December 2000, Mr. Hatalski has served as a Senior Vice President of the iServices Group of Park City Solutions, Inc. Previously, he was a Practice Manager at Siemens Health Services.

~~Bruce W. Hasenyager~~

~~Director since October 2002.~~

~~Age: 60~~

Mr. Hasenyager has been a director of Level 8 since October 2002. Since April 2002, Mr. Hasenyager has served as Director of Business and Technology Development at the Hart eCenter at Southern Methodist University. Prior to that, Mr. Hasenyager served as Senior Vice President and CTO of Technology and Operations at MobilStar Network Corporation since April 1996.

~~Kenneth W. Nielsen~~

~~Director since October 2002.~~

~~Age: 43~~

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. Prior to that, Mr. Nielsen was District Operations Manager for Outsource International, Inc.

~~Jay R. Kingley~~

~~Director since November 2002.~~

~~Age: 41~~

Mr. Kingley has been a director of Level 8 since November 2002. Since 2001, Mr. Kingley has served as CEO of Warren Partners, LLC, a software development and consultancy company. Prior to that, Mr. Kingley was Managing Director of a business development function of Zurich Financial Services Group from 1999-2001. Prior to joining Zurich Financial Services Group, Mr. Kingley was Vice President of Diamond Technology Partners, Inc., a management consulting firm.

~~Meetings and Committees of the Board of Directors~~

The Board of Directors is responsible for the overall affairs of the Company. The Board of Directors held 38 meetings in 2002. Each director attended over 75% of the meetings of the Board and any committees on which he served in fiscal 2002 except for Dr. Jon Anton who attended no meetings and was not nominated for re-election to the Board of Directors at the 2002 Annual Meeting held in December 2002. To assist the Board of Directors in carrying out their responsibility, the Board has delegated certain authority to several committees. Information concerning these committees follows.

Messrs. Artale, Hatalski and Kingley presently serve on the Compensation Committee of the Board of Directors. Until his resignation in May 2003, Paul Rampel served on the Compensation Committee. During 2002, the Compensation Committee consisted of Messrs. Barbano, Berty and Daly. Mr. Daly resigned from the Board of Directors in July 2002. Mr. Berty and Mr. Barbano resigned from the Board of Directors in August. The Compensation Committee has (i) full power and authority to interpret the provisions of and supervise the administration of the Level 8 1997 Stock Option Plan and the Outside Director Stock Incentive Plan, and (ii) the authority to review all compensation matters relating to the Company. The Compensation Committee met six times during fiscal 2002.

Messrs. Artale, Nielsen and Hasenyager presently serve on the Audit Committee of the Board of Directors. The Audit Committee recommends to the Board of Directors the independent public accountants to be selected to audit the Company’s annual financial statements and approves any special assignments given to such accountants. The Audit Committee also reviews the planned scope of the annual audit, any changes in accounting principles and the effectiveness and efficiency of the Company’s internal accounting staff. The Audit Committee met four times during fiscal 2002.

Mr. Hasenyager presently serves on the Nominating Committee of the Board of Directors. Mr. Rampel served on the Nominating Committee during fiscal year 2002 and until his resignation from the Board of Directors in May 2003. The Nominating Committee is responsible for proposing nominees to fill vacancies on the Board of Directors. The Nominating Committee does not consider stockholder recommendations for directors.

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

~~Compensation Committee Interlocks and Insider Participation~~

The Compensation Committee is currently comprised of Messrs. Artale, Hatalski, and Kingley. During fiscal year 2002 and until his resignation from the Board of Directors in May 2003, Paul Rampel also served on the Compensation Committee. None of the current members of the Compensation Committee has served as an executive officer of the Company. Mr. Rampel, who served on the Compensation Committee until his resignation was an executive officer until June 2002. No executive officer of the Company has served as a member of the Compensation Committee of any other entity of which Messrs. Artale, Rampel, Hatalski, and Kingley have served as executive officers. There were no interlocking relationships between the Company and other entities that might affect the determination of the compensation of the directors and executive officers of the Company.

~~Director Compensation~~

In May 1999, stockholders of the Company approved the Outside Director Stock Incentive Plan of the Company. Under this plan, the outside directors may be granted an option to purchase 12,000 shares of common stock at a price equal to the fair market value of the common stock as of the grant date. 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. These options vest over a three year period in equal increments upon the eligible Director'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 shares in lieu of cash, subject to approval by the Board of Directors. In addition, the plan permits the Board of Directors to grant discretionary awards to eligible directors under t he plan. None of the Company's Directors received additional monetary compensation for serving on the Board of Directors of the Company in 2002 other than reimbursement of reasonable expenses incurred in attending meetings.

In October 2002, the Board of Directors approved an amendment to the stock incentive plan for all non-management directors. Under the amendment, each non-management director will receive 100,000 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 dire ctors, 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 being issued out of the Level 8 Systems, Inc. 1997 Employee Stock Plan.

~~Additional Information~~

For additional information that should be considered with regard to the election of directors, see “Executive Compensation,” “Stock Performance Graph” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

~~EXECUTIVE OFFICERS~~

~~The Company’s current executive officers are listed below, together with their age, position with the Company and business experience for the past five years.~~

~~Anthony C. Pizi~~

~~Age: 44~~

Mr. Pizi currently serves as the Chairman of the Board, Chief Executive Officer and Chief Technology Officer of the Company. Please refer to the section of this Proxy Statement entitled “Additional Information Concerning the Board of Directors and Director Nominees” for additional information regarding Mr. Pizi’s experience.

~~John P. Broderick~~

~~Age: 54~~

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.

~~Executive Compensation~~

The following summary compensation table sets forth the compensation earned by all persons serving as the Company’s executive officers during fiscal year 2002, theexecutive officers serving or having served at the end of fiscal 2001 whose salary and bonus exceeded $100,000 for services rendered to the Company during fiscal 2002 and one other former executive officer who would be included but for the fact that he no longer served as executive officer at the end of fiscal 2002. The table reflects compensation earned for each of the last three years or for such shorter period of service as an executive officer as is reflected below. For the principal terms of the options granted during fiscal 2002, see “Option Grants in Fiscal 2002.”

~~Summary Compensation Table~~

Name and
Principal
Position

Fiscal
Year

Salary

Bonus
Securities
Underlying
Options
All Other
AnnualCompensation
Anthony C. Pizi

Chief Executive Officer, Chief
Technology Officer and Chairman (1)
2002
2001
$ 337,500(2)
$ 527,038
$      --
$      --
500,000
500,000
$     --
$     --
John P. Broderick

Chief Operating and Financial Officer, Corporate Secretary
2002
2001

$ 200,000
$ 146,788
$   40,000
$   40,000
100,000
165,900
$     --
$     --
Paul Rampel

Former President (3)
2002
2001
2000
$ 133,333
$ 231,310
$   15,000
$        --
$   60,000
$        --

404,300
       --
$   76,400(4)
$     --

~~(1)~~

~~Mr. Pizi began his service as Chief Executive Officer of the Company in February 2001.~~

~~(2)~~

~~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 and to defer $37,500 of 2002 salary.~~

~~(3)~~

~~Mr. Rampel resigned his position as President in June 2002.~~

~~(4)~~

~~Represents the fair market value of stock issued to Mr. Rampel as part of his separation from the Company as well as a forgiveness of debt to the Company in the amount of $32,500.~~

The following table sets forth information regarding each grant of stock options to each of the Named Executives during fiscal 2002. The Company is required to withhold from the shares issued upon exercise a number of shares sufficient to satisfy applicable withholding tax obligations. The Company did not award any stock appreciation rights (“SARs”) during fiscal 2002.

Option Grants in Fiscal 2002
Individual Grants

Name

Number of
Securities
Underlying
Options
  Granted

Percent of
Total Options
Granted to
Employees in
Fiscal Year

Exercise
Price
($/share)

Expiration
  Date
Potential Realizable Value
at Assumed Annual Rates
of Appreciation for
Option Term

       5% ($)           10% ($)
Anthony C. Pizi
163,600
336,400
8.42%
17.32%
$ 1.50
$ 0.53
02/25/12
11/25/12
$   154,330
112,127
$ 391,623
284,151
John P. Broderick
100,000
5.15%
$ 0.39
07/08/12
24,527
62,156
Paul Rampel
100,000
(1)
$ 0.35
10/14/12
22,011
55,781

~~(1) Mr. Rampel received a grant of stock options as a member of the Company’s Board of Directors. See Item 10 Director Compensation for further discussion.~~

~~The following table sets forth information concerning the options exercised during fiscal 2002 and held at December 31, 2002 by the Named Executives.~~

~~Fiscal 2002 Year–End Option Holdings and Values~~

Number of Securities
Underlying Unexercised
Options at December 31, 2002
Value of Unexercised In-the-MoneyOptions at December 31, 2002(1)

Name
Shares
Acquired
on
Exercise

Value
Realized

Exercisable

Unexercisable

Exercisable

Unexercisable
Anthony C. Pizi
--
--
166,653
833,347
(2)
--
John P. Broderick
--
--
55,295
210,605
(2)
--
Paul Rampel (3)
--
--
237,633
66,670
$11,666
$23,335

~~(1) Based on $0.38 per share, the December 31, 2002, closing price as quoted on the Nasdaq National Market.~~

~~(2) The exercisable stock options held by these executives were not in-the-money at December 31, 2002.~~

(3) Mr. Rampel holds 237,633 shares subject to stock options. As part of the separation agreement dated June 2002 between the Company and Mr. Rampel, all of Mr. Rampel’s option holdings immediately vested and the period in which those options may be exercised was extended to 12 months from the date of termination. Please see “Employment Agreements, Termination of Employment and Change in Control Arrangements” for a complete description of the severance arrangement.

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

Under the employment agreement between the Company and Mr. Pizi effective January 1, 2002, the Company is to pay Mr. Pizi an annual base salary of $300,000, and a performance bonus in cash of up to $150,000 per annum based upon certain revenue goals, as determined by the Compensation Committee of the Board of Directors of the Company, in its discretion. Mr. Pizi and the Company have agreed to modify his employment contract as of January 1, 2003 to provide for an annual base salary of $200,000, and a performance bonus in cash of up to $400,000 per annum as determined by the Compensation Committee of the Board of Directors of the Company, in its discretion. Upon termination of Mr. Pizi's employment by the Company without cause, the Company has agreed to pay Mr. Pizi (a) a lump sum payment of one year of Mr. Pizi's then base salary within thirty (30) days of termination and (b) two hundred thousand (200,000) shares of the Company's common stock. In the event there occurs a substantial change in Mr. Pizi'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 two hundred thousand (200,000) 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.

Under the employment agreement between the Company and Mr. Broderick effective January 1, 2002, the Company pays Mr. Broderick a base salary of $200,000 and a performance bonus of cash up to 20% of Mr. Broderick’s base salary. 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 has agreed to grant Mr. Broderick fifty thousand (50,000) shares of the Company's common stock, a salary continuation amounting to six months of Mr. Broderick's then base salary and immediately vest all unvested stock options held by Mr. Br oderick. 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'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 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.

Under the separation agreement between the Company and Mr. Rampel dated June 18, 2002, the Company has agreed, among other things, to provide to Mr. Rampel: (a) forgiveness of a $32,500 debt owed to the Company by Mr. Rampel; (b) immediate vesting of all unvested stock options and the extension of the period for exercise of these options to 12 months from the date of separation; and (c) a grant of 100,000 shares of common stock of the Company. All the payments above were subject to applicable withholding. In return for this compensation, Mr. Rampel executed a release of employment related claims and agreed to forfeit 310,000 vested stock options with exercise prices between $5.87 and $6.10.

~~COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION~~

This report by the Compensation Committee of the Board of Directors discusses the Committee’s compensation objectives and policies applicable to the Company’s executive officers. The report reviews the Committee’s policy generally with respect to the compensation of all executive officers as a group for fiscal 2002 and specifically reviews the compensation established for the Company’s Chief Executive Officer as reported in the Summary Compensation Table.

~~Report of the Compensation Committee of the Board of Directors on Executive Compensation~~

The Compensation Committee of the Board of Directors approves all policies under which compensation is paid or awarded to the Company’s executive officers. The Committee is currently comprised of Messrs. Artale, Hatalski and Kingley . Mr. Rampel served on the Compensation Committee until his resignation in May 2003 and was President of the Company until June 2002. Messrs. Artale, Hatalski and Kingley are not employees of the Company.

~~Compensation Philosophy~~

The Company’s executive compensation program has three objectives: (1) to align the interests of the executive officers with the interests of the Company’s stockholders by basing a significant portion of an executive’s compensation on the Company’s performance, (2) to attract and retain highly talented and productive executives, and (3) to provide incentives for superior performance by the Company’s executives. To achieve these objectives, the Committee has crafted a program that consists of base salary, short-term incentive compensation in the form of a bonus and long-term incentive compensation in the form of stock options. These compensation elements are in addition to the general benefit programs that are offered to all of the Company’s employees.

Each year, the Committee reviews the Company’s executive compensation program. In its review, the Committee studies the compensation packages for executives of a peer group of the Company’s most direct publicly held competitors for executive talent, assesses the competitiveness of the Company’s executive compensation program and reviews the Company’s financial performance for the previous fiscal year. The Committee also gauges the success of the compensation program in achieving its objectives in the previous year and considers the Company’s overall performance objectives.

~~Each element of the Company’s executive compensation program is discussed below.~~

~~Base Salaries~~

The Committee annually reviews the base salaries of the Company’s executive officers. The base salaries for the Company’s executive officers for fiscal 2002 are reflected in the Summary Compensation Table and were established by the Committee at the beginning of that fiscal year. In addition to considering the factors listed in the foregoing section that support the Company’s executive compensation program generally, the Committee reviews the responsibilities of the specific executive position and the experience and knowledge of the individual in that position. The Committee also measures individual performance based upon a number of factors, including a measurement of the Company’s historic and recent financial performance and the individual’s contribution to that performance, the individual’s performance on non-financial goals and other contributions of the individual to the Company’s success, and gives each of these factors relatively equal weight without confining its analysis to a rigorous formula. As is typical of most corporations, the actual payment of base salary is not conditioned upon the achievement of any predetermined performance targets.

~~Incentive Compensation~~

Bonuses established for executive officers are intended to motivate the individual to work hard to achieve the Company’s financial and operational performance goals or to otherwise motivate the individual to aim for a high level of achievement on behalf of the Company in the coming year. The Committee does not have a formula for determining bonus payments, but establishes general target bonus levels for executive officers at the beginning of the fiscal year based on relatively equal measures upon the Committee’s subjective assessment of the Company’s projected revenues and other operational and individual performance factors and may adjust these targets during the year. Bonuses for 2002 were determined by evaluations of individual performance and by the success of the Company.

~~Long-Term Incentive Compensation~~

The Company provides its executive officers with long-term incentive compensation through grants of stock options under the Company’s stock option plans. The Committee believes that placing a portion of executives’ total compensation in the form of stock options achieves three objectives. It aligns the interest of the Company’s executives directly with those of the Company’s stockholders, gives executives a significant long-term interest in the Company’s success and helps the Company retain key executives. In determining the number and terms of options to grant an executive, the Committee primarily considers subjectively the executive’s past performance and the degree to which an incentive for long-term performance would benefit the Company. The size of option grants is comparable to grants by other corporations within the Company’s industry that are comparable in size to the Company.

~~Benefits~~

The Committee believes the Company must offer a competitive benefits program to attract and retain key executives. The Company provides the same medical and other benefits to its executive officers that are generally available to its other employees.

~~Compensation of the Chief Executive Officer~~

Mr. Pizi has served as Chief Executive Officer of the Company since February 1, 2000, and was compensated in accordance with the terms of his employment agreement with the Company. See “Executive Compensation-Employment Agreements, Termination of Employment and Change-In-Control Arrangements.”

~~Submitted by:~~

~~THE COMPENSATION COMMITTEE~~

~~Frank Artale~~

~~Nicholas Hatalski~~

~~Jay Kingley (as of June 2003)~~

~~Section 162(m) of the Internal Revenue Code~~

It is the responsibility of the Compensation Committee to address the issues raised by Section 162(m) of the Internal Revenue Code, as amended (the “Code”). The revisions to this Code section made certain non-performance based compensation in excess of $1,000,000 to executives of public companies non-deductible to the companies beginning in 1994. The Committee has reviewed these issues and has determined that no portion of compensation payable to any executive officer for fiscal 2002 is non-deductible. The Company’s 1995 Stock Incentive Plan and 1997 Stock Option Plan limit to 200,000 and 500,000, respectively, the number of options or shares that may be awarded to any individual in a single year under these plans.

~~Audit Committee Report~~

The Audit Committee assists the Board of Directors in its oversight of the Company’s accounting, reporting practices and financial reports. The Audit Committee’s responsibilities are more fully described in its charter, a copy of which was filed as Exhibit A to the proxy statement for the 2001 Annual Meeting. Management has the primary responsibility for the preparation and integrity of the Company’s financial statements, accounting and financial reporting principles and internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. The Company’s independent auditors, Deloitte & Touche LLP, are responsible for performing an independent audit of the consolidated financial statements and expressing an opinion on the conformity of those financial statements with generally accepted accounting principles.

~~The Audit Committee reports as follows with respect to the audit of the Company’s 2002 audited financial statements:~~

•

~~The Committee reviewed and discussed the Company’s 2002 audited financial statements with its management,~~

•

The Committee discussed with the independent auditors, Deloitte & Touche LLP, the matters required to be discussed by SAS 61, which include, among other items, matters related to the conduct of the audit of the Company’s financial statements,

•

The Committee received written disclosures and the letter from the independent auditors required by ISB Standard No. 1 (which relates to the auditors’ independence from the Company and its related entities) and discussed with the auditors their independence from the Company, and

•

Based on review and discussions of the Company’s 2002 audited financial statements with management and discussions with the independent auditors, the Audit Committee recommended to the Board of Directors that the Company’s 2002 audited financial statements be included in its Annual Report on Form 10-K.

~~Submitted by:~~

~~THE AUDIT COMMITTEE~~

~~Frank Artale~~

~~Kenneth Nielsen~~

~~Bruce Hasenyager~~

~~Audit Committee Charter~~

The Board of Directors has adopted a written charter for the Audit Committee, a copy of which is attached as Appendix A to the Proxy Statement for the 2001 Annual Meeting of Stockholders. The Board of Directors reviews and approves changes to the Audit Committee Charter annually. The Audit Committee Charter was not amended in 2001 or 2002.

~~Independence of Audit Committee Members~~

~~The Company’s current Audit Committee of Messrs. Artale, Nielsen and Hasenyager meets the requirements of independence as defined in the applicable Nasdaq standards.~~

~~STOCK PERFORMANCE GRAPH~~

The following graph indicates the Company's cumulative total return to stockholders from December 31, 1997 through December 31, 2002, as compared to cumulative total returns for the Nasdaq Stock Market (U.S.) Index and the Media General Business Software and Services Index.

~~CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS~~

~~Assignment of Note Receivable from Profit Key~~

In October 2002, the Company assigned its interest in a Note Receivable from Profit Key Acquisition LLC to a group of investors including Nicholas Hatalski and Paul Rampel, members of our Board of Directors, and Anthony C. Pizi, the Chief Executive Officer of the Company. Pursuant to the terms of the agreement, Level 8 assigned its interest in a Note Receivable in the principal amount of $500,000, due March 31, 2003 with interest at 9% per annum in return for $400,000 cash. The Company solicited a competitive bid before finalizing the transaction.

~~Sale of StarQuest Assets~~

On June 18, 2002, the Company and its subsidiary Level 8 Technologies, Inc. entered into an Asset Purchase Agreement with Starquest Ventures, Inc., a California corporation and an affiliate of Paul Rampel, a member of the Board of Directors of Level 8 and a former executive officer. Pursuant to the terms and conditions of the Asset Purchase Agreement, Level 8 sold its Star/SQL and CTRC software products to Starquest Ventures for $365,000 and the assumption of certain maintenance liabilities. $150,000 of the proceeds of the sale transaction was used to repay borrowings from Mr. Rampel. The Company solicited and received a fairness opinion on the transaction.

~~Loan from Related Parties~~

In December 2001, the Company entered into an agreement with Messrs. Rampel and Pizi which provided for borrowings from them for up to $250,000 and is secured by notes and accounts receivable. The borrowings bear interest at 10% and are payable quarterly. In connection with Mr. Rampel's resignation from the Company in June 18, 2002 and the sale of the StarQuest assets to an entity affiliated with Mr. Rampel as described above, the Company repaid $150,000 of the borrowings to Mr. Rampel. In August 2002, Mr. Pizi elected to convert approximately $150,000 of his indebtedness from the Company into equity and participated in the Series C Convertible Redeemable Preferred Stock Offering on the same terms as the other investors and as a result this agreement has been terminated.

~~Transactions with Merrill Lynch~~

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 and entered into a royalty sharing agreement for sales of Cicero. Under the royalty sharing agreement, the Company is obligated to pay a royalty of 3% of the sales price for each sale of Cicero or related maintenance services. The royalties are not payable in excess of $20 million. As consideration for the issuance of the shares and the royalty payments, Merrill Lynch has entered into an amendment to the Cicero license agreement which extends our exclusive worldwide marketing, sales and development rights to Cicero and granted us certain ownership rights in the Cicero trademark. Pursuant to the Purchase Agreement, the Company also entered into a Registration Rights Agreement granting MLBC certain rights to have the shares of common stock it received under the P urchase Agreement registered under the Securities Act. On July 31, 2000, the Company entered into a Purchase Agreement with Merrill Lynch concerning technology owned by Merrill Lynch. On August 23, 2000, pursuant to the Purchase Agreement, Merrill Lynch granted the Company exclusive worldwide marketing, sales and public development rights for a period of two years to Cicero(R), a comprehensive integrated desktop computer environment developed by Merrill Lynch and used by more than 30,000 Merrill Lynch professionals worldwide, subject to Merrill Lynch's retained right to use and develop Cicero for its own use and the use of affiliates and the possible loss of exclusivity if the Company's share price does not meet certain targets. As consideration for this license, the Company issued 1,000,000 shares of Company common stock to Merrill Lynch.

~~Preferred Stock and Warrant Exchange~~

~~On October 25, 2002, we 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 potential conversion price adjustments 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 B 1 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.

Under the terms of the agreement, we are authorized to issue equity securities in a single or series of financing transactions representing aggregate gross proceeds to the Company of approximately $5.0 million, or up to an aggregate 17.5 million shares of common stock, whichever occurs first, 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, we repriced the warrants as described above and have agreed to issue on a pro rata basis up to 4.6 million 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 $5.0 million issuance cap or the 17.5 million share issuance cap. As a result of the Series C Preferred Stock financing which represented approximately $1.6 million of the Comp any's $5.0 million 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. Additionally, the Company has agreed to issue a warrant to purchase common stock to the existing Preferred Stockholders on a pro rata basis 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 per share (adjusted for recapitalizations, stock splits and the like), whichever is greater. Previously, on October 16, 2001, the Company effected an exchange of all of its outstanding shares of Series A 4% Convertible Redeemable Preferred Stock and Series B 4% Convertible Redeemable Preferred Stock and related warrants for an equal number of shares of our newly created Series A1 Convertible Redeemable Preferred Stock ("Series A1 Preferred Stock") and Series B1 Convertible Redeemable Preferred Stock ("Series B1 Preferred Stock") and related warrants. Advanced Systems Europe, B.V. ("ASE"), a wholly owned subsidiary of Level 8's principal stockholder at the time, exchanged 10,000 shares of Series A Preferred Stock for the newly created Series A1 Preferred Stock. The effect of the exchange with respect to ASE is as follows: The conversion price for the Series A1 Preferred Stock was reduced from $10.00 to $8.333 per share, and the total number of shares of common stock into which such shares may be converted increased from 1,000,000 to 1,200,048. No dividends are payable on the Series A1 Preferred Stock. Liraz and ASE may no longer be considered related parties because of their divestments of capital stock of the Company.

~~Loans to Related Parties~~

On January 27, 2001, the Company extended a loan to Paul Rampel, the then President and a director of the Company, in the amount of $75,000. The loan carried an interest rate of 10% per annum on the principal balance and the loan was due and payable in full on January 27, 2002. The loan was secured by 15,000 shares of common stock of the Company held by Mr. Rampel under a Stock Pledge agreement between the Company and Mr. Rampel. In March of 2002, Mr. Rampel, as part of his new employment agreement with the Company, gave back the 15,000 shares of stock as partial payment on the Note and agreed to pay the rest of the Note off monthly during 2002. The remainder of the balance was settled in connection with Mr. Rampel's separation agreement entered into in June 2002.

~~Borrowings and Commitments from Liraz~~

As part of the acquisition of Template software, the Company obtained $10 million in financing in the form of a 17 month term loan. The financing was guaranteed by Liraz, the Company's principal stockholder, in return for 60,000 shares of the Company's common stock. The number of shares of common stock provided in exchange for the guarantee, was determined by the independent directors of the Company in consultation with an outside appraisal firm and based upon market conditions and the Company's anticipated financing needs at closing. In the third quarter of 2000, this term loan was amended to provide the Company with an additional $5 million in borrowings and to extend the due date from May 31, 2001 to November 30, 2001. Liraz subsequently extended its guarantee of the amended loan through November 30, 2001 in exchange for 110,000 shares of the Company's common stock. The value of the shares issued will be capitalized and amortized over the term of the loan as a compo nent of interest expense. In May of 2001, Liraz extended its guarantee until April 30, 2002. The commitment provides for an interest rate equal to the London Interbank Offered Rate plus 1% annually. As of December 31, 2002 the interest rate was approximately 2.97%. As part of the sale of the Geneva AppBuilder Product to a subsidiary of Liraz in October 2001, the company utilized the proceeds from the transaction and other assets to liquidate approximately $12 million of the outstanding debt. At the same time, Liraz extended its guarantee and the maturity date on the balance of the Note until November 2003.

~~PROPOSAL 2: AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED CERTIFICATE OF~~
~~INCORPORATION TO INCREASE THE NUMBER OF SHARES OF AUTHORIZED COMMON STOCK~~

~~Background~~

Our Board of Directors has unanimously adopted a resolution approving, and recommending to stockholders for approval, a proposal to amend our Amended and Restated Certificate of Incorporation to increase the aggregate number of shares of Common Stock ~~that~~and the ~~Company be authorized to issue from 60,000,000 to 85,000,000. This proposal, if approved by the stockholders will allow the Board to determine~~Majority Holders shall approve, in ~~its sole discretion pursuant to Section 242(c) of the Delaware General Corporation Law to elect, as it determines to be in the best interests of the Company and its stockholders, whether~~writing, such alteration, amendment, deletion or ~~not to affect an increase in the Company’s authorized shares of Common Stock. This proposal must be approved by the stockholders and implemented by the Board~~change.

V. RESERVATION OF SHARES OF COMMON STOCK

A. Reserved Amount. On or prior to the ~~Board’s ability to~~Issuance Date, the Corporation shall reserve ~~additional~~ shares ~~available for the grant~~ of ~~stock options as described in Proposal 3.~~

~~The form of the proposed amendment is attached to this proxy asExhibit A. By approving this Proposal 2, the stockholders are giving the Board of Directors the authority to increase the~~its authorized but unissued shares of Common Stock as described in this Proposal 2. If the stockholders also approve Proposal 3 below, the Board of Directors will affect the increase in authorized Common Stock prior to reserving additional shares under the stock option plan. If this Proposal 2 is approved by the stockholders and the Board elects to increase the authorized shares of Common Stock, the amendment will become effective upon the filing of a Certificate of Amendment with the Delaware Secretary of State.

~~Reasons for the Increase in Authorized Common Stock~~

The Company will need to raise additional equity capital to support its operating plan, attract strategic investors, and to grant additional options under its stock option plan. Based on the trading price of the Company’s Common Stock, the Company would not have sufficient authorized shares to raise any significant amount of equity capital. As of June 13, 2003, the Company had 19,827,203 shares of Common Stock outstanding and an additional 35,101,327 shares of Common Stock reserved for issuance upon ~~the exercise of stock options, warrants and upon the~~ conversion of ~~outstanding Preferred Stock. Additionally,~~ the ~~Company has agreed to issue approximately 1.7 million warrants to the purchasers of~~ Series DA-1 Preferred Stock with such warrants becoming exercisable if the Company is unable to show $6 million in revenues for the nine months September 30, 2003. The Company is also obligated to issue 3.1 million warrants to the holders of its Series A3 and B3 Preferred Stock in connection with their agreement to waive certain anti-dilution provisions in connection with the sale of the Company’s Series C and Series D Preferred Stock. Accordingly, after satisfying its obligations, the Company would have less than 300,000 shares of Common Stock remaining for issuance for other purposes which will be insufficient to close an equity financing that would raise sufficient capital to fund the Company’s operating plan and insufficient to increase the shares available for the grant of stock options as described in Proposal 3.

~~The Board of Directors believes that it is in the Company’s best interests to increase~~thereafter the number of authorized but unissued shares of Common Stock ~~in order~~so reserved (the "RESERVED AMOUNT") shall at all times be sufficient to provide for the ~~Company with~~conversion of all of the ~~flexibility~~Series A-1 Preferred Stock outstanding at the then current Conversion Ratio thereof. The Reserved Amount shall be allocated to ~~issue Common~~the holders of Series A-1 Preferred Stock as provided in Article XV.C.

B. Increases to Reserved Amount. If the Reserved Amount for ~~a variety~~any three consecutive trading days (the last of ~~corporate purposes~~such three trading days being the ~~Board may deem advisable without further action by~~"AUTHORIZATION TRIGGER DATE") shall be less than 100% of the Company’s stockholders, unless required by law, regulation or stock exchange rule. These purposes could include, among other things, the sale of stock to obtain additional capital funds, the sale of shares to strategic investors, the reservationnumber of shares of Common Stock ~~for issuance~~issuable upon ~~the~~ conversion of the then outstanding shares of Series A-1 Preferred Stock, or the ~~exercise of warrants, reserving more shares for issuance under the 1997 Stock Incentive Plan and other bona fide purposes.~~

The Board believes that the proposed increase in authorized Common Stock will make sufficient shares available for use pursuant to the purposes described herein. Other than as specified above and as permitted or required under the Company’s employee benefit plans and under outstanding options, warrants and other securities convertible into Common Stock (including the obligation to issue certain warrants toCorporation shall immediately notify the holders of ~~its~~Series A-1 Preferred ~~Stock), the Company’s management has no present arrangements, agreements or understandings for the use~~Stock of ~~the additional shares proposed~~such occurrence and shall take immediate action (including, if necessary, seeking stockholder approval to ~~be authorized. No additional action or authorization by the Company’s stockholders would be necessary prior to~~authorize the issuance of ~~any~~ additional shares ~~unless required~~of Common Stock) to increase the Reserved Amount to 100% of the number of shares of Common Stock then issuable upon conversion of all of the outstanding Series A-1 Preferred Stock at the then current Conversion Ratio.

VI. [INTENTIONALLY OMITTED]

VII. INABILITY TO CONVERT DUE TO CAP AMOUNT

A. Issuance Limitation. If the Corporation is prohibited by ~~applicable law~~Rule 4350 of the NASD or any successor or similar rule, or the rules of any ~~stock~~other securities exchange or ~~quotation~~electronic trading system on which the Common Stock is then listed or ~~quoted. The Company reserves the right to seek a further increase in authorized shares~~traded (a "TRIGGERING EVENT"), from ~~time to time i n the future as considered appropriate by the Board.~~

~~The additional shares~~issuing all of ~~Common Stock authorized by the proposed amendment would have the same privileges as~~ the shares of Common Stock ~~currently authorized~~issuable

A-4

upon complete conversion of the Series A-1 Preferred Stock (without giving effect to the limitations on conversion and ~~issued. In addition, if~~exercise contained in Article IV.D of this Certificate of Designations), the ~~Board elects~~Corporation shall immediately notify the holders of such Triggering Event and, within a period of five (5) days after the occurrence of such Triggering Event, purchase from each holder of the Series A-1 Preferred Stock, at a per share purchase price equal to ~~issue additional~~the Market Price multiplied by the number of shares of Common Stock issuable to the holder at the then current Conversion Ratio (the "PER SHARE PRICE"), such ~~issuance could have~~whole number of shares of Series A-1 Preferred Stock such that the Common Stock issuable upon complete conversion of the Series A-1 Preferred Stock (without giving effect to the limitations on conversion and exercise contained in Article IV.D of this Certificate of Designations) is no longer prohibited by Rule 4350 of the NASD (or any successor or similar rule) or the rules of any other securities exchange or electronic trading system on which the Common Stock is then listed or traded. In the event that Corporation fails to pay all or any portion of the Per Share Price in accordance with this Article VII.A, the Corporation shall immediately deliver to each holder of Series A-1 Preferred Stock to which any portion of the Per Share Price is due and payable, a ~~dilutive effect~~promissory note, payable upon demand, in a principal amount equal to the amount of the Per Share Price that such holder is owed in accordance with this Article VII.A, and otherwise in form and substance satisfactory to such holder. Any promissory note issued by the Corporation in accordance with this Article VII.A shall bear interest at a rate equal to the lesser of 15% per annum (calculated on a 360 day a year basis) and the highest rate permitted by applicable law.

For purposes of this Article VII.A, the term "MARKET PRICE," as of any date, (i) means the closing bid price for the Common Stock as reported on the ~~earnings per share, voting power and percentage ownership~~OTC by Bloomberg Financial Markets ("BLOOMBERG") or other nationally recognized reporting service, at the option of ~~current stockholders. Except~~the holder hereof, for ~~certain transactions requiring stockholder approval under~~ the ~~Delaware General Corporation Law,~~ten consecutive trading days immediately preceding such date, or (ii) if the ~~Board may approve~~OTC is not the ~~issuance of authorized~~principal trading market for the shares of Common Stock, the average of the reported bid prices reported by Bloomberg or such other nationally recognized reporting service on the principal trading market for the Common Stock during the same period, or, if there is no bid price for such period, the last sales price reported by Bloomberg or such service for such period, or (iii) if the foregoing do not apply, the last bid price of such security in the over-the-counter market on the pink sheets for such security as reported by Bloomberg or such service, or if no bid price is so reported for such security, the last sale price of such security as reported by Bloomberg or such service, or (iv) if market value cannot be calculated as of such date on any of the foregoing bases, the Market Price shall be the average fair market value as reasonably determined by an investment banking firm selected by the Corporation and reasonably acceptable to the holder, with the costs of the appraisal to be borne by the Corporation.

VIII. REDEMPTION

A. Redemption by Holder. The Series A-1 Preferred Stock is not redeemable.

IX. RANK

All shares of the Series A-1 Preferred Stock shall rank (i) prior to (a) the Corporation's Common Stock; and (b) any class or series of capital stock of the Corporation hereafter created (unless, with the consent of the holders of at least 66% of the Series A-1 Preferred Stock obtained in accordance with Article XIII hereof, such ~~times,~~class or series of capital stock specifically, by its terms, ranks senior to or pari passu with the Series A-1 Preferred Stock) (collectively with the Common Stock, "JUNIOR SECURITIES"); (ii) pari passu with any class or series of capital stock of the Corporation hereafter created (with the written consent of the holders of at least 66% of the Series A-1 Preferred Stock obtained in accordance with Article XIII hereof) specifically ranking, by its terms, on parity with the Series A-1 Preferred Stock (the "PARI PASSU SECURITIES"); and (iii) junior to any class or series of capital stock of the Corporation hereafter created (with the written consent of the holders of at least 66% of the Series A-1 Preferred Stock obtained in accordance with Article XIII hereof) specifically ranking, by its terms, senior to the Series A-1 Preferred Stock (collectively, the "SENIOR Securities"), in each case as to distribution of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary.

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X. LIQUIDATION PREFERENCE

A. If the Corporation shall commence a voluntary case under the U.S. Federal bankruptcy laws or any other applicable bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in an involuntary case under any law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Corporation shall be entered by a court having jurisdiction in the premises in an involuntary case under the U.S. Federal bankruptcy laws or any other applicable bankruptcy, insolvency or similar law resulting in the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and any such decree or order shall be unstayed and in effect for a period of 60 consecutive days and, on account of any such event, the Corporation shall liquidate, dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve or wind up, including, but not limited to, the sale or transfer of all or substantially all of the Corporation's assets or intellectual property in one transaction or in a series of related transactions (unless the holders of a majority of the Shares of Series A-1 Preferred Stock elect not to treat such event as a liquidating event) and the consolidation or merger of the Corporation with or into any other entity (unless the holders of a majority of the Shares of Series A-1 Preferred Stock elect not to treat such event as a liquidating event) (a "LIQUIDATION EVENT"), no distribution shall be made to the holders of any shares of capital stock of the Corporation (other than Senior Securities pursuant to the rights, preferences and privileges thereof) upon liquidation, dissolution or winding up unless prior thereto the holders of shares of Series A-1 Preferred Stock shall have received the Liquidation Preference with respect to each share. If, upon the occurrence of a Liquidation Event, the assets and funds available for distribution among the holders of the Series A-1 Preferred Stock and holders of Pari Passu Securities, if any, shall be insufficient to permit the payment to such ~~persons~~holders of the preferential amounts payable thereon, then the entire assets and funds of the Corporation legally available for distribution to the Series A-1 Preferred Stock and the Pari Passu Securities, if any, shall be distributed ratably among such ~~consideration as it determines without prior approval~~shares in proportion to the ratio that the Liquidation Preference payable on each such share bears to the aggregate Liquidation Preference payable on all such shares. If, upon the occurrence of ~~or ratification by~~a Liquidation Event, the ~~stockholders.~~

~~Potential Anti-Takeover Effect~~

~~The proposed amendment~~assets and funds available for distribution among the holders of the Series A-1 Preferred Stock and holders of Pari Passu Securities, if any, shall be sufficient to ~~increase~~permit the ~~number~~payment to such holders of ~~authorized~~the preferential amounts payable thereon, then after such payment shall be made in full to the holders of the Series A-1 Preferred Stock, the remaining assets and funds available for distribution shall be distributed to the holders of any Junior Securities entitled to a liquidation preference in payment of the aggregate liquidation preference of all such holders. After such payment shall be made in full to the holders of any Junior Securities entitled to a liquidation preference, the remaining assets and funds available for distribution shall be distributed ratably among the holders of shares of Common Stock.

B. The purchase or redemption by the Corporation of stock of any class, in any manner permitted by law, shall not, for the purposes hereof, be regarded as a liquidation, dissolution or winding up of the Corporation.

C. The "LIQUIDATION PREFERENCE" with respect to a share of Series A-1 Preferred Stock ~~could, under certain circumstances, have~~means an ~~anti-takeover effect. For example,~~amount equal to $500.00 per share plus all accrued but unpaid dividends thereon (pursuant to Article II or otherwise) through the date of final distribution. The Liquidation Preference with respect to any Pari Passu Securities, if any, shall be as set forth in the ~~event~~Certificate of ~~a hostile attempt~~Designations filed in respect thereof.

XI. ADJUSTMENTS TO THE CONVERSION RATIO

The Conversion Ratio shall be subject to ~~take over control~~adjustment from time to time as follows:

A. Stock Splits, Stock Dividends, Etc. If, at any time on or after the Issuance Date, the number of the Company, it may be possible for management and the Board of Directors to endeavor to impede the attempt by issuing shares of Common Stock, thereby diluting or impairing the voting power of the other outstanding shares of Common Stock ~~and increasing~~is increased by a stock split, stock dividend, combination, reclassification or other similar event, the ~~potential costs to acquire control~~Conversion Ratio shall be proportionately reduced, or if the number of outstanding shares of Common Stock is decreased by a reverse stock split, combination or reclassification of shares, or other similar

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event, the Conversion Ratio shall be proportionately increased. In such event, the Corporation shall notify the Corporation's transfer agent of such change on or before the effective date thereof.

B. Notice of Adjustments. Upon the occurrence of each adjustment or readjustment of the ~~Company.~~Conversion Ratio pursuant to this Article XI amounting to a more than 5% change in such Conversion Ratio, the Corporation, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to each holder of Series A-1 Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The ~~amendment therefore may have~~Corporation shall, upon the ~~effect~~written request at any time of ~~discouraging unsolicited takeover attempts, thereby potentially limiting~~any holder of Series A-1 Preferred Stock, furnish to such holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the ~~opportunity for our stockholders to dispose of their shares~~Conversion Ratio at the ~~higher price generally available~~time in ~~takeover attempts~~effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or ~~that may~~property which at the time would be ~~available under~~received upon conversion of a ~~merger proposal. We may use the additional shares~~share of Series A-1 Preferred Stock.

XII. VOTING RIGHTS

A. Except as otherwise expressly provided elsewhere in this Certificate of Designations or as otherwise required by law, (a) each holder of Series A-1 Preferred Stock shall be entitled to ~~resist or frustrate~~vote on all matters submitted to a ~~third-party transaction providing for an above-market premium even if such third-party transacti on is favored by a majority~~vote of the ~~independent stockholders. The proposed amendment may have~~stockholders of the ~~effect~~Corporation and shall be entitled to that number of ~~permitting our current management, including~~votes equal to the ~~current Board~~number of ~~Directors,~~shares of Common Stock into which such holder's shares of Series A-1 Preferred Stock could then be converted, at the record date for the determination of stockholders entitled to ~~retain its position,~~vote on such matters or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited, and ~~place it~~(b) the holders of shares of Series A-1 Preferred Stock and Common Stock shall vote together (or tender written consents in lieu of a ~~better position~~vote) as a single class on all matters submitted to ~~resist changes that~~the stockholders ~~may wish~~of the Corporation. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares of Common Stock into which shares of Series A-1 Preferred Stock held by each holder could be converted) shall be rounded to ~~make if they are dissatisfied~~the nearest whole number. In connection with the ~~conduct~~foregoing, the Corporation shall provide each holder of ~~our business. This proposal~~Series A-1 Preferred Stock with prior notification of any meeting of the stockholders (and copies of proxy materials and other information sent to ~~increase~~stockholders) at the ~~authorized~~same time such notice and materials are provided to the holders of Common Stock.

B. Series A-1 Preferred Stock ~~has been prompted by business and financial considerations.~~

~~Stockholder Approval~~

Board Observer. The ~~affirmative vote~~holders of a majority of the outstanding shares of ~~Voting Common~~the Series A-1 Preferred Stock ~~voting together as a single class~~shall be entitled to appoint two observers to the Corporation’s Board of Directors who shall be entitled to receive all information received by the Board of Directors and to attend and participate without vote at meetings of the ~~affirmative vote~~Board of Directors and any committees thereof (the “Board Observer Rights”).

C. Series A-1 Preferred Stock Board Member. The holders of a majority of the outstanding shares of ~~Voting~~the Series A-1 Preferred Stock shall have the option to temporarily or permanently exchange their Board Observer Rights for two seats on the Board of Directors, each having one vote. The holders of a majority of the Series A-1 Preferred Stock shall be entitled to designate, by written election delivered to the Corporation, two representatives for appointment to the Board (the “Series A-1 Board Members”). If the Board of Directors contains the maximum number of directors permitted under the By-laws and Certificate of Incorporation of the Corporation at the time that the holders of a majority of Series A-1 Preferred Stock exercise their right to designate the Series A-1 Board Members, the Corporation shall take, or cause to be taken, all actions necessary to cause the removal of a director(s) of its choosing from the Board to allow for the election of the Series A-1 Board Members to the Board of Directors. The Series A-1 Board Members, once elected to the Board, shall have all fiduciary duties and obligations of the other directors and shall be subject to the provisions of, and entitled to the rights under, the By-laws and Certificate of Incorporation of the Corporation insofar as they apply to Directors generally.

XIII. PROTECTIVE PROVISIONS

Until such time as the Corporation consummates at least an additional $5,000,000.00 equity financing from institutional or strategic investors, the approval of the holders of at least 2/3 (66.6%) of the outstanding shares of the Series A-1 Preferred Stock voting together separately as a ~~single~~ class will be required for:

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A. The merger, sale of all, or substantially all of the assets or intellectual property, recapitalization, or reorganization of the Corporation;

B. The authorization or issuance of any equity security having any right, preference or priority superior to or on parity with the Series A-1 Preferred Stock (excluding debt not convertible into any such senior or Pari Passu equity security);

C. The redemption, repurchase or acquisition, directly or indirectly, through subsidiaries or otherwise, of any equity securities (other than the repurchase of equity securities of the Corporation at cost upon termination of employment or service pursuant to vesting agreements or stockholder agreements or a repurchase of the Series A-1 Preferred Stock) or the payment of dividends or other distributions on equity securities by the Corporation (other than on the Series A-1 Preferred Stock);

D. Any amendment or repeal of any provision of the Corporation’s Certificate of Incorporation or By-laws that would adversely affect the rights, preferences, or privileges of the Series A-1 Preferred Stock;

E. A significant change in the principal business of the Corporation as conducted at the time of the consummation of the closing of the Recapitalization;

F. The making of any loan or advance to any entity other than in the ordinary course of business unless it is wholly owned by the Corporation;

G. The making of any loan or advance to any person, including, without limitation, any employee or director of the Corporation or any subsidiary, except advances and similar expenditures in the ordinary course of business or under the terms of an employee stock or option plan approved by the Board of Directors and the holders of the Series A-1 Preferred Stock; or

H. The guarantee, directly or indirectly, of any indebtedness or obligations, except for trade accounts of any subsidiary arising in the ordinary course of business.

In addition to the approval of the Series A-1 Preferred Stock, any liquidation, dissolution, recapitalization or reorganization of the Corporation shall also require a unanimous vote of the Board of Directors.

XIV. MISCELLANEOUS

A. Cancellation of Series A-1 Preferred Stock. If any shares of Series A-1 Preferred Stock are converted pursuant to Article IV or repurchased by the Corporation, the shares so converted or repurchased shall be canceled, shall return to the status of authorized, but unissued preferred stock of no designated series, and shall not be issuable by the Corporation as Series A-1 Preferred Stock.

B. Lost or Stolen Certificates. Upon receipt by the Corporation of (i) evidence of the loss, theft, destruction or mutilation of any Preferred Stock Certificate(s) and (ii) (y) in the case of loss, theft or destruction, indemnity (without any bond or other security) reasonably satisfactory to the Corporation, or (z) in the case of mutilation, the Preferred Stock Certificate(s) (surrendered for cancellation), the Corporation shall execute and deliver new Preferred Stock Certificate(s) of like tenor and date. However, the Corporation shall not be obligated to reissue such lost or stolen Preferred Stock Certificate(s) if the holder contemporaneously requests the Corporation to convert such Series A-1 Preferred Stock.

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C. Allocation of Cap Amount and Reserved Amount. The initial Cap Amount and Reserved Amount shall be allocated pro rata among the holders of Series A-1 Preferred Stock based on the number of shares of Series A-1 Preferred Stock issued to each holder. Each increase to the Cap Amount and the Reserved Amount shall be allocated pro rata among the holders of Series A-1 Preferred Stock based on the number of shares of Series A-1 Preferred Stock held by each holder at the time of the increase in the Cap Amount or Reserved Amount. In the event a holder shall sell or otherwise transfer any of such holder's shares of Series A-1 Preferred Stock, each transferee shall be allocated a pro rata portion of such transferor's Cap Amount and Reserved Amount. Any portion of the Cap Amount or Reserved Amount which remains allocated to any person or entity which does not hold any Series A-1 Preferred Stock shall be allocated to the remaining holders of shares of Series A-1 Preferred Stock, pro rata based on the number of shares of Series A-1 Preferred Stock then held by such holders.

D. Quarterly Statements of Available Shares. For each calendar quarter beginning in the quarter in which the initial registration statement required to ~~approve~~be filed and thereafter so long as any shares of Series A-1 Preferred Stock are outstanding, the ~~proposal~~Corporation shall deliver (or cause its transfer agent to ~~amend~~deliver) to each holder a written report notifying the ~~Company’s~~holders of any occurrence which prohibits the Corporation from issuing Common Stock upon any conversion. The report shall also specify (i) the total number of shares of Series A-1 Preferred Stock outstanding as of the end of such quarter, (ii) the total number of shares of Common Stock issued upon all conversions of Series A-1 Preferred Stock prior to the end of such quarter, (iii) the total number of shares of Common Stock which are reserved for issuance upon conversion of the Series A-1 Preferred Stock as of the end of such quarter and (iv) the total number of shares of Common Stock which may thereafter be issued by the Corporation upon conversion of the Series A-1 Preferred Stock before the Corporation would exceed the Cap Amount and the Reserved Amount. The Corporation (or its transfer agent) shall use its best efforts to deliver the report for each quarter to each holder prior to the tenth day of the calendar month following the quarter to which such report relates. In addition, the Corporation (or its transfer agent) shall provide, as promptly as practicable following delivery to the Corporation of a written request by any holder, any of the information enumerated in clauses (i) - (iv) of this Paragraph D as of the date of such request.

E. Payment of Cash; Defaults. Whenever the Corporation is required to make any cash payment to a holder under this Certificate of Designations (as payment of any dividend, or otherwise), such cash payment shall be made to the holder within five business days after delivery by such holder of a notice specifying that the holder elects to receive such payment in cash and the method (e.g., by check, wire transfer) in which such payment should be made and any supporting documentation reasonably requested by the Corporation to substantiate the holder's claim to such cash payment or the amount thereof. If such payment is not delivered within such five business day period, such holder shall thereafter be entitled to interest on the unpaid amount at a per annum rate equal to the lower of fifteen percent (15%) and the highest interest rate permitted by applicable law until such amount is paid in full to the holder.

F. Status as Stockholder. Upon submission of a Notice of Conversion by a holder of Series A-1 Preferred Stock, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because their issuance would exceed such holder's allocated portion of the Reserved Amount or Cap Amount) shall be deemed converted into shares of Common Stock and (ii) the holder's rights as a holder of such converted shares of Series A-1 Preferred Stock shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such holder because of a failure by the Corporation to comply with the terms of this Certificate of Designations. In situations where Article VI.B is applicable, the number of shares of Common Stock referred to in clauses (i) and (ii) of the immediately preceding sentence shall be determined on the date on which such shares of Common Stock are delivered to the holder. Notwithstanding the foregoing, if a holder has not received certificates for all shares of Common Stock prior to the sixth business day after the expiration of the Delivery Period with respect to a conversion of Series A-1 Preferred Stock for any reason, then (unless the holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Corporation within five business days after the expiration of such 6 business day period after expiration of the Delivery Period) the holder shall regain the rights of a holder of Series A-1 Preferred Stock with respect to such unconverted shares of Series A-1 Preferred Stock and the Corporation shall, as soon as practicable, return such unconverted shares to the holder. In all cases, the holder shall retain all of its rights and remedies for the Corporation's failure to convert Series A-1 Preferred Stock.

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G. Remedies Cumulative. The remedies provided in this Certificate of Designations shall be cumulative and in addition to all other remedies available under this Certificate of Designations, at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit a holder's right to pursue actual damages for any failure by the Corporation to comply with the terms of this Certificate of Designations. The Corporation acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the holders of Series A-1 Preferred Stock and that the remedy at law for any such breach may be inadequate. The Corporation therefore agrees, in the event of any such breach or threatened breach that the holders of Series A-1 Preferred Stock shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required.

H. Waiver. Notwithstanding any provision in this Certificate of Designations to the contrary, any provision contained herein and any right of the holders of Series A-1 Preferred Stock granted hereunder may be waived as to all shares of Series A-1 Preferred Stock (and the holders thereof) upon the written consent of the holders of not less than a majority of the shares of Series A-1 Preferred Stock then outstanding, unless a higher percentage is required by applicable law, in which case the written consent of the holders of not less than such higher percentage shall be required.

I. Notices. Any notices required or permitted to be given under the terms hereof shall be sent by certified or registered mail (return receipt requested) or delivered personally, by responsible overnight carrier or by confirmed facsimile, and shall be effective five (5) days after being placed in the mail, if mailed, or upon receipt or refusal of receipt, if delivered personally or by responsible overnight carrier or confirmed facsimile, in each case addressed to a party. The addresses for such communications are (i) if to the Corporation to Level 8 Systems, Inc., 8000 Regency Parkway, Cary, NC 27511 Telephone: (919) 380-5000, Facsimile: (919) 380-5121, Attention: John P. Broderick, and (ii) if to any holder to the address set forth under the Corporation’s stock transfer records, or such other address as may be designated in writing hereafter, in the same manner, by such person.

IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf of the Corporation this ____ day of, 2006.

			LEVEL 8 SYSTEMS, INC.

		By:
		Name:
		Title:

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NOTICE OF CONVERSION

(To be Executed by the Registered Holder in order to Convert the Series A-1 Preferred Stock)

The undersigned hereby irrevocably elects to convert ____________ shares of Series A-1 Preferred Stock (the "CONVERSION"), represented by stock certificate No(s). ___________ (the "PREFERRED STOCK CERTIFICATES"), into shares of common stock ("COMMON STOCK") of Level 8 Systems, Inc. (the "CORPORATION") according to the conditions of the Certificate of Designations, Preferences and Rights of Series A-1 Convertible Preferred Stock (the "CERTIFICATE OF DESIGNATIONS"), as of the date written below. If securities are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. No fee will be charged to the holder for any conversion, except for transfer taxes, if any. Each Preferred Stock Certificate is attached hereto (or evidence of loss, theft or destruction thereof).

Except as may be provided below, the Corporation shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or its nominee (which is _________________) with DTC through its Deposit Withdrawal Agent Commission System ("DTC TRANSFER").

The undersigned acknowledges and agrees that all offers and sales by the undersigned of the securities issuable to the undersigned upon conversion of the Series A-1 Preferred Stock have been or will be made only pursuant to an effective registration of the transfer of the Common Stock under the Securities Act of 1933, as amended (the "Act"), or pursuant to an exemption from registration under the Act.

In lieu of receiving the shares of Common Stock issuable pursuant to this Notice of Conversion by way of DTC Transfer, the undersigned hereby requests that the Corporation issue and deliver to the undersigned physical certificates representing such shares of Common Stock.

		Date of Conversion:

		Applicable Conversion Ratio:

		Signature:

		Name:

Address:

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Annex B

LEVEL 8 SYSTEMS, INC.

CERTIFICATE OF AMENDMENT OF

CERTIFICATE OF DESIGNATIONS

SERIES A-3 CONVERTIBLE REDEEMABLE PREFERRED STOCK

(Pursuant to Section 151 of the Delaware General Corporation Law)

Level 8 Systems, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the “DGCL”), does hereby certify that:

I.The name of the corporation is Level 8 Systems, Inc. (the “Corporation”).

II.The Corporation’s Certificate of Designations of Series A-3 Convertible Preferred Stock (the “Series A-3 Certificate of Designations”), which was previously filed with the Secretary of State of the State of Delaware is hereby amended as set forth herein.

III.The amendments to the Series A-3 Certificate of Designations as set forth herein have been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware and have been consented to in writing by holders of at least 85% of the Corporation’s Series A-3 Convertible Redeemable Preferred Stock in accordance with Section 228 of the General Corporation Law of the State of Delaware and written notice has been given as provided in Section 228(c).

IV.Article VI shall be amended and restated to read in its entirety as follows:

6.1 Conversion Price. Each share of Preferred Stock at a price per share of $3.50 (the “Conversion Price”) may, at any time, be converted into that number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock, as is determined by the Conversion Ratio.

6.2 Automatic Conversion. Upon the filing of the Amended and Restated Certificate of Incorporation of the Corporation whereby the Corporation changes its name to ~~increase~~Cicero, Inc., affects a [ ] reverse stock split, and increases the number of shares of authorized capital stock, each share of Series A-3 Preferred Stock shall automatically be converted into 0.0142857 fully paid and non-assessable shares of Series A-1 Preferred Stock of the Corporation; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Series A-1 Preferred Stock issuable upon such conversion unless certificates evidencing such shares of the Preferred Stock being converted are delivered to the Corporation or its transfer agent, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement reasonably satisfactory to the Corporation to indemnify the Corporation from any losses incurred by it in connection therewith.

V.Article VIII shall be amended by deleting in its entirety every section other than Sections 8.5 and 8.7 which shall remain.

VI.In accordance with Section 151 of the DGCL, the Board of Directors has resolved that upon automatic conversion of the Series A-3 Preferred Stock pursuant to Section 6.2 of the Series A-3 Certificate of Designations:

No shares of the Corporation’s Series A-3 Preferred Stock are outstanding and that no shares of Series A-3 Preferred Stock will be issued subject to the previously filed Series A-3 Certificate of Designations with respect to the Series A-3 Preferred Stock; and

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Corporation’s certificate of incorporation all matters set forth in the Series A-3 Certificate of Designations with respect to the Series A-3 Preferred Stock.

In witness whereof, Level 8 Systems, Inc. has caused this Certificate to be signed this day of , 2006.

		Level 8 Systems, Inc.

		By:
		Name:	John P. Broderick
		Title:	Chief Executive Officer and Chief Financial Officer

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LEVEL 8 SYSTEMS, INC.

CERTIFICATE OF AMENDMENT OF

CERTIFICATE OF DESIGNATIONS

SERIES B-3 CONVERTIBLE REDEEMABLE PREFERRED STOCK

(Pursuant to Section 151 of the Delaware General Corporation Law)

Level 8 Systems, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the “DGCL”), does hereby certify that:

I. The name of the corporation is Level 8 Systems, Inc. (the “Corporation”).

II. The Corporation’s Certificate of Designations of Series B-3 Convertible Preferred Stock (the “Series B-3 Certificate of Designations”), which was previously filed with the Secretary of State of the State of Delaware is hereby amended as set forth herein.

III. The amendments to the Series B-3 Certificate of Designations as set forth herein have been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware and have been consented to in writing by holders of at least 85% of the Corporation’s Series B-3 Convertible Redeemable Preferred Stock in accordance with Section 228 of the General Corporation Law of the State of Delaware and written notice has been given as provided in Section 228(c).

IV.Article VI shall be amended and restated to read in its entirety as follows:

6.1 Conversion Price. Each share of Preferred Stock at a price per share of $4.00 (the “Conversion Price”) may, at any time, be converted into that number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock, as is determined by the Conversion Ratio.

6.2 Automatic Conversion. Upon the filing of the Amended and Restated Certificate of Incorporation of the Corporation whereby the Corporation changes its name to Cicero, Inc., affects a [ ] reverse stock split, and increases the number of shares of authorized capital stock, each share of Series B-3 Preferred Stock shall automatically be converted into 0.125 fully paid and non-assessable shares of Series A-1 Preferred Stock of the Corporation; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Series A-1 Preferred Stock issuable upon such conversion unless certificates evidencing such shares of the Preferred Stock being converted are delivered to the Corporation or its transfer agent, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement reasonably satisfactory to the Corporation to indemnify the Corporation from any losses incurred by it in connection therewith.

V.Article VIII shall be amended by deleting in its entirety every section other than Sections 8.5 and 8.7 which shall remain.

VI. In accordance with Section 151 of the DGCL, the Board of Directors has resolved that upon automatic conversion of the Series B-3 Preferred Stock pursuant to Section 6.2 of the Series B-3 Certificate of Designations:

No shares of the Corporation’s Series B-3 Preferred Stock are outstanding and that no shares of Series B-3 Preferred Stock will be issued subject to the previously filed Series B-3 Certificate of Designations with respect to the Series B-3 Preferred Stock; and

That the officers of the Corporation are directed to file with the Secretary of State of the State of Delaware this certificate pursuant to Section 151(g) of the DGCL setting forth these resolutions in order to eliminate from the Corporation’s certificate of incorporation all matters set forth in the Series B-3 Certificate of Designations with respect to the Series B-3 Preferred Stock.

~~THE BOARD~~

B-3

In witness whereof, Level 8 Systems, Inc. has caused this Certificate to be signed this day of , 2006.

		Level 8 Systems, Inc.

		By:

		Name:	John P. Broderick
		Title:	Chief Executive Officer and Chief Financial Office

B-4

LEVEL 8 SYSTEMS, INC.

CERTIFICATE OF ~~DIRECTORS RECOMMENDS A VOTE "FOR" THE~~ AMENDMENT ~~TO THE COMPANY’S~~ OF

CERTIFICATE OF DESIGNATIONS

SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK

(Pursuant to Section 151 of the Delaware General Corporation Law)

Level 8 Systems, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the “DGCL”), does hereby certify that:

I. The name of the corporation is Level 8 Systems, Inc. (the “Corporation”).

II. The Corporation’s Certificate of Designations of Series C Convertible Preferred Stock (the “Series C Certificate of Designations”), which was previously filed with the Secretary of State of the State of Delaware is hereby amended as set forth herein.

III. The amendments to the Series C Certificate of Designations as set forth herein have been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware and have been consented to in writing by holders of at least 85% of the Corporation’s Series C Convertible Redeemable Preferred Stock in accordance with Section 228 of the General Corporation Law of the State of Delaware and written notice has been given as provided in Section 228(c).

IV.Article V shall be amended and restated to read in its entirety as follows:

5.1 Conversion Price. Each share of Preferred Stock at a price per share of $0.25 (the “Conversion Price”) may, at any time, be converted into that number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock, as is determined by the Conversion Ratio.

5.2 Automatic Conversion. Upon the filing of the Amended and Restated Certificate of Incorporation of the Corporation whereby the Corporation changes its name to Cicero, Inc., affects a [ ] reverse stock split, and increases the number of shares of authorized capital stock, each share of Series C Preferred Stock shall automatically be converted into 0.20 fully paid and non-assessable shares of Series A-1 Preferred Stock of the Corporation; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Series A-1 Preferred Stock issuable upon such conversion unless certificates evidencing such shares of the Preferred Stock being converted are delivered to the Corporation or its transfer agent, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement reasonably satisfactory to the Corporation to indemnify the Corporation from any losses incurred by it in connection therewith.

V.Article VII shall be amended by deleting in its entirety every section other than Sections 7.5 and 7.7 which shall remain.

VI. In accordance with Section 151 of the DGCL, the Board of Directors has resolved that upon automatic conversion of the Series C Preferred Stock pursuant to Section 5.2 of the Series C Certificate of Designations:

No shares of the Corporation’s Series C Preferred Stock are outstanding and that no shares of Series C Preferred Stock will be issued subject to the previously filed Series C Certificate of Designations with respect to the Series C Preferred Stock; and

That the officers of the Corporation are directed to file with the Secretary of State of the State of Delaware this certificate pursuant to Section 151(g) of the DGCL setting forth these resolutions in order to eliminate from the Corporation’s certificate of incorporation all matters set forth in the Series C Certificate of Designations with respect to the Series C Preferred Stock.

B-5

In witness whereof, Level 8 Systems, Inc. has caused this Certificate to be signed this day of , 2006.

		Level 8 Systems, Inc.

		By:

		Name:	John P. Broderick
		Title:	Chief Executive Officer and Chief Financial Office

B-6

CERTIFICATE OF AMENDMENT OF

CERTIFICATE OF DESIGNATIONS

SERIES D CONVERTIBLE REDEEMABLE PREFERRED STOCK

(Pursuant to Section 151 of the Delaware General Corporation Law)

Level 8 Systems, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the “DGCL”), does hereby certify that:

I. The name of the corporation is Level 8 Systems, Inc. (the “Corporation”).

II. The Corporation’s Certificate of Designations of Series D Convertible Preferred Stock (the “Series D Certificate of Designations”), which was previously filed with the Secretary of State of the State of Delaware is hereby amended as set forth herein.

III. The amendments to the Series D Certificate of Designations as set forth herein have been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware and have been consented to in writing by holders of at least two-thirds of the Corporation’s Series D Convertible Redeemable Preferred Stock in accordance with Section 228 of the General Corporation Law of the State of Delaware and written notice has been given as provided in Section 228(c).

IV.The definition of “Conversion Price” under Article III “Certain Definition” shall be deleted in its entirety.

V.Article IV shall be amended and restated to read in its entirety as follows:

4.1 Conversion Price. Each share of Preferred Stock at a price per share of $0.20 (the “Conversion Price”) may, at any time, be converted into that number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock, as is determined by the Conversion Ratio.

4.2 Automatic Conversion. Upon the filing of the Amended and Restated Certificate of Incorporation of Cicero, Inc. whereby the Corporation changes its name to Cicero, Inc., affects a [ ] reverse stock split, and increases the number of shares of authorized capital stock, each share of Series D Preferred Stock shall automatically be converted into 0.25 fully paid and non-assessable shares of Series A-1 Preferred Stock of the Corporation; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Series A-1 Preferred Stock issuable upon such conversion unless certificates evidencing such shares of the Preferred Stock being converted are delivered to the Corporation or its transfer agent, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement reasonably satisfactory to the Corporation to indemnify the Corporation from any losses incurred by it in connection therewith.

VI.Article XI shall be deleted in its entirety.

VII. In accordance with Section 151 of the DGCL, the Board of Directors has resolved that upon automatic conversion of the Series D Preferred Stock pursuant to Section 4.2 of the Series D Certificate of Designations:

No shares of the Corporation’s Series D Preferred Stock are outstanding and that no shares of Series D Preferred Stock will be issued subject to the previously filed Series D Certificate of Designations with respect to the Series D Preferred Stock; and

That the officers of the Corporation are directed to file with the Secretary of State of the State of Delaware this certificate pursuant to Section 151(g) of the DGCL setting forth these resolutions in order to eliminate from the Corporation’s certificate of incorporation all matters set forth in the Series D Certificate of Designations with respect to the Series D Preferred Stock.

B-7

In witness whereof, Level 8 Systems, Inc. has caused this Certificate to be signed this day of , 2006.

		Level 8 Systems, Inc.

		By:

		Name:	John P. Broderick
		Title:	Chief Executive Officer and Chief Financial Office

B-8

Annex C

AMENDED AND RESTATED CERTIFICATE OF INCORPORATION ~~TO INCREASE THE AUTHORIZED SHARES~~

OF ~~COMMON STOCK.~~

LEVEL 8 SYSTEMS, INC.

~~PROPOSAL 3: AMENDMENT OF THE COMPANY 1997 STOCK OPTION PLAN TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE THEREUNDER~~

~~Background~~

~~On June 9, 2003,~~

Level 8 Systems, Inc. a corporation organized and existing under the ~~Board of Directors~~laws of the ~~Company approved (subject to stockholder approval) an amendment to~~State of Delaware (the “Corporation”), hereby certifies as follows:

1. The name of the ~~Company 1997 Stock Option Plan which increases~~Corporation is Level 8 Systems, Inc., that the ~~total number of shares of common stock issuable~~Corporation was initially incorporated pursuant to the 1997 Stock Option Plan from 6,500,000 to 10,000,000. The amendment increasing the total number of shares of common stock issuable pursuant to the 1997 Stock Option Plan also requires that the stockholders approve Proposal 2 and that the Board of Directors files an amendment to the Company’sa Certificate of Incorporation ~~increasing~~filed with the ~~Company’s authorized but unissued shares~~Secretary of ~~Common Stock. If~~State of Delaware on May 25, 1999.

2. This Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) amends, restates and integrates the ~~stockholders approve this Proposal 3 but do not approve Proposal 2, the amendment to the 1997 Stock Option Plan described in this Proposal 3 will be abandoned by the Board~~Corporation’s Certificate of ~~Directors.~~

Incorporation as heretofore amended and supplemented. The ~~following description~~Certificate of ~~the 1997 Stock Option Plan is intended only as a summary and is qualified in its entirety by reference to the 1997 Stock Option Plan.~~

~~Purpose~~

The purpose of the 1997 Stock Option Plan is to enhance the profitability and value of the Company for the benefit of its stockholders principally by enabling the Company to offer employees and consultants of the Company and its subsidiaries and non-employee directors of the Company stock-based incentives in the Company in order to attract, retain and reward such individuals and strengthen the mutuality of interest between such individuals and the Company stockholders.

~~Eligibility~~

~~All employees and consultants of the Company and its subsidiaries and non-employee directors of the Company designated~~Incorporation was duly adopted by the Board of Directors of the ~~Company to participate~~Corporation in accordance with the ~~1997 Stock Option Plan are eligible to receive options under~~provisions of Sections 242 and 245 of the ~~1997 Stock Option Plan.~~

~~Available Shares~~

If the proposed amendment is approved, options covering a maximum of 10,000,000 shares of common stock may be issued under the 1997 Stock Option Plan. Options covering a maximum of 500,000 shares may be granted to any single individual in any one fiscal year. If an option expires, terminates or is cancelled, the unissued shares of common stock subject to the option will again be available under the 1997 Stock Option Plan.

~~Benefits to Named Executive Officers and Others~~

~~The Committee has not yet made any determination as to which eligible participants will be granted options under the 1997 Stock Option Plan~~Delaware General Corporation Law, as amended from time to time (the “DGCL”), and was duly adopted by ~~this proposal in~~ the ~~future. Consequently, it is not presently determinable with respect to any persons and groups which benefits and or amounts that will be received in~~stockholders of the ~~future by such persons or groups~~Corporation, acting pursuant to Section 228 of the ~~1997 Stock Option Plan~~DGCL, by written consent in lieu of a meeting, and written notice has been given as provided in Section 228(c).

3. The text of the Certificate, as amended ~~by this proposal.~~

~~Terms of Stock Options~~

~~Under the 1997 Stock Option Plan, options granted~~ to ~~employees may be~~date, is hereby amended and restated in ~~the form of incentive stock options or nonqualified stock options. Options granted~~its entirety to ~~consultants or non-employee directors may only be nonqualified stock options.~~provide as herein set forth in full:

FIRST: The committee that administers the 1997 Stock Option Plan (see “Administration” below) (the “Committee”) will determine the number of shares subject to each option, the term of each option (which may not exceed ten years or, in the case of an incentive stock option granted to a 10% stockholder, five years), the exercise price per share of stock subject to each option, the vesting schedule (if any) and the other material terms of the option. No incentive stock option may have an exercise price less than 100% of the fair market value of the common stock at the time of the grant (or, in the case of an incentive stock option granted to a 10% stockholder, 110% of the fair market value). The exercise price of a nonqualified stock option will be determined by the Committee.

The option price upon exercise may be paid in cash or, if so determined by the Committee, in shares of common stock by a reduction in the number of shares of common stock issuable upon the exercise of the option or by such other method as the Committee determines. Options may be made exercisable in installments, and the exercisability of options may be accelerated by the Committee. The Committee may at any time offer to buy an option previously granted on such terms and conditions as the Committee establishes. At the discretion of the Committee, options may provide for “reloads” (i.e., a new option is granted for the same number of shares as the number used by the holder to pay the option price upon exercise).

~~Subject to limited exceptions, options are forfeited upon termination of employment or service. Options are not assignable (except by will or the laws of descent and distribution).~~

~~Options may not be granted after the tenth anniversary of the 1997 Stock Option Plan’s adoption.~~

~~Change in Control~~

Unless otherwise determined by the Committee at the time of the grant, upon a change in control (as defined in the 1997 Stock Option Plan), all of the options automatically will become fully exercisable. However, unless otherwise determined by the Committee at the time of the grant, no acceleration or exercisability of an option will occur, if the Committee determines prior to a change in control that the option will be honored or assumed or new rights substituted immediately following the change in control; provided that, the new rights or alternative option is based on stock which is or will be traded on an established securities market, contains at least substantially equivalent terms and conditions as the option being assumed, and has substantially equal earnings value.

~~Certain Reorganizations~~

The 1997 Stock Option Plan provides for appropriate adjustments of the number and kind of shares to be issued upon exercise of an option and of the exercise price to reflect changes in the capital structurename of the corporation ~~stock splits, recapitalizations, mergers~~is hereby changed to Cicero, Inc. (the "Corporation").

SECOND: The address, including street, number, city, and ~~reorganizations.~~

~~Amendment or Termination~~county, of the ~~1997 Stock Option Plan~~

registered office of the Corporation in the State of Delaware is 2711 Centerville Road, Suite 400, City of Wilmington 19808, County of New Castle. The ~~1997 Stock Option Plan~~name of its registered agent at such address is Corporation Service Company.

THIRD: The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be ~~amended by~~organized under the ~~Board of Directors~~General Corporation Law of the ~~Company, except that stockholder approval~~State of amendments will be required among other things (a) to the extent stockholder approval is required by Rule 16b-3 under the Exchange Act, and (b) to (i) increase the maximum number of shares subject to options granted in a fiscal year, (ii) change the classification of employees eligible to receive awards, (iii) extend the maximum option period under the 1997 Stock Option Plan, or (iv) increase the number of shares that may be issued under the 1997 Stock Option Plan. The 1997 Stock Option Plan is effective for ten years from the date the 1997 Stock Option Plan was adopted during which time options may be granted.

Delaware.

~~Administration~~

The 1997 Stock Option Plan will be administered by the Committee, which will include two or more “non-employee” and “outside” directors. However, with respect to option grants to non-employee directors and any action under the 1997 Stock Option Plan relating to options held by non-employee directors, the Committee will consist of the entire Board of Directors. The Committee will determine the individuals who will receive options and the terms of the options, which will be reflected in written agreements with the holders. Decisions by the Board of Directors or the Committee with respect to the 1997 Stock Option Plan are final and binding.

~~Federal Income Tax Consequences~~

~~Incentive Stock Options~~. An optionee will not recognize income upon the grant or exercise of an incentive stock option. Instead, the optionee will be taxed at the time he or she sells the stock purchased pursuant to the option. The optionee will be taxed on the difference between the price he or she paid for the stock and the amount for which he or she sells the stock. If the optionee does not sell the stock within two years from the date of grant of the option and one year from the date the stock is transferred to the optionee, the gain will be a long-term capital gain, and the Company will not be entitled to a deduction. If the optionee sells the stock at a gain prior to that time, the difference between the amount the optionee paid for the stock and the lesser of the fair market value on the date of exercise or the amount for which the stock is sold will be taxed as ordinary income and the Company will be entitled to a corresponding deduction. If the stock is sold for an amount in excess of the fair market value on the date of exercise, the excess amount will be taxed as capital gain. If the optionee sells the stock for less than the amount he or she paid for it, the loss will be taxed as a capital loss. Exercise of an incentive stock option may subject an optionee to, or increase an optionee’s liability for, the alternative minimum tax.

~~Non-Qualified Stock Options~~. An optionee will not recognize income upon the grant of a non-qualified stock option under the 1997 Stock Option Plan or at any time prior to the exercise of the option or a portion thereof. Generally, at the time the optionee exercises a non-qualified option or portion thereof, the optionee will recognize compensation taxable as ordinary income in an amount equal to the excess of the fair market value of the underlying stock on the date the option is exercised over the option price of the stock and the Company will then be entitled to a corresponding deduction. At that time, the Company will be subject to income tax withholding requirements and will have the right to require an optionee who is or was an employee of the Company to remit in cash to the Company an amount sufficient to satisfy any federal, state and local tax requirements prior to the delivery of any certificate or certifica tes for such shares of stock.

A subsequent taxable disposition of the stock acquired upon exercise of an option and held as a capital asset will result in a capital gain or loss measured by the difference between the fair market value of the stock on the date of the option exercise and the amount realized on later disposition.

The foregoing is a summary discussion of certain federal income tax consequences to optionees under the Internal Revenue Code and should not be construed as legal, tax or investment advice. ALL 1997 STOCK OPTION PLAN PARTICIPANTS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES APPLICABLE TO THEM, INCLUDING FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.

~~Stockholder Approval~~

The Company’s board of directors seeks stockholder approval because such approval is required under the Internal Revenue Code as a condition to incentive stock option treatment and will maximize the potential for deductions associated with any non-qualified options granted under the 1997 Stock Option Plan.

~~Approval of this proposal will require the affirmative vote of a majority of the shares of Voting Stock. It is the intention of the persons named as proxies to vote the proxies “~~~~FOR”~~ ~~this proposal to amend the 1997 Option Plan, unless a stockholder directs otherwise.~~

~~THE BOARD OF DIRECTORS OF THE COMPANY, BY UNANIMOUS ACTION OF THE DIRECTORS, RECOMMENDS A VOTE “FOR” THE PROPOSED AMENDMENT TO THE 1997 STOCK OPTION PLAN.~~

~~PROPOSAL 4: RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS~~

Stockholders will be asked to vote for a proposal to ratify the appointment of Deloitte & Touche LLP as the Company's independent accountants for the fiscal year ending December 31, 2003. If the stockholders, by affirmative vote of the holders of a majority of the votes cast, do not ratify this appointment, the Audit Committee of the Board of Directors will reconsider its action and select other independent public accountants without further stockholder action. Abstentions and broker non-votes will have no effect on Proposal 4.

The Company appointed Deloitte & Touche LLP as its independent auditors on July 11, 2000. During the two most recent fiscal years, none of the reports on the Company's financial statements contained an adverse opinion or a disclaimer of opinion or was qualified or modified as to uncertainty, audit scope or accounting principles. In connection with its audits for the two most recent fiscal years and any subsequent interim period, there have been no disagreements with the Company's independent accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.

A representative of Deloitte & Touche LLP is expected to be present at the Annual Meeting to respond to appropriate questions and will be given the opportunity to make a statement if such representative desires to do so.

~~Accountants Fees and Expenses~~

The following table sets forth the aggregate fees billed to the Company for the fiscal years ended December 31, 2002 and December 31, 2001 by Deloitte & Touche LLP. The table includes audit tax fees of $31,937 to Price Waterhouse Coopers, Australia.

December 31, 2002
December 31, 2001
Audit fees (1)

$121,255
$290,729
Audit-related fees (2)

134,700
      --
Tax fees (3)

   99,310
   97,902
All other fees (4)

   10,000
   81,821
Total fees

$365,265
$470,452

~~(1)~~

Includes fees for professional services rendered for the audit of the Company’s annual financial statements and review of the Company’s annual report on Form 10-K for the fiscal years ended 2002 and 2001 and for reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q for the first three quarters of fiscal 2002 and 2001.

~~(2)~~

~~Includes fees for professional services rendered in fiscal 2002 and 2001, in connection with SEC registration statements.~~

~~(3)~~

~~Includes fees for professional services rendered in fiscal 2002 and 2001, in connection with tax compliance.~~

~~(4)~~

~~Includes fees for 401K audit.~~

~~The Audit Committee has adopted policies and procedures regarding procurement of audit services and non-audit services that are compatible with maintaining independence of our public accountants.~~

~~The scope of our external services is classified into the following categories:~~

~~Permitted Services~~

~~Audit Services/Audit Related~~

These services generally are highly correlated with the role of an independent auditor. Such services include matters such as analysis and interpretation of accounting principles and their application, support for financings and similar transactions, and other services that have bearing on the Company’s financial statements on which the external auditor provides their opinion. These services must be pre-approved annually by the Audit Committee.

~~Tax Services~~

These services are expressly allowed under this policy and do not impact the auditors independence. It is in the best interest of the Company to utilize the best service provider available particularly where knowledge of the Company is deemed highly advantageous, provided independence is not impaired. These services must be approved annually by the Audit Committee.

~~Specific Approval~~

~~These services are allowed under the policy and do not affect the auditor’s independence, but do require the pre-approval of the Audit Committee prior to the engagement.~~

~~Restricted Services~~

Restricted services are those services that may not be provided by external auditors as they are considered by statute or in the Company’s opinion to be incompatible with the role of an independent auditor. Any questions or interpretations of such matters should be addressed by the Chief Accounting Officer

This policy applies to the Company and all corporations, subsidiaries, branches and other entities directly or indirectly owned by the Company that are included in the Company’s consolidated financial statements.

~~THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE INDEPENDENT ACCOUNTANTS OF THE COMPANY.~~

~~STOCKHOLDER PROPOSALS FOR THE 2004 ANNUAL MEETING~~

Stockholders wishing to submit a proposal for action at the Company’s 2004 Annual Meeting of Stockholders and desiring the proposal to be considered for inclusion in the Company’s proxy materials relating thereto must provide a written copy of the proposal to the Secretary of the Company at its principal executive offices a reasonable time before the Company begins to print and mail its proxy materials and must otherwise comply with the rules of the Securities and Exchange Commission relating to stockholder proposals. The Company has the right to request documentary support (as provided in Rule 14a-8 promulgated by the Commission pursuant to the Exchange Act) of the proponent’s ownership claim within 14 calendar days after receipt of the proposal, and the proponent shall furnish appropriate documentation within twenty-one (21) days after receiving such request. Stockholders who submit proposals must, in all other respects, comply with Rule 14a-8 un der the Exchange Act. If a proponent fails to notify the Company at least forty-five (45) days prior to the month and day of the prior year’s proxy statement, then the management proxies would be allowed their discretionary voting authority when the proposal is presented at the Annual Meeting, without any discussion of the matter in the proxy statement.

~~ANNUAL REPORT~~

~~A copy of Level 8's combined Annual Report to Stockholders and Annual Report on Form 10-K for the year ended December 31, 2002 accompanies this Proxy Statement.~~

~~OTHER MATTERS~~

Management is not aware of any other matters to be considered at the Annual Meeting other than as set forth in this Proxy Statement. However, if any other matters properly come before the Annual Meeting, it is the intention of the persons named in the accompanying form of proxy in their discretion to vote the proxies in accordance with their judgment of such matters.

THE COMPANY WILL UPON THE WRITTEN REQUEST OF ANY STOCKHOLDER, FURNISH WITHOUT CHARGE A COPY OF ITS ANNUAL REPORT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002. REQUESTS FOR COPIES SHOULD BE DIRECTED TO INVESTOR RELATIONS, LEVEL 8 SYSTEMS, INC., 214 CARNEGIE CENTER; SUITE 303, PRINCETON, NEW JERSEY 08540.

~~June 27, 2003~~

~~Exhibit A~~

~~Amendment to the Amended and Restated Certificate of Incorporation~~

~~The text of Article Six of the Company’s Amended and Restated Certificate of Incorporation prior to the start of subsection 6.A.PREFERRED STOCK~~ ~~will be deleted and replaced in its entirety with the following:~~

~~“6.~~

FOURTH: The total number of shares of capital stock which the Corporation is authorized to issue is ~~ninety~~two hundred twenty five million ~~(95,000,000)~~225,000,000 shares, consisting of:

(i)

~~eighty five~~ Two Hundred Fifteen million ~~(85,000,000)~~(215,000,000) shares of ~~common stock,~~Common Stock, par value $.001 per share (“("Common ~~Stock)~~Stock");

and

(ii)

~~ten~~ Ten million (10,000,000) shares of preferred stock, par value $.001 per share ("preferred stock").

Simultaneously with the effective time of this Amended and Restated Certificate of Incorporation (the “Effective Time”):

(A) all issued and outstanding shares of Common Stock (“Existing Common Stock”) shall be and hereby are automatically combined and reclassified as follows: each ( ) shares of Existing Common Stock shall be combined and reclassified (the “Reverse Split”) as one share of issued and outstanding Common Stock (“New Common Stock”), provided that there shall be no fractional shares of New Common Stock. In the case of any holder of fewer than ( ) shares of Existing Common Stock or any number of shares of Existing Common Stock which, when divided by ( ), does not result in a whole number (a “Fractional Share Holder”), the Corporation shall issue

C-1

cash in lieu of shares of Common Stock for any fractional share interest of New Common Stock held by such Fractional Share Holder as a result of the Reverse Split.

(B) the term “New Common Stock” as used in this Article IV shall mean Common Stock as provided in the Amended and Restated Certificate of Incorporation.

(C) the following series of preferred stock of the Corporation, heretofore designated, no shares of which are outstanding, shall be eliminated and cease to be designated, and no shares of which will issued subject to the Certificate of Designations previously filed: Series A, B, A-1, B-1, A-2 and B-2.

(D) the following series of preferred stock of the Corporation shall, upon the automatic conversion of such shares into shares of Series A-1 preferred stock of the Corporation in accordance with the Certificate of Designation with respect to each such series, at which conversion time no such series shall be outstanding, shall be eliminated and cease to be designated and no shares of which will be issued subject to the Certificate of Designations previously filed: Series A-3, B-3, C and D.

As a result of the two preceding paragraphs, all series of preferred stock of the Corporation heretofore designated shall at the Effective Time be eliminated, other than Series A-1 Preferred ~~Stock);~~Stock of the Corporation.

The Corporation shall, through its transfer agent, provide certificates representing New Common Stock to holders of Existing Common Stock in exchange for certificates representing Existing Common Stock. From and

after the Effective Time, certificates representing shares of Existing Common Stock and Series A-3, B-3, C and D preferred stock are hereby canceled and shall represent only the right of the holders thereof to receive New Common Stock to the extent provided herein and shares of Series A-3, B-3, C and D preferred stock as provided in the Certificate of Designations, with respect to such series, respectively.

The following is a statement of the ~~designations~~Designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation.”

PREFERRED STOCK.

~~PROXY – COMMON STOCK AND PREFERRED STOCK~~

~~LEVEL 8 SYSTEMS, INC.~~

~~Proxy Solicited by~~

The Board of Directors is authorized to provide, without stockholder action, for the ~~Annual Meeting~~

issuance of ~~Stockholders — July 30, 2003~~

shares of preferred stock, subject to limitations prescribed by law and by this Certificate of Incorporation, without stockholder action in one or more series. The ~~undersigned hereby appoints JOHN P. BRODERICK~~description of shares of each series of preferred stock, including the number of shares to be included in each such series, any preferences, conversion and ~~ANTHONY C. PIZI~~other rights, voting powers, restrictions, limitations as ~~Proxies,~~to dividends, qualifications and terms and conditions of redemption, if any, shall be as set forth in resolutions adopted by the Board of Directors and Articles of Amendment to this Certificate of Incorporation shall be filed with the Delaware Secretary of State as required by law to be filed with respect to the issuance of such preferred stock prior to such issuance. Unless otherwise required by law, this Certificate of Incorporation or ~~either~~agreement, no Shareholder action is required for the authorization and issuance of ~~them,~~such shares of preferred stock.

The authority of the Board of Directors with ~~full power~~respect to each series of ~~substitution,~~preferred stock shall include, but not be limited to, setting or changing the following:

(a) the number of shares constituting each series and ~~hereby authorizes them~~the distinctive Designations of that series;

(b) the annual dividend rate, if any, on shares of such series, the times of payment, if dividends are to ~~vote,~~be cumulative and, if so, the date from which dividends shall be accumulated, and the relative rights of priority with respect to dividends;

(c) whether the shares of such series shall be redeemable and, if so, the redemption price and the terms and conditions of such redemption;

(d) the obligation, if any, of the Corporation to redeem shares of such series pursuant to a sinking fund;

C-2

(e) whether shares of such series shall be convertible into, or exchangeable for, shares of stock or any other class or classes and, if so, the terms and conditions of such conversion or exchange, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any;

(f) whether the shares of such series shall have voting rights, in addition to the voting rights provided by law, and, if so, the extent of such voting rights;

(g) the rights of the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and

(h) any other relative rights, powers, preferences, qualifications, limitations or restrictions thereof relating to such series.

The shares of preferred stock of any one series shall be identical with each other in all respects except as ~~designated below, all shares (unless a lesser number~~to the dates from and after which dividends thereon shall cumulate, if cumulative.

COMMON STOCK

(1)

GENERAL. The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights of the holders of the preferred stock, if any.

(2)

VOTING. The holders of the Common Stock are entitled to one vote for each share held at all meetings of stockholders (and written actions in lieu of meetings). There shall be no cumulative voting.

(3)

DIVIDENDS. Dividends may be declared and paid on the Common Stock from funds lawfully available therefor as and when determined by the Board of Directors.

(4)

LIQUIDATION. Upon the dissolution or liquidation of the Corporation, whether voluntary or involuntary, and subject to the rights of the holders of preferred stock, if any, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders.

FIFTH: In furtherance of and not in limitation of powers conferred by statute, it is ~~specified~~further provided that the election of directors need not be by written ballot.

SIXTH: Except to the extent that the General Corporation Law of the State of Delaware prohibits the elimination or limitation or liability of directors for breaches of fiduciary duty, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as director, notwithstanding any provision of law imposing such liability. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions such director

occurring prior to such amendment.

SEVENTH: The Corporation shall, to the full extent permitted by Section 145 of the General Corporation Law of Delaware, as amended from time to time, indemnify each person who was or is a party 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, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other ~~side)~~enterprise (including any employee benefit plan), or by reason of ~~Common Stock, par value $.001 per share~~any action alleged to have been taken or omitted in such capacity, against all expenses (including reasonable attorneys' fees), judgments, fines and amounts paid in settlement

C-3

actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom.

Indemnification may include payment by the Corporation of ~~Level 8 Systems, Inc. (the “Company”)~~expenses in defending an action or proceeding in advance of the final disposition of such action or proceeding upon receipt of an undertaking by the person indemnified to repay such payment if it is ultimately determined that such person is not entitled to the indemnification under this Article, which undertaking may be accepted without reference to the financial ability of such person to make such repayment.

The Corporation shall not indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person unless the initiation thereof was approved by the Board of Directors of the Corporation.

The indemnification rights provided in this Section (i) shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any law, agreement or vote of stockholder or disinterested directors or otherwise, and (ii) shall inure to the benefit of the heirs, executors and administrators of such persons. The Corporation may, to the extent authorized form time to time by its Board of Directors, grant indemnification rights to other employees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article.

EIGHTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute and the Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation.

NINTH: The Board of Directors is authorized to make, adopt, amend, alter or repeal the By-Laws of the Corporation. The stockholders shall also have the power to make, adopt, amend, alter or repeal the By-Laws of the Corporation.

[Remainder of page left intentionally blank.]

C-4

THE UNDERSIGNED, being the Chief Executive Officer and Chief Financial Officer of the Corporation, for the purpose of amending and restating the Corporation’s Certificate of Incorporation pursuant to the General Corporation Law of the State of Delaware, do execute this certificate, hereby declaring and certifying that his is my act and deed on behalf of the Corporation this day of 2006.

		By:

		Name:	John P. Broderick
		Title:	Chief Executive Officer and Chief Financial Office

C-5

FORM OF PROXY

FOR THE NOVEMBER 16, 2006 SPECIAL MEETING OF

LEVEL 8 SYSTEMS, INC.

Meeting Location: Courtyard by Marriott Raleigh Cary

102 Edinburgh Drive South, Cary, North Carolina 27518

Meeting: 11:00a.m., November 16, 2006

THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS

John Broderick is hereby authorized to represent and vote the shares of ~~Preferred Stock of the Company that~~ the undersigned ~~would be entitled to vote at the Annual Meeting of Stockholders of the Company to be held on July 30, 2003 or any adjournments thereof,~~ with all the powers the undersigned would possess, if personally present ~~for (i)~~at the ~~election~~special meeting of ~~directors, (ii)~~Level 8 Systems, Inc. to be held the Courtyard by Marriott Raleigh Cary, 102 Edinburgh Drive South, Cary, North Carolina 27518 at 11a.m., November 16, 2006 or at any postponement or adjournment thereof. The Recapitalization discussed in the proxy statement is conditioned upon approval of all of proposals 2, 3 and 4 and none of these proposals will be implemented unless all of those proposals are approved.

The Board of Directors recommends a vote FOR each of the ~~proposal~~following proposals:

1. Amend the amended and restated certificate of incorporation to ~~amend~~change the ~~Company’s Amended~~name of the Company to Cicero, Inc.;

FOR

AGAINST

ABSTAIN

2. Effect a consolidation (a/k/a a reverse split) of the common stock of the Company at a ratio within a range of 20:1 to 100:1.

FOR

AGAINST

ABSTAIN

3. Amend the amended and ~~Restated Certificate~~restated certificate of ~~Incorporation~~incorporation to increase the number of authorized shares of ~~Common Stock authorized for issuance, (iii) the approval~~common stock of the ~~proposal~~Company from 85 million to 215 million; and

FOR

AGAINST

ABSTAIN

4. To amend the ~~1997 Stock Option Plan to increase~~conversion prices at which all of the ~~numbe r~~outstanding shares of Series A-3, B-3, C-3 and D preferred stock of the Company convert into shares of common stock of the Company and then convert such outstanding shares into a single series of Series A-1 preferred stock of the Company with each share converting into such number of shares of ~~Common Stock reserved for issuance thereunder,~~Series A-1 preferred stock as set forth in the second table below (and to eliminate the authorization and ~~(iv) the ratification~~designations of ~~the appointment~~such Series A-3, B-3, C-3 and D preferred stock):

Series of Preferred Stock	Current Conversion Price		Amended Conversion Price
Series A-3	$	8.33	$	3.50

Series B-3	$	12.53	$	4.00

Series C	$	0.38	$	0.25

Series D	$	0.32	$	0.20

Existing Series Preferred Stock		Number of Shares of Series A-1 Preferred Stock
	Series A-3		0.0142857
	Series B-3		0.125
	Series C		0.20
	Series D		0.25

Title of ~~the independent accountants, and in their discretion with respect to matters incident to the conduct~~each class of ~~the meeting and matters as~~securities to which transaction applies:

FOR

AGAINST

ABSTAIN

INSTRUCTIONS: To vote FOR, AGAINST or ABSTAIN for each proposal, check the ~~Board of Directors does not know, as of a reasonable time before the solicitation of this proxy, are to be presented at the meeting.~~

~~The shares represented by this proxy~~appropriate box. Shares will be voted as directed by ~~the undersigned stockholder.~~stockholders If no direction is given, ~~such shares~~the proxies will ~~be voted “FOR”~~have the ~~nominees listed in Proposal~~authority to vote FOR Item 1, ~~“FOR” each of Proposals~~FOR Item 2, ~~through 4~~FOR Item 3 and ~~in the discretion of the proxy holder(s) with respect~~FOR Item 4.

Please complete, sign and date this Proxy where indicated and return it promptly to ~~other matters properly brought before the meeting, including any adjournments thereof.~~

~~(Continued and to be~~~~SIGNED~~ ~~on the Next Page)~~

Level 8 Systems, Inc., 8000 Regency Pkwy, Suite 542, Cary, North Carolina 27511, Attn: Chief Executive Officer.

~~No. 1~~

~~Proposal to elect Anthony Pizi, Frank Artale, Nicholas Hatalski, Bruce Hasenyager, Kenneth Nielsen and Jay Kingley as directors of the Company.~~

¨ ~~FOR~~ ¨ ~~WITHHELD~~

~~(INSTRUCTION: To withhold authority to vote for any individual nominee, write that nominee's name~~

~~in the space provided below.)~~

~~___________________________________________________________________~~

DATED:

, 2006

~~No. 2~~ ~~Proposal to amend the Company’s Amended and Restated Certificate of Incorporation to increase the shares of Common Stock authorized for issuance and to authorize the Board to effect such amendment.~~ ¨ ~~FOR~~ ¨ ~~WITHHELD~~ ¨ ~~ABSTAIN~~
~~No. 3~~ ~~Proposal to amend the Company’s 1997 Stock Option Plan to increase the number of shares reserved for issuance thereunder.~~ ¨ ~~FOR~~ ¨ ~~WITHHELD~~ ¨ ~~ABSTAIN~~
~~No. 4~~ ~~Proposal to ratify and approve the appointment of Deloitte & Touche LLP as the Company's independent auditors for the fiscal year ending December 31, 2003.~~ ¨ ~~FOR~~ ¨ ~~WITHHELD~~ ¨ ~~ABSTAIN~~

~~The Board of Directors recommends a vote FOR each of Proposals 1 through 4.~~ Signature
Please mark and date the proxy and sign your name as it appears hereon. If executed by a corporation, a duly authorized officer must sign by name and title. Executors, administrators and trustees must so indicate when signing. If shares are	Signature if held jointly ~~EACH holder must sign.~~ ~~Dated __________________________, 2003~~ ~~Signature(s) of Stockholder(s)~~

(Please sign above exactly as the shares are issued. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized person.)

Plan Category	Number of Securities to be issued upon exercise of outstanding options	Weighted-average exercise price of outstanding options	Number of securities remaining available under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved by stockholders	3,834,379	$ 7.22	2,368,998
Equity compensation plans not approved by stockholders (1)	--	--	--
Total	3,834,379	$ 7.22	2,368,998

Option Grants in Fiscal 2002 Individual Grants
Name	Number of Securities Underlying Options Granted	Percent of Total Options Granted to Employees in Fiscal Year	Exercise Price ($/share)	Expiration Date	Potential Realizable Value at Assumed Annual Rates of Appreciation for Option Term 5% ($) 10% ($)
Anthony C. Pizi	163,600 336,400	8.42% 17.32%	$ 1.50 $ 0.53	02/25/12 11/25/12	$ 154,330 112,127	$ 391,623 284,151
John P. Broderick	100,000	5.15%	$ 0.39	07/08/12	24,527	62,156
Paul Rampel	100,000	(1)	$ 0.35	10/14/12	22,011	55,781

			Number of Securities Underlying Unexercised Options at December 31, 2002		Value of Unexercised In-the-MoneyOptions at December 31, 2002(1)
Name	Shares Acquired on Exercise	Value Realized	Exercisable	Unexercisable	Exercisable	Unexercisable
Anthony C. Pizi	--	--	166,653	833,347	(2)	--
John P. Broderick	--	--	55,295	210,605	(2)	--
Paul Rampel (3)	--	--	237,633	66,670	$11,666	$23,335

	December 31, 2002	December 31, 2001
Audit fees (1)	$121,255	$290,729
Audit-related fees (2)	134,700	--
Tax fees (3)	99,310	97,902
All other fees (4)	10,000	81,821
Total fees	$365,265	$470,452