UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
Proxy Statement Pursuant to Section 14(a) of theEXCHANGE ACT OF 1934
Securities Exchange Act of 1934

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¨Soliciting Material Pursuant to Section 240.14a-12
o Definitive Proxy Statement
¨o Definitive Additional Materials
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Cicero, Inc.
(Name of Registrant as Specified In Its Charter)
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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4)Date Filed: ___________________________________________




LEVEL 8 SYSTEMS, INC.

NOTICE OF SPECIAL STOCKHOLDERS’ MEETING TO BE HELD
November 16, 2006 at 11:00 a.m.

Dear 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 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:

1.To amend the Amended and Restated Certificate of Incorporation of the Company (“Certificate of Incorporation”) to change its name to Cicero Inc.;
2.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;
3.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
4.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
   
 (1)John BroderickAmount Previously Paid:
  (2)Chief Executive OfficerForm, Schedule or Registration Statement No.:
 (3)Filing Party:
 (4)Dated: October 17, 2006Date Filed:



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LEVEL 8 SYSTEMS, INC.
To the Stockholders of Level 8 Systems, Inc.:
On behalf of the Board of Directors of Level 8 Systems, Inc. (the  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 StockNumber of Shares of Series A-1 Preferred Stock
Series A-30.0142857
Series B-30.125
Series C0.20
Series D0.25
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,

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·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
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Level 8 Systems, Inc.
8000 Regency Pkwy, Suite 542Parkway
Cary, North Carolina 27518

Notice of Annual Meeting


Dear Stockholder:

PROXY STATEMENT

SOLICITATION OF PROXY
This Proxy Statement is being furnishedYou are cordially invited to attend 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 ProxyAnnual Meeting of Stockholders of Cicero, Inc., a Delaware corporation (the "Proxy"“Company”) delivered herewith..  The Annual Meeting will be held at [●] a.m. on August 25, 2015 at [______________________________]. The meeting will be held for the following purposes:

This Proxy Statement1. To elect seven directors to serve for the ensuing year and the accompanying form of Proxyuntil their successors are first being mailed to stockholders of the Company on or about October 23, 2006.elected;

The Company will bear all costs2. To consider 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.

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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?

A: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?

A: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?

A: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?
A: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 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
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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?
A: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 StockNumber of Shares of Series A-1 Preferred Stock
Series A-30.0142857
Series B-30.125
Series C0.20
Series D0.25

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?

A: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

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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 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?

A: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?

A: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

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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 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?

A: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?

A: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

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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: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.

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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 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), (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 incorporationproposal 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.
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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 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.
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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 


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
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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 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;


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·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.

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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 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 Common Stock and 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.

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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 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 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.

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 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 2.

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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 our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of Commoncommon stock, par value $0.001 per share, from 215,000,000 to 600,000,000, subject to the Board of Directors’ authority to abandon such amendment;

3. For the holders of the Company’s Series A-1 Convertible Preferred Stock from 85,000,000 shares to 215,000,000 shares. Proposal 2 relates toconsider and vote upon a proposal to effect a reverse stock split within a range of 20:1 to 100:1amend Article IV (Conversion) of the Common Stock. The approvalSeries A-1 Convertible Preferred Stock Certificate of Proposals 2 and 3 inDesignations to the Recapitalization would substantially increaseeffect that the number of shares that we may issue becauseSeries A-1 Preferred Stock will automatically convert into common stock upon the increase in authorized shares would be coupled withCompany consummating an equity financing for at least $1,000,000;

4.  For the reverse stock split. The effect of upon completionholders of the Recapitalization would be an substantial increaseCompany’s Series B Convertible Preferred Stock to consider and vote upon a proposal to amend the requirement in Section 6 (Automatic Conversion) of the numberSeries B Convertible Preferred Stock Certificate of shares that might be issued when comparedDesignations to the number of shares of Commoneffect that the Series B Preferred Stock that will be issued and outstanding.automatically convert into common stock upon the Company consummating an equity financing for at least $1,000,000;

This5.  To consider and vote upon a 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 onto amend 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 plan, arrangement or understanding to issue a substantial amount of the additional shares of common stock but these additional shares will provide us with the flexibility to 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 Common Stock, 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 Common Stock presently issued and outstanding. Although the additional shares of Common Stock would not have any effect on the rights and 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 Common Stock could have an anti-takeover effect. Although the board of directors has no present intention of doing so, new shares of Common Stock could be issued without stockholder approval to dilute the percentage ownership of current stockholders, thereby increasing the cost and difficulty of obtaining control of Level 8.

If the amendment to theCompany’s Amended and Restated Certificate of Incorporation is approved, it will become effectiveto allow stockholders to be able to act by written consent only while Privet Fund LPand its affiliates own an aggregate of at least 30% of the Company’s outstanding voting stock, subject to the Board of Directors’ authority to abandon such amendment;

6.  To consider and vote upon its filing witha proposal to amend the Company’s Amended and Restated Certificate of Incorporation to provide that only the Board of Directors may call a special meeting of stockholders of the Company, subject to the Board of Directors’ authority to abandon such amendment;

7.  To consider and vote upon a proposal to amend the Company’s Amended and Restated Certificate of Incorporation to renounce the Company’s expectancy regarding certain corporate opportunities presented to a Privet Stockholder, subject to the Board of Directors’ authority to abandon such amendment;

8.  To consider and vote upon a proposal to amend the Company’s Amended and Restated Certificate of Incorporation to Corporation to not be governed by the provisions of Section 203 of the Delaware SecretaryGeneral Corporation Law, subject to the Board of Directors’ authority to abandon such amendment;

9.  To consider and vote upon a proposal to amend the Company’s Amended and Restated Certificate of Incorporation establishing the courts located within the State which will occurof Delaware as soon as reasonably practicable after approvalthe exclusive forum for the adjudication of certain legal actions by the stockholders, subject to the Board of Directors’ authority to abandon such amendment;

10.  To consider and vote upon a proposal to amend the Company’s Amended and Restated Certificate of Incorporation to authorize 10,000,000 shares of “blank check” preferred stock, par value $0.001 per share, subject to the Board of Directors’ authority to abandon such amendment;

11.  To consider and cast an advisory vote on a non-binding resolution to approve the compensation of our executive officers disclosed in this Proxy Statement;


12. To consider and cast an advisory vote upon a non-binding resolution to determine the frequency of an advisory vote on executive compensation;

13. To ratify the selection by the Audit Committee of the Recapitalization.Board of Directors of Cherry Bekaert LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2015; and

14. To conduct any other business properly brought before the meeting.
 
These items of business are more fully described in the Proxy Statement accompanying this Notice.
The record date for the Annual Meeting is July 30, 2015. Only stockholders of record at the close of business on that date may vote at the meeting or any adjournment thereof.

By order of the Board of Directors
Date
John Broderick
Chief Executive Officer

Cary, North Carolina
[_______], 2015


YOUR VOTE IS IMPORTANT
THIS PROXY STATEMENT IS FURNISHED IN CONNECTION WITH THE SOLICITATION OF PROXIES BY THE COMPANY, ON BEHALF OF THE BOARD OF DIRECTORS, FOR THE 2015 ANNUAL MEETING OF STOCKHOLDERS. THE PROXY STATEMENT AND THE RELATED PROXY FORM ARE BEING DISTRIBUTED ON OR ABOUT [_______], 2015. YOU CAN VOTE YOUR SHARES USING ONE OF THE FOLLOWING METHODS:
• COMPLETE AND RETURN A WRITTEN PROXY CARD; OR
• ATTEND THE COMPANY'S 2015 ANNUAL MEETING OF STOCKHOLDERS AND VOTE.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING. HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE POSTAGE-PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER ATTENDING THE MEETING MAY VOTE IN PERSON EVEN IF HE OR SHE HAS RETURNED A PROXY CARD.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDERS MEETING TO BE HELD ON AUGUST 25, 2015 — THE PROXY STATEMENT AND THE 2014 ANNUAL REPORT TO STOCKHOLDERS ARE AVAILABLE AT [_______________].



TABLE OF CONTENTS

Page No.
GENERAL INFORMATION1
PROPOSAL I ELECTION OF DIRECTORS4
CORPORATE GOVERNANCE6
PROPOSAL II  APPROVAL OF AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION INCREASING THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 215,000,000 SHARES TO 600,000,000 SHARES11
PROPOSAL III  APPROVAL to amend Article IV (Conversion) of the Series A-1 Convertible Preferred Stock Certificate of Designations to the effect that the Series A-1 Preferred Stock will automatically convert into common stock upon the Company consummating an equity financing for at least $1,000,00014
PROPOSAL IV  APPROVAL to amend SECTION 6 (AUTOMATIC Conversion) of the Series B Convertible Preferred Stock Certificate of Designations to the effect that the Series B Preferred Stock will automatically convert into common stock upon the Company consummating an equity financing for at least $1,000,00016
PROPOSAL V  APPROVAL OF AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION to allow stockholders to able to act by written consent only WHILE Privet Fund LP and its affiliates own an aggregate of at least 30% of the Company’s outstanding voting stock18
PROPOSAL VI  APPROVAL OF AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION to provide that only the Board of Directors may call a special meeting of stockholders of the Company20
PROPOSAL VII  APPROVAL OF AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION to RENOUNCE THE COMPANY’S EXPECTANCY REGARDING CERTAIN CORPORATE OPPORTUNITIES presented to a privet stockholder21
PROPOSAL VIII  APPROVAL OF AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION to ELECT not be governed by the provisions of Section 203 of the Delaware General Corporation Law23
PROPOSAL IX  APPROVAL OF AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION establishing the courts located within the State of Delaware as the exclusive forum for the adjudication of certain legal actions24
PROPOSAL X  APPROVAL OF AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION to authorize 10,000,000 shares of “blank check” preferred stock, par value $0.001 per share25
PROPOSAL XI  ADVISORY (NON-BINDING) VOTE ON EXECUTIVE COMPENSATION27
PROPOSAL XII  ADVISORY (NON-BINDING) VOTE ON THE FREQUENCY OF ADVISORY VOTES ON EXECUTIVE COMPENSATION28
PROPOSAL XIII  RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM29
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT31
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE33
EXECUTIVE COMPENSATION33
CERTAIN TRANSACTIONS37
UNAUDITED PRO FORMA FINANCIAL STATEMENTS38
HOUSEHOLDING OF PROXY MATERIALS38
OTHER MATTERS38
DOCUMENTS INCORPORATED BY REFERENCE40
APPENDIX A – SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
APPENDIX B – AUDIT COMMITTEE CHARTER



Cicero, Inc.
8000 Regency Parkway
Cary, North Carolina 27518

PROXY STATEMENT FOR THE 2015 ANNUAL MEETING OF STOCKHOLDERS
GENERAL INFORMATION
This proxy statement contains information related to the 2015 Annual Meeting of Stockholders (“Annual Meeting”) of Cicero, Inc., a Delaware corporation (“we”, “us”, “our”, “Cicero”, or “the Company”), to be held at [_______________] on August 25, 2015 at [●] a.m., local time, and at any postponements or adjournments thereof. The approximate date of mailing for this proxy statement and a copy of our Annual Report on Form 10-K for the year ended December 31, 2014 is [_______], 2015. You are invited to attend the Annual Meeting, and we request that you vote on the proposals described in this Proxy Statement. You do not need to attend the meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card.

Record Date and Quorum
Our Board of Directors has fixed the close of business on July 30, 2015 as the record date (the “Record Date”) for determination of stockholders entitled to notice of, and to vote at, the Annual Meeting. The presence, in person or by proxy, of the holders of record of capital stock representing a majority of the votes entitled to be cast at the Annual Meeting will constitute a quorum.

Voting Securities and Required Vote
As of the Record Date, we had issued and outstanding 180,353,377 shares of common stock, par value $0.001 per share, 1,499.628 shares of our Series A-1 Preferred Stock, par value $0.001 per share, and 10,400 shares of our Series B Preferred Stock, par value $0.001 per share.  Holders of common stock are entitled to one vote for each share of common stock held on the Record Date; holders of Series A-1 Preferred Stock are entitled to one thousand votes for each share of Series A-1 Preferred Stock held on the Record Date; and  holders of Series B Preferred Stock are entitled to one thousand votes for each share of Series B Preferred Stock held on the Record Date.
Proposal I - Directors are elected by a plurality of the affirmative votes cast by those shares of stock present in person, or represented by proxy, and entitled to vote at the Annual Meeting. Seven directors are to be elected by the holders of our common stock, Series A-1 Preferred Stock and Series B Preferred Stock, voting together as a single class.
Proposal II – 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 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.

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.

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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 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 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.
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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

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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.

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  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 
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(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

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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 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

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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 Commonour voting stock (which consists of our common stock, Series A-1 Preferred Stock and Series A-3, B-3, C and D preferred stock (each voting on an as-converted basis) entitled to vote thereon,B Preferred Stock), voting together as a single class, (ii)is required to approve this proposal. Abstentions and broker non-votes will have the same effect as an “Against” vote.
Proposal III – The affirmative vote of the holders of at least two-thirds of the issued and outstanding shares of our Series D preferred stock entitled to vote thereon,A-1 Preferred Stock, voting together separately as a single class, with respectis required to approve this proposal. Abstentions will have the conversion intosame effect as an “Against” vote. None of these shares are held by brokers.
Proposal IV – The affirmative vote of Series A-1 preferred stock at the reduced conversion rates and the entire Recapitalization and (iii) the holders of at least 85%two-thirds of the issued and outstanding shares of our Series A-3, B-3 and C preferred stock entitled to vote thereon, eachB Preferred Stock, voting together separately as a single class, with respectis required to approve this proposal. Abstentions will have the conversion intosame effect as an “Against” vote. None of these shares are held by brokers.
Proposal V – The affirmative vote of the holders of a majority of the issued and outstanding shares of our voting stock (which consists of our common stock, Series A-1 preferred stock at the reduced conversion ratesPreferred Stock and Series B Preferred Stock), voting together as a single class, is required to approve this proposal. Abstentions and broker non-votes will have the same effect as an “Against” vote.
Proposal VI – The affirmative vote of the holders of a majority of the issued and outstanding shares of our voting stock (which consists of our common stock, Series A-1 Preferred Stock and Series B Preferred Stock), voting together as a single class, is required to approve this proposal. Abstentions and broker non-votes will have the same effect as an “Against” vote.
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Proposal VII – The affirmative vote of the holders of a majority of the issued and outstanding shares of our voting stock (which consists of our common stock, Series A-1 Preferred Stock and Series B Preferred Stock), voting together as a single class, is required to approve this proposal. Abstentions and broker non-votes will have the same effect as an “Against” vote.
Proposal VIII – The affirmative vote of the holders of a majority of the issued and outstanding shares of our voting stock (which consists of our common stock, Series A-1 Preferred Stock and Series B Preferred Stock), voting together as a single class, is required to approve this proposal. Abstentions and broker non-votes will have the same effect as an “Against” vote.
Proposal IX – The affirmative vote of the holders of a majority of the issued and outstanding shares of our voting stock (which consists of our common stock, Series A-1 Preferred Stock and Series B Preferred Stock), voting together as a single class, is required to approve this proposal. Abstentions and broker non-votes will have the same effect as an “Against” vote.
Proposal X – The affirmative vote of the holders of a majority of the issued and outstanding shares of our voting stock (which consists of our common stock, Series A-1 Preferred Stock and Series B Preferred Stock), voting together as a single class, is required to approve this proposal. Abstentions and broker non-votes will have the same effect as an “Against” vote.
Proposal XI – The affirmative vote of the holders of a majority of the shares of our voting stock (which consists of our common stock, Series A-1 Preferred Stock and Series B Preferred Stock) present and entitled to vote at the meeting, voting together as a single class, is required to approve this proposal. Abstentions will have the same effect as an “Against” vote while vote broker non-votes will have no effect on the outcome of the vote.
Proposal XII – The number of years receiving the greatest number of votes (i.e. one, two or three years) from the holders of our voting stock (which consists of our common stock, Series A-1 Preferred Stock and Series B Preferred Stock), voting together as a single class, will be considered the frequency recommended by stockholders. Abstentions and broker non-votes will have no effect on the outcome of the vote.
Proposal XIII – The affirmative vote of the holders of a majority of the shares of our voting stock (which consists of our common stock, Series A-1 Preferred Stock and Series B Preferred Stock) present and entitled to vote at the meeting, voting together as a single class, is required to approve this proposal. Abstentions will have the same effect as an “Against” vote while vote broker non-votes will have no effect on the outcome of the vote.

Voting by Proxy
If your shares are registered directly in your name with American Stock Transfer & Trust Company, our transfer agent, you are considered a stockholder of record. As a stockholder of record at the close of business on the Record Date, you can vote in person at the Annual Meeting or you can provide a proxy to be voted at the meeting by signing and returning the enclosed proxy card. If you submit a proxy card, we will vote your shares as you direct. If you submit a proxy card without giving specific voting instructions, those shares will be voted as recommended by the Board of Directors. If you return a signed and dated proxy card without marking any voting selections, your shares will be voted “For” all the nominees to the Board of Directors in Proposal I, “For” Proposals II, III, IV, V, VI, VII, VIII, IX, X, XI and XIII, and “3-Years” for Proposal XII. If any other matter is properly presented at the Annual Meeting, your proxy (i.e., one of the individuals named on your proxy card) will vote your shares using his or her best judgment.

If your shares are held in a stock brokerage account or otherwise by a nominee (that is, in “street name”), you will need to obtain a proxy form from the institution that holds your shares and follow the instructions included on that form regarding how to instruct your broker to vote your shares. If you do not give instructions to your broker, your broker can vote your shares with respect to “discretionary” items, but not with respect to “non-discretionary” items. Discretionary items are proposals considered routine under the rules of the New York Stock Exchange on which your broker may vote shares held in street name in the absence of your voting instructions. On non-discretionary items for which you do not give your broker instructions, the shares cannot be voted and will be treated as broker non-votes.
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Revocation of Proxy
Your execution of the enclosed proxy will not affect your right as a stockholder to attend the Annual Meeting and to vote in person. Any stockholder giving a proxy has the right to revoke it at anytime by either (i) a later-dated proxy, (ii) a written revocation sent to and received by the Secretary of the Company prior to the Annual Meeting, or (iii) attendance at the Meeting and voting in person. If your shares are held in street name, you must follow the instructions provided by your broker or bank. 

Cost of Proxy Solicitation

We will pay for the entire Recapitalization.cost of soliciting proxies by our Board of Directors. In addition to the solicitation of proxies by mail, solicitation may be made personally or by telephone or electronic communication by our directors, officers and employees, none of whom will receive additional compensation for these services. We will reimburse brokers and other nominees for their reasonable out-of-pocket expenses incurred in connection with distributing forms of proxies and proxy materials to the beneficial owners of our common stock.

Stockholder Proposals for next Annual Meeting
Under Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), stockholders of the Company may present proper proposals for inclusion in the Company's Proxy Statement and for consideration at the next annual meeting of stockholders by submitting their proposals to the Company in a timely manner. In order to be considered for inclusion in the Proxy Statement distributed to stockholders prior to the annual meeting of stockholders in the year 2016, a stockholder proposal must be received by the Company no later than [April 1, 2016] and must otherwise comply with the requirements of Rule 14a-8. Stockholder proposals should be delivered in writing to Cicero Inc., 8000 Regency Parkway, Cary, North Carolina 27518 Attention: Secretary.
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PROPOSAL I
ELECTION OF DIRECTORS
There are seven nominees for election to the Company's Board of Directors. The names of the persons who are nominees for director and their positions and offices with the Company are set forth in the table below. Each director to be elected will hold office until the 2016 Annual Meeting of Stockholders and until his successor is elected and has qualified, or until such director's earlier death, resignation or removal.

AsDirectors are elected by a plurality of June 30, 2006, the directorsvotes present in person or represented by proxy and executive officersentitled to vote at the Annual Meeting. Shares represented by executed proxies will be voted, if authorization to do so is not withheld, for the election of Level 8the seven nominees named below. In the event that any nominee should be unavailable for election as a result of an unexpected occurrence, your shares will be voted for the election of a substitute nominee as the Board of Directors may propose. Each of the nominees listed below has been nominated for and their affiliates together own about 2.0%has agreed to stand for election and management has no reason to believe that any nominee will be unable to serve.

The following table provides information regarding each nominee to our Board of Level 8 voting stock, including 0.9% of Common Stock outstanding, 1.1% of Level 8 Series C preferred stock.Directors:
NameAgePosition
John L Steffens73Chairman of the Board
John Broderick66Chief Executive Officer, Chief Financial Officer and Director
Mark Landis73Director
Bruce D. Miller64Director
Don Peppers64Director
Ryan Levenson40Director
Thomas Avery61Director
John L. Steffens

Regulatory Approvals. ToMr. Steffens was appointed to our Board of Directors on May 16, 2007, and is the Company’sFounder and Senior Managing Director of Spring Mountain Capital, LP. Prior to founding Spring Mountain Capital in 2001, Mr. Steffens spent 38 years at Merrill Lynch & Co., Inc., where he held numerous senior management positions, including President of Merrill Lynch Consumer Markets, Vice Chairman of Merrill Lynch & Co., Inc., and Chairman of its U.S. Private Client Group. Under his leadership, the Private Client Group experienced tremendous growth, increasing assets under management from $200 billion to $1.6 trillion. Mr. Steffens also served on the board of directors of Merrill Lynch & Co., Inc. from April 1986 until July 2001.

Mr. Steffens currently serves on the board of directors of Colony Financial, Inc. He also serves on the board of managers of HealthpointCapital and the advisory boards of StarVest Partners and Wicks Communication & Media Partners, L.P. In addition, he is currently National Chairman Emeritus of the Alliance for Aging Research and a member of the Board of Overseers of the Geisel School of Medicine at Dartmouth. Previously, Mr. Steffens served as Chairman of the Securities Industry Association (now the Securities Industry and Financial Markets Association, or SIFMA) and as a Trustee of the Committee for Economic Development. In 2010, Mr. Steffens was the recipient of the Billie Jean King Contribution Award from the Women's Sports Foundation. Mr. Steffens received a B.A. in Economics from Dartmouth College and also completed Harvard Business School’s Advanced Management Program. We believe Mr. Steffen’s qualifications to serve on our Board of Directors include his experience in leading complex enterprises and his experience as a senior executive.

John P. Broderick

Mr. Broderick is currently the Chief Executive Officer and Chief Financial Officer of the Company and is also a director. Mr. Broderick has served as a director and as the Chief Executive Officer of the Company since June 2005, as the Chief Financial Officer of the Company since April 2001, and as Corporate

Secretary since August 2001. Prior to joining our Company, Mr. Broderick was Executive Vice President of Swell Inc., a sports media e-commerce company where he oversaw the development of all commerce operations and served as the organization's interim Chief Financial Officer. Previously, Mr. Broderick served as Chief Financial Officer and Senior Vice President of North American Operations for Programmer's Paradise, a publicly held international software marketer.  Mr. Broderick received his B.S. degree in accounting from Villanova University.  We believe Mr. Broderick’s qualifications to serve on our Board of Directors include his intimate knowledge of our operations as a result of day to day leadership as our Chief Executive Officer.

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Mark Landis

Mr. Landis has been a director of the only required regulatoryCompany since July 2005. Mr. Landis retired in 2003 from Siemens Building Technology’s where he served as president of the North American Security Division since 2001.  Previously he served as CEO of Security Technologies Group from 1988 until it was sold to Siemens Building Technology’s in 2001.  In 2008 he became Chairman of Docassist, LLC.  Mr. Landis earned his B.A. from Cornell University and his Juris Doctorate from the University of Pennsylvania.  Mr. Landis received his Chartered Property and Casualty Underwriter (CPCU) from the American Institute for Property and Liability Underwriters.  We believe Mr. Landis’ qualifications to serve on our Board of Directors include his experience in leading enterprises and his experience as a senior executive.

Bruce D. Miller

Mr. Miller has been a director since July 2005.  He has served as General Partner of Delphi Partners, Ltd. a closely held investment partnership, since 1989.  Mr. Miller is a long-standing member of the board of Cape Air/Nantucket Airlines and was recently named a Trustee of the Cape Cod Five Cent Savings Bank. He has been involved with numerous non-profits in his home town of Nantucket, Massachusetts.  Mr. Miller received both a B.S. in Finance and an M.B.A. from Lehigh University.  We believe Mr. Miller’s qualifications to serve on our Board of Directors include his experience as General Partner of a privately owned investment partnership.

Don Peppers

Mr. Peppers has been a Director since June 2007.  Mr. Peppers formed Marketing 1:1, Inc. in January 1992 which became Peppers & Rogers Group, a customer-centered management consulting firm with offices located in the United States, Europe, the Middle East, Latin America and South Africa.  He has written or governmental approval or filing necessaryco-authored ten books on marketing, sales, and customer relationships issues.  Peppers & Rogers Group is now a unit of TeleTech Holdings (TTEC), a business process outsourcer based in Denver, Colorado.  From October 1990 to January 1992, Mr. Peppers was the Chief Executive Officer of Perkins/Butler Direct Marketing, a top-20 U.S.-direct-marketing agency.  Prior to marketing and advertising, he worked as an economist in the oil business and as the director of accounting for a regional airline. Mr. Peppers holds a Bachelor's Degree in astronautical engineering from the U.S. Air Force Academy, and a Master's Degree in public affairs from Princeton University's Woodrow Wilson School.  We believe Mr. Pepper’s qualifications to serve on our Board of Directors include his years of experience providing strategic advisory services to organizations.

Ryan Levenson

Mr. Levenson was appointed to the Board of Directors on July 15, 2015, pursuant to a director designation right granted to Privet Fund LP (“Privet”) in connection with the consummationStock and Warrant Purchase Agreement (the “Purchase Agreement”) entered into by the Company with Privet, five directors of the RecapitalizationCompany, including John L. Steffens, Donald Peppers, Mark Landis, Bruce Miller and Thomas Avery and three other persons (see Proposal II for more details regarding the Purchase Agreement). Mr. Levenson is currently and has been Principal and Managing Member of Privet Fund Management LLC, an investment firm, since its founding in February 2007. Mr. Levenson currently serves as a director of RELM Wireless Corp., a manufacturer and distributor of wireless communications products. Previously, Mr. Levenson served as a director and member of the Compensation, Organization and Corporate Governance Committee of Material Sciences Corp. from May 2013 until its sale in March 2014. Mr. Levenson also served as a member of the board of directors and Compensation and Audit Committees of The Middleby Corporation from May 2006 until November 2012. Prior to founding Privet Fund Management LLC in February 2007, Mr. Levenson served as Vice President of Business Development at MSI, a privately held building products distributor and construction services company, from 2003 until 2006. Prior to his service with MSI, Mr. Levenson served as a financial analyst for Cramer Rosenthal McGlynn’s long/short equity hedge fund after working at SAC Capital Advisors LLC in a similar capacity. Mr. Levenson graduated from Vanderbilt University with a degree in art history. We believe Mr. Levenson’s qualifications to serve on our Board of Directors include his experience with making value-oriented investments in small capitalization companies across all levels of the capital structure.

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Thomas Avery

Mr. Avery was appointed to the Board of Directors on July 15, 2015, pursuant to a director designation right granted to Privet in connection with the Purchase Agreement entered into by the Company with Privet, five directors of the Company, including John L. Steffens, Donald Peppers, Mark Landis, Bruce Miller and Thomas Avery and three other persons (see Proposal II for more details regarding the Purchase Agreement). Mr. Avery has over 37 years of investment banking and venture capital experience which includes serving as a Managing Director at Raymond James & Associates from 2000 until 2014; the head of the investment banking group at Interstate/Johnson-Lane from 1995 to 2000; a general partner at Noro-Moseley Partners from 1989 to 1995; a general partner at Summit Partners from 1984 to 1989; and Senior Vice President at The Robinson-Humphrey Company from 1977 to 1984. During his career as a venture capitalist, Mr. Avery served on numerous private company boards, assisting those companies with advice and help in financing their enterprises, planning and executing growth strategies, and building effective management teams. Mr. Avery is currently serving on the board of directors of KIPP Metro Atlanta, a national charter school organization serving low income, minority children. Mr. Avery graduated Summa Cum Laude from the Georgia Institute of Technology with a bachelor’s degree in industrial management and from the Harvard Business School with a master’s degree in business administration. We believe Mr. Avery’s qualifications to serve on our Board of Directors include his many years of investment banking and venture capital experience.

Interest of Certain Persons in Matters to be Acted Upon

In connection with and as a condition to the Company entering into the Purchase Agreement, Mr. Steffens and Privet entered into a voting agreement whereby Mr. Steffens and Privet agreed to vote their respective shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock in favor of electing Messrs. Levenson and Avery to the Board of Directors. As Mr. Steffens and Privet together control over 68% of the aggregate voting power of the Company’s outstanding shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock, Messrs. Levenson and Avery will be elected to the Board at the Annual Meeting.


THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL OF
THE NOMINEES IN PROPOSAL I
CORPORATE GOVERNANCE
Board Leadership Structure

The Board considers and establishes the appropriate leadership structure for the Company. The Board has concluded that the Company and its stockholders are best served by not having a formal policy on whether the same individual should serve as both Chief Executive Officer and Chairman of the Board. The Board believes that it is important to retain the flexibility to make this determination based on the circumstances at the time of the determination, recognizing that no single leadership structure will best serve the Company in all cases. This allows the Board to use its broad experience and knowledge to elect the most qualified director as Chairman of the Board, while maintaining its ability to either separate or combine the roles of Chairman and Chief Executive Officer.
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The Board  has decided to separate the roles of Chief Executive Officer (John Broderick) and Chairman of the Board (John Steffens) in recognition of the differences between the two roles. Our Chief Executive Officer is responsible for setting the strategic direction for the Company and the day to day leadership and performance of the Company, while the Chairman of the Board provides guidance to our Chief Executive Officer and sets the agenda for Board meetings and presides over meetings of the full Board.
Independence of the Board of Directors
Our Board of Directors currently consists of seven members.  They are John L. Steffens, John P. Broderick, Mark Landis, Bruce D. Miller, Don Peppers, Ryan Levenson and Thomas Avery. Mr. Steffens is the Company’s Chairman of the Board and Mr. Broderick is the Company’s Chief Executive Officer and Chief Financial Officer.  The Company’s stock is quoted on the Over The Counter Bulletin Board, which does not have director independence requirements. Under Item 407(a) of Regulation S-K, the Company has chosen to measure the independence of its directors under the definition of independence used by the NYSE MKT, which can be found in the NYSE MKT Company Guide, §803(A)(2).  Under such definition, Messrs. Steffens, Landis, Miller, Peppers, Levenson and Avery are independent directors.
Committees of the Board of Directors
The Board has established three standing committees: an Audit Committee, a Compensation Committee and a Nominating Committee.

Audit Committee
The Audit Committee is currently composed of Mark Landis and Bruce Miller.  Bruce Hasenyager and John W. Atherton, Jr. were members of the Audit Committee prior to their resignations from the Board on April 7, 2015 and July 15, 2015, respectively. The Board plans to appoint new members to the Audit Committee after the Annual Meeting. The responsibilities of the Audit Committee include the appointment of, retention, replacement, compensation and overseeing the work of the Company’s independent accountants and tax professionals. The Audit Committee reviews with the independent accountants the results of the audit engagement, approves professional services provided by the accountants including the scope of non-audit services, if any, and reviews the adequacy of our internal accounting controls. The Audit Committee met formally four times during our fiscal year ended December 31, 2014. Each member attended every meeting while they were appointed to the Audit Committee. The Board of Directors has determined that the members of the Audit Committee were and are independent.  Mr. Landis qualifies as an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K. The Audit Committee does have a written charter, which is attached to this proxy statement as Appendix B.
Compensation Committee
The Compensation Committee was, prior to their respective resignations from the Board on July 15, 2015, composed of Jay Kingley and Charles Porciello. The Board plans to appoint new members to the Compensation Committee after the Annual Meeting.  The Compensation Committee met once in 2014. The Compensation Committee does not have a written charter.

The Compensation Committee has responsibility for establishing, implementing and monitoring adherence with the Company’s compensation philosophy.  Its duties include:
           • Setting the total compensation of our Chief Executive Officer and evaluating his performance based on corporate goals and objectives;
       ��   • Reviewing and approving the Chief Executive Officer’s decisions relevant to the total compensation of the Company’s other executive officer;
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           •  Making recommendations to the Board of Directors with respect to equity-based plans in order to allow us to attract and retain qualified personnel; and

           • Reviewing director compensation levels and practices, and recommending, from time to time, changes in such compensation levels and practices of the Board of Directors.

Nominating Committee
The Nominating Committee was, prior to his resignation from the Board on July 15, 2015, composed of Bruce Hasenyager. The Board plans to appoint new members to the Nomination Committee after the Annual Meeting The functions of the Nominating Committee include identification and recommendation of director nominees qualified to serve on the Board of Directors. The Nominating Committee did not meet in 2014. The Nominating Committee does not have a written charter.

The Nominating Committee considers persons identified by its members, management, shareholders, potential investors, investment bankers and others. The Nominating Committee may also use the services of search firms to assist in identifying potential directors, in gathering information about the background and experience of such persons and acting as an intermediary with such persons.

The Nominating Committee does not have any formal criteria for nominees; however, it believes that persons to be nominated should be actively engaged in business endeavors, have an understanding of financial statements, corporate budgeting and capital structure, be familiar with the requirements of a publicly traded company, be familiar with industries relevant to the Company’s business endeavors, be willing to devote significant time to the oversight duties of the board of directors of a public company, and be able to promote a diversity of views based on the person’s education, experience and professional employments. The Nominating Committee evaluates each individual in the context of the Board as a whole, with the objective of recommending a group of persons that can best implement our business plan, perpetuate our business and represent shareholder interests. The Nominating Committee may require certain skills or attributes, for example financial or accounting experience, to meet specific Board needs that arise from time to time. The Nominating Committee does not distinguish among nominees recommended by shareholders and other persons.

Shareholders and others wishing to suggest candidates to the Nominating Committee for consideration as directors must submit written notice to our corporate Secretary, who will provide it to the Nominating Committee.

Meetings of the Board of Directors
The Board of Directors met four times during 2014. All incumbent directors attended at least 75% of the meetings of the Board of Directors held during the period for which they were a director.

We expect all of our directors to attend the 2015 Annual Meeting of Stockholders. We do not maintain a formal policy regarding director attendance at our annual meeting of stockholders.

The Board's Role in Risk Oversight
The Board of Directors has an active role, as a whole and also at the committee level, in overseeing management of the Company's risks. The Board regularly reviews information regarding the Company's credit, liquidity and operations, as well as the risks associated with each. The Compensation Committee is responsible for overseeing the management of risks relating to the Company's executive compensation plans and arrangements. The Audit Committee oversees management of financial risks. The Nominating Committee manages risks associated with the independence of the Board of Directors and potential conflicts of interest of director nominees. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Board of Directors is regularly informed through committee reports about such risks.
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Stockholder Communications with the Board of Directors
Stockholders may contact members of the Board of Directors by writing to them c/o Cicero Inc., Suite 542, 8000 Regency Parkway, Cary, North Carolina 27518 Attention: Secretary. The Secretary will forward correspondence to the directors from time to time.

Code of Business Conduct and Ethics
Our Board of Directors has adopted a code of ethics and a code of conduct that applies to all of our Directors, Chief Executive Officer, Chief Financial Officer, and employees.  We will provide copies of our code of conduct and code of ethics without charge upon request. To obtain a copy of the code of ethics or code of conduct, please send your written request to Cicero Inc., Suite 542, 8000 Regency Pkwy, Cary, North Carolina 27518, Attention: Secretary.  The code of ethics is also available on the Company’s website at www.ciceroinc.com.
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REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS*
The Audit Committee oversees the Company's financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal control over financial reporting and disclosure controls and procedures. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 with management, including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements.
The Audit Committee is responsible for reviewing, approving and managing the engagement of the Company’s independent registered public accounting firm, including the scope, extent and procedures of the annual audit and compensation to be paid therefore, and all other matters the audit committee deems appropriate, including the Company’s independent registered public accounting firm’s accountability to the Board of Directors and the Audit Committee. The Audit Committee reviewed with the Company’s independent registered public accounting firm, which is responsible for expressing an opinion on the conformity of audited financial statements with generally accepted accounting principles, its judgment as to the quality, not just the acceptability, of the Company's accounting principles and such other matters as are required to be discussed with the audit committee under auditing standards generally accepted in the United States, including those described in Auditing Standard 16, as amended, “Communication with Audit Committees,” and discussed and reviewed the results of the Company’s independent registered public accounting firm’s examination of the financial statements. In addition, the Audit Committee discussed with the Company's independent registered public accounting firm the independent registered public accounting firm’s independence from management and the Company, including the matters in the written disclosures and the letter regarding its independence as required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant's communications with the audit committee concerning independence. The Audit Committee also considered whether the provision of any non-audit services was compatible with maintaining the independent registered public accounting firm's independence.
The Audit Committee discussed with the Company’s independent registered public accounting firm the overall scope and plans for its audits, and received from them written disclosures and letter regarding their independence. The Audit Committee meets with the Company's independent registered public accounting firm, with and without management present, to discuss the results of its examinations and the overall quality of the Company's financial reporting. The Audit Committee held four meetings during the fiscal year ended December 31, 2014.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors (and the Board of Directors approved) that the audited financial statements be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014 for filing with the Securities and Exchange Commission. The audit committee has also retained Cherry Bekaert LLP as the   Company's independent registered public accounting firm for the fiscal year ending December 31, 2015.

Audit Committee:

Mark Landis
Bruce Miller

The material in this report is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
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PROPOSAL II
APPROVAL OF AMENDMENT TO THE COMPANY’S
AMENDED AND RESTATED CERTIFICATE OF INCORPORATIO
INCREASING THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
FROM 215,000,000 SHARES TO 600,000,000 SHARES
General
The Board of Directors is proposing for stockholder approval an amendment to the Company’s Amended and Restated Certificate of Incorporation with(the “Charter”) to increase the Secretarynumber of Stateauthorized shares of common stock, par value $0.001 per share, from 215,000,000 shares to 600,000,000 shares. At a meeting held on July 8, 2015, the Board of Directors approved this amendment, subject to stockholder approval, and directed that this amendment be submitted to a vote of the StateCompany’s stockholders at the Annual Meeting. The Charter also authorizes the issuance of Delaware.

Required Votes. The consummation of the Recapitalization is subjectup 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 purchase10,000,000 shares of Common Stockconvertible preferred stock, par value $0.001 per share, 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 intowhich 1,499.628 shares of Series A-1 preferred stock of the Company,Preferred Stock 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 into10,400 shares of Series A-1B Preferred Stock are currently issued or outstanding. This proposed amendment will not increase or otherwise affect the Company’s authorized shares of preferred stockstock; however, at the Annual Meeting (A) holders of the Company. BecauseCompany’s Series A-1 Preferred Stock will be voting on a proposal to amend the requirement in Article IV (Conversion) of the relatively few numbersSeries A-1 Convertible Preferred Stock Certificate of Designations which provides that the Series A-1 Preferred Stock be automatically converted into common stock upon the Company consummating an equity financing for at least $5,000,000 to consummating an equity financing for at least $1,000,000, which will cause an automatic conversion of the Series A-1 Preferred Stock into common stock (see Proposal III); (B) holders of eachthe Company’s Series B Preferred Stock will be voting on a proposal to amend the requirement in Article 6 (Automatic Conversion) of the Series B Convertible Promissory Notes, Senior Reorganization Notes and Convertible Bridge Notes, wePreferred Stock Certificate of Designations which provides that the Series B Preferred Stock be automatically converted into common stock upon the Company consummating an equity financing for at least $5,000,000 to consummating an equity financing for at least $1,000,000, which 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 datecause an automatic conversion of the special meeting in order to effect the Recapitalization as soon as possible thereafter ifSeries B Preferred Stock into common stock (see Proposal IV); and (C) 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 Recapitalizationstockholders will be effected withinvoting on a few weeks of stockholder approval. Our failureproposal to consummateamend 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 theCompany’s Amended and Restated Certificate of Incorporation withto authorize 10,000,000 shares of “blank check” preferred stock, par value $0.001 per share (see Proposal X).

The Board believes that it is in the Secretary of Statebest interests of the StateCompany and its stockholders to increase the number of Delaware. Upon approvalauthorized shares of common stock in order to allow the Company to meet certain contractual commitments and to give the Company greater flexibility in considering and planning for future potential business needs.

Purpose
The Charter currently authorizes the issuance of up to 215,000,000 shares of common stock, par value $0.001 per share. As of the requisite voteclose of Level 8 Stockholders,business on July 30, 2015, 180,353,377 shares of common stock were issued and outstanding. In addition, as of the close of business on July 30, 2015, there were 207,959,111 shares of common stock issuable upon exercise of outstanding warrants, 3,603,110 shares of common stock issuable upon exercise of outstanding stock options, 898,090 shares of common stock reserved for issuance for future grants under the Company’s 2007 Employee Stock Option Plan and Outside Director Stock Option Plan (collectively, the “Current Option Plans”) and 11,899,628 shares of common stock issuable upon conversion of the Company’s Series A-1 and Series B Preferred Stock. Assuming all currently outstanding warrants, options and shares of Series A-1 and Series B Preferred Stock were exercised or converted and all options reserved for issuance under the Current Option Plans were issued and exercised, the Company would filenot have enough authorized shares of common stock to allow exercise of the warrants issued to the purchasers in the following ordertransaction described below.

On July 15, 2015, the Company entered into a Stock and Warrant Purchase Agreement (the “Purchase Agreement”) with investors named therein, including Privet Fund LP (“Privet”), five directors of the Company, including John L. Steffens, Donald Peppers, Mark Landis, Bruce Miller and Thomas Avery and three other persons (collectively the nine investors are referred to as the “Purchasers”). Pursuant to the terms of the Purchase Agreement, the Company issued to the Purchasers an aggregate of 25,000,000 shares of common stock and warrants to purchase up to an aggregate of 205,277,778 shares of common stock, in return for an aggregate investment of $1,000,000. The warrants, if exercised, would result in a cash inflow to the Company of approximately $9,000,000.

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Therefore, the purposes of this amendment to increase the number of authorized shares of common stock from 215,000,000 to 600,000,000 are:

·to allow the Company to issue additional shares of common stock for any proper corporate purposes, including but not limited to, public or private financings, stock splits, stock dividends, potential strategic transactions, including mergers, acquisitions, strategic partnerships, joint ventures and other business combinations, as well as for other general corporate transactions; and
·to allow exercised of the above-described options, warrants, including the warrants issued to Purchasers (the exercise of which could result in a cash inflow to the Company of up to $9,000,000), and conversion of outstanding preferred and promissory notes.

Other than as described above and the conversion of the Company’s Series A-1 Preferred Stock (Proposal III) and Series B Preferred Stock (Proposal IV), the Company has no current plan, commitment, arrangement, understanding or agreement regarding the issuance of the additional shares of common stock resulting from the proposed increase in the number of authorized shares of common stock. The additional shares of common stock will be available for issuance from time to time as determined by the Board of Directors for any proper corporate purposes. Having these additional shares of authorized common stock available for future use will allow the Company to issue additional shares of common stock without the expense and delay of arranging a special meeting of stockholders.

Possible Effects and Anti-takeover Considerations
Once the amendment to the Charter is approved, the additional authorized shares would be available for issuance at the discretion of the Board and without further stockholder approval. It is not the present intention of the Board of Directors to seek stockholder approval prior to any issuance of shares of common stock that would become authorized by the amendment unless otherwise required by law or regulation. Frequently, opportunities arise that require prompt action, and it is the belief of the Board of Directors that the delay necessitated for stockholder approval of a specific issuance could be to the detriment of the Company and its stockholders. The additional shares of authorized common stock would have the same rights and privileges as the shares of common stock currently issued and outstanding. The adoption of the amendment would not have any immediate dilutive effect on the proportionate voting power or other rights of existing stockholders. Shares of common stock issued in the future (including for the purposes described above in the section entitled “Purpose”), other than for a stock split, may decrease existing stockholders’ percentage equity ownership and, depending on the price at which they are issued, could have a financially dilutive effect on previously issued shares of common stock and have a negative effect on the market price of the common stock. The Company cannot provide assurances that any such transactions will be consummated on favorable terms or at all, that they will enhance stockholder value or that they will not adversely affect the Company’s business or the trading price of our stock. Current stockholders have no preemptive or similar rights.

The Company has not proposed the increase in the number of authorized shares of common stock with the intention of using the additional authorized shares for anti-takeover purposes, but the Company would be able to use the additional shares to oppose a hostile takeover attempt or delay or prevent changes in control or management of the Company. For example, without further stockholder approval, the Board could sell shares of common stock or preferred stock, including preferred stock convertible into shares of common stock, in a private transaction to purchasers who would oppose a takeover or favor the current Board. Although this proposal to increase the authorized number of shares of common stock has been prompted by the need to fulfill contractual obligations and other business and financial considerations, and not by the threat of any known or threatened hostile takeover attempt, stockholders should be aware that approval of this proposal could facilitate future efforts by the Company to oppose changes in control of the Company and perpetuate the Company’s management, including transactions in which the stockholders might otherwise receive a premium for their shares over then current market prices.

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Interest of Certain Persons in Matters to be Acted Upon

As described above, in connection with the Purchase Agreement, the Company issued warrants to John L. Steffens, Tom Avery, Mark Landis, Bruce Miller and Don Peppers, each a director of the Company, to purchase up to an aggregate of 51,319,445 shares of common stock. These warrants are exercisable for a term of three years at exercise prices ranging from $0.04 to $0.05 per share. Some of the additional shares of common stock authorized by this proposal may be issued to Messrs. Steffens, Avery, Landis, Miller and Peppers upon exercise of their respective warrants.

In connection with and as a condition to the Company entering into the Purchase Agreement, Mr. Steffens and Privet entered into a voting agreement whereby Mr. Steffens and Privet agreed to vote their respective shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock in favor of this proposal. As Mr. Steffens and Privet together control over 68% of the aggregate voting power of the Company’s outstanding shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock, this proposal will be approved at the Annual Meeting.
Effective Date
In order for the increase in the number of authorized shares of common stock to 600,000,000 shares to become effective, we will have to file a Second Amended and Restated Certificate of Amendment (a copy of which is attached to this Proxy Statement as Appendix A) with the Delaware Secretary of StateState. Upon obtaining stockholder approval of Delaware:this proposal, we intend to file the Second Amended and Restated Certificate of Amendment as soon as practicable. The Board of Directors reserves the right, notwithstanding stockholder approval of this proposal and without further action by our stockholders, not to proceed with the corporate action authorized by this proposal at any time before the filing of the Second Amended and Restated Certificate of Amendment.

Regarding the authorized capital structure of the Company, the first sentence of the Fourth Article of the Charter currently reads as follows:

“The total number of shares of capital stock which the Corporation is authorized to issue is two hundred twenty five million 225,000,000 shares, consisting of: (i) Two Hundred Fifteen million (215,000,000) shares of Common Stock, par value $.001 per share (“Common Stock”); and (ii) Ten million (10,000,000) shares of preferred stock, par value $.001 per share (“preferred stock”).

The first sentence of Section 4.01 of Article IV of the Company’s Second Amended and Restated Certificate of Amendment, as approved by the Board of Directors, reads as follows:

Total Authorized Shares.  The total number of shares of capital stock that the Corporation shall have authority to issue is 610,000,000, which shall be divided into 600,000,000 shares of common stock, par value $0.001 (the “Common Stock”), and 10,000,000 shares of preferred stock, par value $0.001 per share (the “Preferred Stock”).”

Dissenter’s Rights
Delaware law does not provide for appraisal or other similar rights for dissenting stockholders in connection with this proposal.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL II
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PROPOSAL III
APPROVAL TO AMEND ARTICLE IV (CONVERSION) OF THE SERIES A-1 CONVERTIBLE PREFERRED STOCK CERTIFICATE OF DESIGNATIONS TO THE EFFECT THAT THE SERIES A-1 PREFERRED STOCK WILL AUTOMATICALLY CONVERT INTO COMMON STOCK UPON THE COMPANY CONSUMMATING AN EQUITY FINANCING FOR AT LEAST $1,000,000
General
The Board of Directors is proposing for approval by the holders of the Company’s Series A-1 Preferred Stock an amendment to Article IV (Conversion) of the Series A-1 Convertible Preferred Stock Certificate of Designations Preferenceswhich provides that the Series A-1 Preferred Stock be automatically converted into common stock upon the Company consummating an equity financing for at least $5,000,000 to consummating an equity financing for at least $1,000,000, with recognition that the consummation of the Purchase Agreement (as describe in Proposal II) would satisfy this requirement, approval of this proposal would cause an automatic conversion of all 1,499.628 shares of Series A-1 Preferred Stock into 1,499,628 shares of common stock. At a meeting held on July 8, 2015, the Board of Directors approved this amendment, subject to stockholder approval, and Rightsdirected that this amendment be submitted to a vote of the Company’s Series A-1 Preferred Stockholders at the Annual Meeting.

Purpose
The purpose of this proposal is to cause the automatic conversion of all outstanding shares of the Company’s Series A-1 Preferred Stock. Additionally, with the full conversion of the Series A-1 Preferred Stock, a Certificatethe Company will be able to eliminate that class of Amendment to eachpreferred stock. If the Class B Preferred Stock is similarly converted (see Proposal IV), then the terms and provisions of the Series ofCompany’s convertible preferred stock to amend the conversion pricecan be eliminated and replaced by a form of each series of preferred and to provide for their conversion into Series A-1“blank check” preferred stock, andas is being submitted for approval by the filingstockholders under Proposal X. The Board of Directors believes that converting all of the Amended and Restated Certificateoutstanding shares of Incorporation. Please see Annex A for the proposed Certificate of Designations, Preferences and Rights of theCompany’s 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.
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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 forits stockholders because as by no longer having any fractionaloutstanding 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

26


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 (or Series B Preferred Stock – see Proposal IV), the Company will be cleaning up its capitalization structure and thus making the Company possibly more attractive to any potential equity investors who may want to invest in the Company in the future.

Amendment

The holders of the Company’s Series A-1 preferred stock shall havePreferred Stock are being asked to vote on 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 protectionsfollowing resolution:

RESOLVED, 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 formArticle IV.B 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 Certificatebe deleted in its entirety. For a comparison of the rights of the existing preferred shares and the newentirety as replaced as follows:
“B.  Mandatory Conversion.  The 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 timeshall automatically be converted into Common Stock at the optionthen applicable Conversion Ratio upon the occurrence of one of the holder into an initial conversion ratio of 1,000 shares of Common Stock for each share of Series A-1 preferred stock. following events:
(1)  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 onCorporation has consummated since January 1, 2015 or consummates at least an additional $5,000,000$1,000,000.00 equity financing from institutional or strategic investors; and/or institutional investors, or (ii) the Company has
(2)  The Corporation having four (4) consecutive quarters of positive cash flow as reflected on the Company’sCorporation’s financial statements prepared in accordance with generally accepted accounting principalsprinciples (“GAAP”) and filed with the Commission. TheSecurities and Exchange Commission (the “SEC”).”
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Interest of Certain Persons in Matters to be Acted Upon
John L. Steffens and Mark Landis, directors of the Company, own an aggregate of 1,340.968 shares of Series A-1 Preferred Stock. Their interest in this proposal is solely as holders of Series A-1 preferred stock are entitledPreferred Stock and they will be treated the same as any other holder of Series A-1 Preferred Stock.

In connection with and as a condition to receive equivalent dividends on an as-converted basis whenever the Company declaresentering into the Purchase Agreement, Mr. Steffens, Mr. Landis, Carolyn Landis (Mr. Landis’ wife) and Privet entered into a dividend on its Common Stock, other than dividends payable invoting agreement whereby Mr. Steffens, Mr. Landis and Mrs. Landis agreed to vote their shares of Common Stock. Series A-1 Preferred Stock in favor of this proposal. As Mr. Steffens, Mr. Landis and Mrs. Landis collectively own over 89% of the outstanding shares of Series A-1 Preferred Stock, this proposal will be approved at the Annual Meeting and all shares of Series A-1 Preferred Stock will, upon approval, automatically convert into share of common stock in accordance with the Series A-1 Convertible Preferred Stock Certificate of Designations, as amended.



THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL III
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PROPOSAL IV
APPROVAL TO AMEND SECTION 6 (AUTOMATIC CONVERSION) OF THE SERIES B CONVERTIBLE PREFERRED STOCK CERTIFICATE OF DESIGNATIONS TO THE
EFFECT THAT THE SERIES B PREFERRED STOCK WILL AUTOMATICALLY
CONVERT INTO COMMON STOCK UPON THE COMPANY CONSUMMATING
AN EQUITY FINANCING FOR AT LEAST $1,000,000
General
The Board of Directors is proposing for approval by the holders of the Company’s Series A-1 preferred stock are entitledB Preferred Stock an amendment to a liquidation preferenceSection 6 (Automatic Conversion) of $500 per sharethe Series B Convertible Preferred Stock Certificate of Designations which provides that the Series A-1 preferredB Preferred Stock be automatically converted into common stock upon the liquidationCompany consummating an equity financing for at least $5,000,000 to consummating an equity financing for at least $1,000,000, with recognition that the consummation of the Company. Purchase Agreement (as describe in Proposal II) would satisfy this requirement, approval of this proposal would cause an automatic conversion of all 10,400 shares of Series B Preferred Stock into 10,400,000 shares of common stock. At a meeting held on July 8, 2015, the Board of Directors approved this amendment, subject to stockholder approval, and directed that this amendment be submitted to a vote of the Company’s Series B Preferred Stockholders at the Annual Meeting.

Purpose
The purpose of this proposal is to cause the automatic conversion of all outstanding shares of the Company’s Series B Preferred Stock. Additionally, with the full conversion of the Series B Preferred Stock, the Company will be able to eliminate that class of preferred stock. If the Class A-1 Preferred Stock is similarly converted (see Proposal III), then the terms and provisions of the Company’s convertible preferred stock can be eliminated and replaced by a form of “blank check” preferred stock, as is being submitted for approval by the stockholders under Proposal X. The Board of Directors believes that converting all of the outstanding shares of the Company’s Series B Preferred Stock to be in the best interests of the Company and its stockholders because as by no longer having any outstanding shares of Series B Preferred Stock (or Series A-1 preferred stock is not redeemable.Preferred Stock – see Proposal III), the Company will be cleaning up its capitalization structure and thus making the Company possibly more attractive to any potential equity investors who may want to invest in the Company in the future.

Amendment

The holders of the Company’s Series A-1 preferred stock also possessB Preferred Stock are being asked to vote on 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

27


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.resolution:

Comparison RESOLVED, that Section 6(a) of the Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stockholder Rights Before and After the RecapitalizationStock be deleted in its entirety as replaced as follows:
 
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
“6. 
Series A-1 preferred stock
 Automatic Conversion.
 
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

28


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
(a)
 
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 .

29


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 holdersAutomatic Conversion of Series C and D preferred stock are entitledB Preferred Stock. Notwithstanding anything herein 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 holderscontrary, each outstanding share 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 CommonB Preferred 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 holdershall automatically be converted into an initial conversion ratio of 1,000 shares of Common Stock at the then applicable conversion rate determined pursuant to Section 5 upon the earlier to occur 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 thatfollowing events (each, an “Automatic Conversion Triggering Event”): (i) the Company closes onhas consummated since January 1, 2015 or consummates at least an additional $5,000,000$1,000,000 equity financing from institutional or strategic or institutional investors, investors; and/or (ii) the Company has four (4) consecutive quarters of positive cash flow as

30


reflected on the Company’s financial statements prepared in accordance with generally accepted accounting principals (“GAAP”)principles and filed with the Securities and Exchange Commission.
Anti-Dilution Protection
Anti-Dilution Protection
The Series C preferred stockforegoing automatic conversion price shall be adjustedeffective 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 recapitalizationsoccurrence of the Company.
applicable Automatic Liquidation PreferenceConversion Triggering Event (the “
Liquidation PreferenceAutomatic Conversion Date
The holders of each series of preferred stock are entitled to a liquidation preference of $1,000 per share of preferred stock upon”), notwithstanding that 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 toB Preferred Stock may not receive warrants to purchase Common Stock upon either a subsequent financing or a loan from an unaffiliated lender. In addition,notice of conversion until after the occurrence of certain events will trigger a 14% per annum dividend that will accrue until such events are cured.Automatic Conversion Date.”
16

Interest of Certain Persons in Matters to be Acted Upon

John L. Steffens and Don Peppers, directors of the Company, own an aggregate of 7,733 shares of Series B Preferred Stock. Their interest in this proposal is solely as a holder of Series B Preferred Stock and they will be treated the same as any other holder of Series B Preferred Stock.

In connection with and as a condition to the Company entering into the Purchase Agreement, Mr. Steffens, Mr. Peppers and Privet entered into a voting agreement whereby Mr. Steffens and Mr. Peppers agreed to vote their shares of Series B Preferred Stock in favor of this proposal. As Mr. Steffens and Mr. Peppers collectively own over 74% of the outstanding shares of Series B Preferred Stock, this proposal will be approved at the Annual Meeting and all shares of Series B Preferred Stock will, upon approval, automatically convert into share of common stock in accordance with the Series B Convertible Preferred Stock Certificate of Designations, as amended.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL IV
17

PROPOSAL V
APPROVAL OF AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO ALLOW STOCKHOLDERS TO ABLE TO ACT BY WRITTEN CONSENT ONLY WHILE PRIVET FUND LP AND ITS AFFILIATES OWN AN AGGREGATE OF AT LEAST 30% OF THE COMPANY’S OUTSTANDING VOTING STOCK
General
The Board of Directors is proposing for stockholder approval an amendment to the Company’s Charter to allow stockholders to be able to act by written consent only while Privet Fund LP and its affiliates and their respective affiliates, subsidiaries, members, partners, directors, officers and employees, in each case other than the Company and its subsidiaries (collectively, the “Privet Stockholders”), own an aggregate of at least 30% of the Company’s outstanding voting stock. At a meeting held on July 8, 2015, the Board of Directors approved this amendment, subject to stockholder approval, and directed that this amendment be submitted to a vote of the Company’s stockholders at the Annual Meeting. For the complete text of the amendment, please see Article VII (Stockholder Action By Written Consent) of the Company’s Second Amended and Restated Certificate of Amendment, attached to this Proxy Statement as Annex A.

Purpose and Effect
The Company’s By-laws currently provide that, except as otherwise provided in the Company’s certificate of incorporation, any action required or permitted to be taken at an annual or special meeting of stockholders of the Company may be taken without a meeting, without prior notice and without a vote of stockholders. The Company’s Charter is currently silent as to stockholder action by written consent.

The purpose of this amendment is to afford the Privet Stockholders a special right to attempt to obtain stockholder approval by written consent while they hold 30% or more of the Company’s outstanding shares of voting stock. This provision was bargained for as part of the terms of the Purchase Agreement (see Proposal II) and was an inducement for Privet Fund LP to make its investment in the Company. This provision effectively eliminates the current ability of stockholders to use the written consent process to approve any stockholder action until the time that the Privet Stockholders are in a 30% ownership position. The Privet Stockholders do not have a 30% ownership at this time and may never obtain a 30% ownership interest in the Company.

Interest of Certain Persons in Matters to be Acted Upon

In connection with and as a condition to the Company entering into the Purchase Agreement, Mr. Steffens and Privet entered into a voting agreement whereby Mr. Steffens and Privet agreed to vote their respective shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock in favor of this proposal. As Mr. Steffens and Privet together control over 68% of the aggregate voting power of the Company’s outstanding shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock, this proposal will be approved at the Annual Meeting.

Effective Date
We will have to file a Second Amended and Restated Certificate of Amendment with the Delaware Secretary of State in order for the amendment to become effective. We intend to file the Second Amended and Restated Certificate of Amendment as soon as practicable following stockholder approval of this proposal. The Board of Directors reserves the right, notwithstanding stockholder approval of this proposal and without further action by our stockholders, not to proceed with the corporate action authorized by this proposal at any time before the filing of the Second Amended and Restated Certificate of Amendment.
18

Dissenter’s Rights
Delaware law does not provide for appraisal or other similar rights for dissenting stockholders in connection with this proposal.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL V
19

PROPOSAL VI
APPROVAL OF AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO PROVIDE THAT ONLY THE BOARD OF DIRECTORS MAY CALL A SPECIAL MEETING OF STOCKHOLDERS OF THE COMPANY
General
The Board of Directors is proposing for stockholder approval an amendment to the Company’s Charter to provided that only the Board of Directors may call a special meeting of stockholders of the Company. At a meeting held on July 8, 2015, the Board of Directors approved this amendment, subject to stockholder approval, and directed that this amendment be submitted to a vote of the Company’s stockholders at the Annual Meeting. For the complete text of the amendment, please see Article VIII (Special Meetings of Stockholders) of the Company’s Second Amended and Restated Certificate of Amendment, attached to this Proxy Statement as Annex A.

Purpose and Effect
The Company’s By-laws currently provide thata special meeting of the Company’s stockholders may be called at any time only by or at the direction of the Board of Directors pursuant to a resolution of the Board adopted by a majority of the total number of authorized directors and the stockholders shall not have the power to call a special meeting of the stockholders.

While the Company’s By-laws do not currently allow for stockholders to call a special meeting of stockholders, the By-laws may be subsequently amended by the Board of Directors without stockholder approval. By amending the Company’s Charter, it means that this provision may only be subsequently amended with the approval of the Board of Directors and the Company’s stockholders, as opposed to the Board alone.  This amendment makes consistent the terms of the Company’s By-Laws and certificate of incorporation.

Interest of Certain Persons in Matters to be Acted Upon

In connection with and as a condition to the Company entering into the Purchase Agreement (see Proposal II), Mr. Steffens and Privet entered into a voting agreement whereby Mr. Steffens and Privet agreed to vote their respective shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock in favor of this proposal. As Mr. Steffens and Privet together control over 68% of the aggregate voting power of the Company’s outstanding shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock, this proposal will be approved at the Annual Meeting.

Effective Date
We will have to file a Second Amended and Restated Certificate of Amendment with the Delaware Secretary of State in order for the amendment to become effective. We intend to file the Second Amended and Restated Certificate of Amendment as soon as practicable following stockholder approval of this proposal. The Board of Directors reserves the right, notwithstanding stockholder approval of this proposal and without further action by our stockholders, not to proceed with the corporate action authorized by this proposal at any time before the filing of the Second Amended and Restated Certificate of Amendment.

Dissenter’s Rights
Delaware law does not provide for appraisal or other similar rights for dissenting stockholders in connection with this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL VI
20

PROPOSAL VII
APPROVAL OF AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO RENOUNCE THE COMPANY’S
EXPECTANCY REGARDING CERTAIN CORPORATE OPPORTUNITIES
PRESENTED TO A PRIVET STOCKHOLDER
General

On July 15, 2015, the Company entered into a Stock and Warrant Purchase Agreement (the “Purchase Agreement”) with investors named therein, including Privet Fund LP (“Privet”), five directors of the Company, including John L. Steffens, Donald Peppers, Mark Landis, Bruce Miller and Thomas Avery and three other persons (collectively the nine investors are referred to as the “Purchasers”). Pursuant to the terms of the Purchase Agreement, the Company issued to the Purchasers an aggregate of 25,000,000 shares of common stock and warrants to purchase up to an aggregate of 205,277,778 shares of common stock, in return for an aggregate investment of $1,000,000. Concurrent with and as a condition of the consummation of the Purchase Agreement, Ryan Levenson was appointed to a vacant position on the Company’s Board of Directors. Mr. Levenson is Principal and Managing Member of Privet Fund Management LLC, an affiliate of Privet, and maintains positions with certain other Privet-affiliated entities. Mr. Levenson, as well as other officers, representatives, directors, agents, stockholders, members, partners of Privet, its affiliates and their respective affiliates (each, a “Privet Stockholder”), may from time to time be presented with certain corporate opportunities of potential interest to both the Company and other entities of which such persons serve as a officers, representatives, directors, agents, stockholders, members, partners, such as Privet and its affiliates (each, a “Privet Entity”).

In recognition of the foregoing, the Board of Directors, on July 8, 2015, approved, subject to stockholder approval, an amendment (the “Corporate Opportunities Amendment”) to our Charter, and directed that this amendment be submitted to a vote of the Company’s stockholders at the Annual Meeting, that will have the effect of renouncing the Company’s expectancy regarding certain corporate opportunities presented to the Privet Stockholders. For the complete text of the amendment, please see Article X (Competition and Corporate Opportunities) of the Company’s Second Amended and Restated Certificate of Amendment, attached to this Proxy Statement as Annex A.

Purpose and Effect

Directors and officers of a corporation, as part of their duty of loyalty to the corporation and its stockholders, generally have a fiduciary duty to disclose to the corporation opportunities that are related to its business and are prohibited from pursuing those opportunities unless such corporation determines that it is not going to pursue them. Directors and officers that serve in a fiduciary capacity of multiple entities, then, could become conflicted as to which entity should be presented with any given corporate opportunity. Section 122(17) of the Delaware General Corporation Law (the “DGCL”) expressly permits a Delaware corporation, such as the Company, to renounce in its certificate of incorporation or by action of its board of directors any interest or expectancy of the corporation in certain opportunities. This proposed Corporate Opportunities Amendment in part would renounce our right to certain corporate opportunities in order to more clearly delineate the responsibilities of Privet Stockholders with respect to corporate opportunities of which they may become aware. Specifically, after the Corporate Opportunities Amendment is enacted, we would renounce any interest and expectancy in any business opportunity (other than a business opportunity that is expressly offered in writing to a Privet Stockholder solely in his or her capacity as a director or officer of the Company), such that a Privet Stockholder may freely present such business opportunity to a Privet Entity rather than the Company, and the Privet Entity may freely pursue such business opportunity, even if it is competitive with our business or might otherwise constitute an attractive opportunity for the Company.
21

Interest of Certain Persons in Matters to be Acted Upon

In connection with and as a condition to the Company entering into the Purchase Agreement, Mr. Steffens and Privet entered into a voting agreement whereby Mr. Steffens and Privet agreed to vote their respective shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock in favor of this proposal. As Mr. Steffens and Privet together control over 68% of the aggregate voting power of the Company’s outstanding shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock, this proposal will be approved at the Annual Meeting.

Effective Date
We will have to file a Second Amended and Restated Certificate of Amendment with the Delaware Secretary of State in order for the amendment to become effective. We intend to file the Second Amended and Restated Certificate of Amendment as soon as practicable following stockholder approval of this proposal. The Board of Directors reserves the right, notwithstanding stockholder approval of this proposal and without further action by our stockholders, not to proceed with the corporate action authorized by this proposal at any time before the filing of the Second Amended and Restated Certificate of Amendment.

Dissenter’s Rights
Delaware law does not provide for appraisal or other similar rights for dissenting stockholders in connection with this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL VII
22

PROPOSAL VIII
APPROVAL OF AMENDMENT TO THE COMPANY’S AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION TO ELECT NOT BE GOVERNED BY THE PROVISIONS OF SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
General
The Board of Directors is proposing for stockholder approval an amendment to the Company’s Charter to elect not be governed by the provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”). At a meeting held on July 8, 2015, the Board of Directors approved this amendment, subject to stockholder approval, and directed that this amendment be submitted to a vote of the Company’s stockholders at the Annual Meeting. Privet Fund LP (“Privet”) is not subject to the restrictions on business combinations set forth in Section 203 because the Board of Directors took action to waive application of Section 203 in respect of the investment in the Company by Privet (see Proposal II). For the complete text of the amendment, please see Article XI (Section 203 of the General Corporation Law) of the Company’s Second Amended and Restated Certificate of Amendment, attached to this Proxy Statement as Annex A.

Purpose and Effect

Section 203 of the DGCL provides that any person or entity who acquires 15% or more in voting power of a corporation’s voting stock (thereby becoming an “interested stockholder”) may not engage in a wide range of transactions (referred to as “business combinations”) with the corporation for a period of three years following the date the person became an interested stockholder, subject to certain exceptions. The exceptions are (i) the board of directors of the corporation has approved, prior to that acquisition date, either the business combination or the transaction that resulted in the person becoming an interested stockholder, (ii) upon consummation of the transaction that resulted in the person becoming an interested stockholder, that person owns at least 85% in voting power of the corporation's voting stock outstanding at the time the transaction commenced (excluding certain shares), or (iii) the business combination is approved by the board of directors and authorized, at a shareholder meeting and not by written consent, by the affirmative vote of at least 662/3% in voting power of the outstanding voting stock not owned by the interested stockholder. Under Section 203 of the DGCL, a corporation can elect not to be subject to Section 203 if the corporation inserts a provision to that effect in its certificate of incorporation or if the stockholders of the corporation insert a provision to that effect in the bylaws of the corporation.

The purpose of this amendment is to give the Company greater flexibility in the future to enter into any potential business combinations (such as mergers, asset sales and securities issuances) with any future “interested stockholder” without having to go through the time and expense in waving the application of Section 203 with respect to such future “interested stockholder.”

Interest of Certain Persons in Matters to be Acted Upon

In connection with and as a condition to the Company entering into the Purchase Agreement (see Proposal II), Mr. Steffens and Privet entered into a voting agreement whereby Mr. Steffens and Privet agreed to vote their respective shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock in favor of this proposal. As Mr. Steffens and Privet together control over 68% of the aggregate voting power of the Company’s outstanding shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock, this proposal will be approved at the Annual Meeting.

Effective Date
We will have to file a Second Amended and Restated Certificate of Amendment with the Delaware Secretary of State in order for the amendment to become effective. We intend to file the Second Amended and Restated Certificate of Amendment as soon as practicable following stockholder approval of this proposal. The Board of Directors reserves the right, notwithstanding stockholder approval of this proposal and without further action by our stockholders, not to proceed with the corporate action authorized by this proposal at any time before the filing of the Second Amended and Restated Certificate of Amendment.

Dissenter’s Rights
Delaware law does not provide for appraisal or other similar rights for dissenting stockholders in connection with this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL VIII

23

PROPOSAL IX
APPROVAL OF AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION ESTABLISHING THE COURTS LOCATED
WITHIN THE STATE OF DELAWARE AS THE EXCLUSIVE FORUM FOR
THE ADJUDICATION OF CERTAIN LEGAL ACTIONS
General
The Board of Directors is proposing for stockholder approval of an amendment to the Company’s Charter establishing the courts located within the State of Delaware as the exclusive forum for the adjudication of certain legal actions. At a meeting held on July 8, 2015, the Board of Directors approved this amendment, subject to stockholder approval, and directed that this amendment be submitted to a vote of the Company’s stockholders at the Annual Meeting. For the complete text of the amendment, please see Article XIII (Forum) of the Company’s Second Amended and Restated Certificate of Amendment, attached to this Proxy Statement as Annex A.

Possible Effects and Anti-takeover Considerations
The Amendment would designate the state courts of the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware, as the sole and exclusive forum for: (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, employee or agent of the Company to the Company or the Company’s stockholders, (iii) any action asserting a claim against the Company arising pursuant to any provision of the Delaware General Corporation Law, the Company’s certificate of incorporation or by-laws, or (iv) any action asserting a claim against the Company or any director or officer or other employee of the Company governed by the internal affairs doctrine.
The Board of Directors believes that our stockholders will benefit from having disputes of this nature litigated in the Delaware courts. Although some plaintiffs could prefer to litigate matters in a forum outside of Delaware because another court may be more convenient to them (among other reasons), the Board of Directors believes that the proposed provision provides substantial benefits to the Company and its stockholders as a whole. Delaware state courts offers a specialized system to deal with corporate law questions, with streamlined procedures and processes that help provide relatively quick decisions. This accelerated schedule can limit the time, cost and uncertainty of litigation for all parties. The Delaware state courts have developed considerable expertise in dealing with corporate law issues, as well as a substantial and influential body of case law construing Delaware’s corporate law and long-standing precedent regarding corporate governance. This provides stockholders and the Company with more certainty with respect to the outcome of intra-corporate disputes. In addition, adoption of the provision would reduce the risk that the Company could be involved in duplicative litigation in more than one forum, as well as the risk that the outcome of cases in multiple forums could be inconsistent, even though each forum purports to follow Delaware law.

Interest of Certain Persons in Matters to be Acted Upon
In connection with and as a condition to the Company entering into the Purchase Agreement, Mr. Steffens and Privet entered into a voting agreement whereby Mr. Steffens and Privet agreed to vote their respective shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock in favor of this proposal. As Mr. Steffens and Privet together control over 68% of the aggregate voting power of the Company’s outstanding shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock, this proposal will be approved at the Annual Meeting.

Effective Date
We will have to file a Second Amended and Restated Certificate of Amendment with the Delaware Secretary of State in order for the amendment to become effective. We intend to file the Second Amended and Restated Certificate of Amendment as soon as practicable following stockholder approval of this proposal. The Board of Directors reserves the right, notwithstanding stockholder approval of this proposal and without further action by our stockholders, not to proceed with the corporate action authorized by this proposal at any time before the filing of the Second Amended and Restated Certificate of Amendment.

Dissenter’s Rights
Delaware law does not provide for appraisal or other similar rights for dissenting stockholders in connection with this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL IX

24

PROPOSAL X
APPROVAL OF AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO AUTHORIZE 10,000,000 SHARES OF
“BLANK CHECK” PREFERRED STOCK, PAR VALUE $0.001 PER SHARE
General
The Board of Directors is proposing for stockholder approval an amendment to the Company’s Charter to authorize 10,000,000 shares of “blank check” preferred stock, par value $0.001 per share to replace the current class of convertible preferred stock. The Charter currently authorizes the issuance of up to 10,000,000 shares of preferred stock, par value $0.001 per share, of which 1,499.628 shares of Series A-1 Preferred Stock and 10,400 shares of Series B Preferred Stock are currently issued or outstanding. However, at the Annual Meeting (A) holders of the Company’s Series A-1 Preferred Stock will be voting on a proposal to amend Article IV (Conversion) of the Series A-1 Convertible Preferred Stock Certificate of Designations which, when approved, will cause an automatic conversion of the Series A-1 Preferred Stock into common stock (see Proposal III); and (B) holders of the Company’s Series B Preferred Stock will be voting on a proposal to amend Article 6 (Automatic Conversion) of the Series B Convertible Preferred Stock Certificate of Designations which, when approved, will cause an automatic conversion of the Series B Preferred Stock into common stock (see Proposal IV). Therefore, upon conclusion of the Annual Meeting, assuming Proposals III and IV are approved, all shares of the Company’s preferred stock currently outstanding will have converted into common stock.

Purpose and Effect
The term “blank check” is often used to refer to preferred stock, the creation and issuance of which is authorized by the stockholders in advance and the terms, rights and features of which are determined by the Board of Directors from time to time. Therefore, once authorized, the Board of Directors will be able to issue the shares in classes without further shareholder approval. The authorization of blank check preferred stock permits the Board of Directors to create and issue preferred stock from time to time in one or more series. Under the Company’s Second Amended and Restated Certificate of Incorporation, the Board of Directors would be expressly authorized, at its discretion, to adopt resolutions to issue preferred shares, to fix the number of shares and to change designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, including dividend rights, dividend rates, terms of redemption, redemption prices, voting rights, conversion rights, and liquidation preferences of the shares constituting any series of preferred stock, in each case without any further action or vote by the stockholders.  To the extent that any preferred stock is convertible into common stock, upon conversion the existing holders of common stock would suffer dilution of their percentage ownership of the Company and may suffer economic dilution as a result of more common stock outstanding and trading in the market.  Because the terms of any preferred stock are not yet established, it is not possible to quantify the extent of any dilutive impact on the common stock, but it could be substantial.  The Board of Directors would be required to make any determination to issue shares of preferred stock based on its judgment that doing so would be in the best interests of the Company and all its stockholders.
The authorization of “blank check” preferred stock will provide the Company with increased flexibility in meeting future capital requirements by providing another type of security in addition to its common stock, as it will allow the Company to issue preferred stock from time to time with such features as may be determined by the Board of Directors for any proper corporate purpose. Such uses may include, without limitation, issuance for cash as a means of obtaining capital for use by the Company, or issuance as all or part of the consideration to be paid by the Company for acquisitions of other businesses or their assets. The Board of Directors has no present intent, plans, understandings, agreements or commitments to issue any preferred stock.
25

Possible Effects and Anti-takeover Considerations
The issuance of preferred stock could, under certain circumstances, have the effect of delaying or preventing a change of control of the Company by increasing the number of outstanding shares entitled to vote and by increasing the number of votes required to approve a change of control of the Company. Shares of voting or convertible preferred stock could be issued, or rights to purchase such shares could be issued, to make it more difficult to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise. The ability of the Board of Directors to issue such additional shares of preferred stock, with the rights and preferences it deems advisable, could discourage potential acquirors, and could therefore deprive stockholders of benefits they might otherwise obtain from an attempt by a third-party to acquire ownership or control of the Company, such as selling their shares at a premium over market price. Moreover, the issuance of such additional shares to persons friendly to the Board of Directors could make it more difficult to remove incumbent directors from office in the event such change were to be deemed advisable by the stockholders.

While the amendment may have anti-takeover consequences, the Board of Directors believes that the benefits it would confer on the Company outweigh any disadvantages. In addition to the enhanced ability to finance purchases and secure capital, as discussed above, the Company would gain a degree of protection from hostile takeovers that might be contrary to the interests of the Company and the stockholders. The Board of Directors believes it is in the best interest of the Company and the stockholders to encourage potential acquirers to negotiate directly with the Board rather than taking unilateral action. Only when empowered to negotiate on behalf of the Company can the Board have the best possible opportunity to secure the terms that best serve the interests of the Company and all the stockholders.

Interest of Certain Persons in Matters to be Acted Upon

In connection with and as a condition to the Company entering into the Purchase Agreement (see Proposal II), Mr. Steffens and Privet entered into a voting agreement whereby Mr. Steffens and Privet agreed to vote their respective shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock in favor of this proposal. As Mr. Steffens and Privet together control over 68% of the aggregate voting power of the Company’s outstanding shares of common stock, Series A-1 Preferred Stock and Series B Preferred Stock, this proposal will be approved at the Annual Meeting.

Effective Date
We will have to file a Second Amended and Restated Certificate of Amendment with the Delaware Secretary of State in order for the amendment to become effective. We intend to file the Second Amended and Restated Certificate of Amendment as soon as practicable following stockholder approval of this proposal. The Board of Directors reserves the right, notwithstanding stockholder approval of this proposal and without further action by our stockholders, not to proceed with the corporate action authorized by this proposal at any time before the filing of the Second Amended and Restated Certificate of Amendment.
Dissenter’s Rights
Delaware law does not provide for appraisal or other similar rights for dissenting stockholders in connection with this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL X
26

PROPOSAL XI
ADVISORY (NON-BINDING) VOTE ON EXECUTIVE COMPENSATION
The Company is providing stockholders with an advisory vote on executive compensation as required by Section 14A of the Exchange Act. Section 14A was added to the Exchange Act by Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Stockholders are urged to read the Executive Compensation section of this Proxy Statement, which discusses how our compensation philosophy and how our compensation policies and procedures implement our compensation philosophy, as well as the Summary Compensation Table and other related compensation tables. The Board of Directors believes that the policies and procedures articulated in the Executive Compensation section are effective in implementing our compensation philosophy and in achieving its goals and that the compensation of our executive officers reflects and supports these compensation policies and procedures.

Stockholders are being asked to vote on the following resolution:

RESOLVED, that the compensation paid to the Company’s executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the compensation tables and narrative discussion, is hereby APPROVED.
This advisory vote on executive compensation, commonly and herein referred to as a “say-on-pay” advisory vote, is not binding on our Board of Directors. However, the Board of Directors will take into account the result of the vote when determining future executive compensation arrangements.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL XI

27

PROPOSAL XII
ADVISORY (NON-BINDING) VOTE ON THE FREQUENCY OF
ADVISORY VOTES ON EXECUTIVE COMPENSATION
As required by Section 14A of the Exchange Act and Section 951 of the Dodd-Frank Act, we are also providing stockholders an advisory vote on the frequency with which the stockholders shall have the advisory say-on-pay vote on executive compensation (see Proposal XI).

The advisory vote on the frequency of the say-on-pay vote is a non-binding vote as to how often the say-on-pay vote should occur: every year, every two years, or every three years. In addition, stockholders may abstain from voting. The Dodd-Frank Act requires us to hold the advisory vote on the frequency of the say-on-pay vote at least once every six years.

After careful consideration, the Board of Directors recommends that future stockholder say-on-pay advisory votes on executive compensation be conducted every three years. A vote every three years provides stockholders and advisory firms the opportunity to evaluate the Company’s compensation program on a more thorough, longer-term basis than an annual or bi-annual vote.
Although the Board of Directors recommends a say-on-pay vote every three years, stockholders are not voting to approve or disapprove the Board’s recommendation. Stockholders are being asked to vote on the following resolution:
RESOLVED, that the stockholders of the Company determine, on an advisory basis, whether the frequency with which the stockholders shall have an advisory vote on executive compensation set forth in the Company’s Proxy Statement for its annual meeting of stockholders, beginning with the 2015 Annual Meeting of Stockholders, shall be (i) every year, (ii) every 2 years, or (iii) every 3 years.

Although this advisory vote on the frequency of the say-on-pay vote is not binding on our Board of Directors, the Board of Directors will take into account the result of the vote when determining the frequency of future say-on-pay votes.

The enclosed proxy card gives you three choices of periods for voting on this proposal. The choice of the period for the advisory vote which receives the highest number of votes will be deemed the choice of the stockholders.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE “FOR” THE THREE-YEAR FREQUENCY

28

PROPOSAL XIII
RATIFICATION OF SELECTION OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee of the Board of Directors has selected Cherry Bekaert LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2015. Representatives of Cherry Bekaert LLP are expected to be available to respond to appropriate questions at the Annual Meeting.

Stockholder ratification of the selection of Cherry Bekaert LLP as the Company’s independent registered public accounting firm is not required by the Company’s By-laws or otherwise. However, the Board of Directors, on behalf of the Audit Committee, is submitting the selection of Cherry Bekaert LLP to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain that firm. Even if the selection is ratified, the Audit Committee in its discretion may direct the appointment of different independent registered public accounting firm at any time during the year if they determine that such a change would be in the best interests of the Company and its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL XIII

29

Principal Accountant Fees
Cherry Bekaert LLP audited our consolidated financial statements for the years ended December 31, 2014 and 2013.
Audit Fees.  Audit fees include fees for the audit of the Company’s annual consolidated financial statements, fees for the review of the Company’s interim consolidated financial statements, and fees for services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements. The aggregate fees billed by Cherry Bekaert LLP for professional services rendered to our Company for the audit of the Company's annual consolidated financial statements for fiscal year 2014 and 2013 (and reviews of quarterly consolidated financial statements on Form 10-Q) were $81,150 and $78,750, respectively.
Audit-Related Fees. Audit-related fees include fees for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements. There were no audit-related fees billed by Cherry Bekaert LLP for fiscal years 2014 and 2013.

Tax Fees.  Tax fees include fees for tax compliance, tax advice and tax planning. There were no fees billed by Cherry Bekaert LLP for these services in 2014 and 2013.
All Other Fees.  All other fees include fees for all services except those described above. There were no other fees billed by Cherry Bekaert LLP for fiscal years 2014 and 2013.

Pre-Approval of Audit and Non-Audit Services
The Audit Committee has adopted a policy that all audits, audit-related, tax and any other non-audit service to be performed by the Company’s independent registered public accounting firm must be pre-approved by the Audit Committee. It is the Company’s policy that all such services be pre-approved prior to commencement of the engagement. The Audit Committee is also required to pre-approve the estimated fees for such services, as well as any subsequent changes to the terms of the engagement.

30

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of the Company’s common stock, Series A-1 Preferred Stock and Series B Preferred Stock, as of July 30, 2015, by: (i) each director; (ii) each of our executive officers; (iii) all executive officers and directors of the Company as a group; and (iv) all those known by the Company to be beneficial owners of more than five percent of any class of the Company’s voting stock. Unless otherwise indicated, the address for each person listed is c/o Cicero Inc., 8000 Regency Parkway, Suite 542, Cary, North Carolina 27518.
The chart is based on 180,353,377 shares of common stock, 1,499.628 shares of Series A-1 Preferred Stock and 10,400 shares of Series B Preferred stock outstanding as of July 30, 2015.  Beneficial ownership is determined in accordance with Rule 13-3(d) promulgated by the SEC under the Securities Exchange Act of 1934.  Except as otherwise stated in the footnotes below, the named persons have sole voting and investment power with regard to the shares shown as beneficially owned by such persons.
Name of Beneficial Owner No. of Common Shares  % of Class  No. of Series A1 Shares  % of Class  No. of Series B Shares  % of Class  % of Combined Classes 
Executive Officers and Directors                     
John L. Steffens(1)
  146,926,732   66.6%  14.832   1.0%  6,400.00   61.5%  67.5%(2)
Ryan Levenson(3)
  168,102,778   50.9%  --   *   --   *   50.9%(4)
Mark and Carolyn P. Landis(5)
  7,237,884   3.9%  1,326.136   88.4%  --   *   4.6%(6)
Bruce Miller  6,346,822   3.5%  --   *   --   *   3.5%(7)
Don Peppers  4,096,957   2.2%  --   *   1,333.33   12.8%  3.0%(8)
Thomas Avery  4,605,555   2.5%  --   *   --   *   2.5%(9)
John P. Broderick  2,676,968   1.5%  --   *   --   *   1.5%(10)
Antony Castagno  17,320,626   8.9%  --   *   --   *   8.9%(11)
All current directors and executive officers as a group (8) persons)  357,314,322   89.0%  1,340.968   89.4%  7,733.33   74.4%  89.3%(12)
5% Stockholders                            
Jonathan Gallen(13)
  9,283,173   5.1%  --   *   1,667.00   16.0%  6.0%(14)
Scott Lustgarten  1,393,934   *   --   *   1,000.00   9.6%  1.3%(15)
 
Until the second anniversary
*Represents less than one percent 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.outstanding shares.

31


Dilutive Effects of Preferred Shareholdings
1.
Dilutive EffectsThe address of Preferred ShareholdingsJohn L. Steffens is 65 East 55th Street, New York, N.Y. 10022.
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.
2.
Under the amended conversion rates, post recapitalization, these same holders will be entitled to receive 860,773Includes 106,517,669 shares of Cicero common stock.
The holdersstock, 14,832 common shares issuable upon conversion of the Series A-1 preferred stock shall be entitled,Convertible Preferred Stock, 6,400,000 common shares issuable upon their election to do so, to elect two directorsconversion of the boardSeries B Convertible Preferred Stock, 40,391,063 shares issuable upon the exercise of directors by a plurality of the votes of theoutstanding warrants and 18,000 shares present in person or represented by proxy at a meeting and entitledsubject to vote for directors, voting separately as a class.
stock options.

Par Value of Capital Stock; Surplus; Capital
3.The address of Mr. Levenson is c/o Privet Fund LP, 79 West Paces Ferry Road, Suite 200B Atlanta, GA 30305.
 
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.
4.Includes 18,250,000 shares of common stock and 149,852,778 common shares issuable upon conversion of outstanding warrants held of record by Privet Fund LP. Mr. Levenson has sole voting and dispositive power with respect to the securities held by the Privet Fund LP.

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
5.The address of Mark and Carolyn P. Landis is 54 Dillon Way, Washington Crossing, PA 18977.

6.Includes 4,146,717 shares of common stock, 1,326,136 common shares issuable upon conversion of the Series A-1 Preferred Stock, 3,079,167 common shares issuable upon exercise of outstanding warrants and 12,000 shares subject to stock options.
7.Includes of 2,640,388 shares of common stock, 3,179,167 common shares issuable upon exercise of outstanding warrants and 18,000 shares subject to stock options. Also includes 509,267 shares of common stock held of record by Delphi Partners, Ltd. Mr. Miller has shared voting and dispositive power with respect to the securities held by Delphi Partners, Ltd.
8.Includes 1,832,179 shares of common stock, 1,333,333 common shares issuable upon conversion of the Series B Preferred Stock, 2,252,778 shares of common stock issuable upon exercise of outstanding warrants and 12,000 shares subject to stock options.
9.Includes 500,000 shares of common stock and 4,105,555 common shares issuable upon exercise of outstanding warrants.
10.Includes 3,248 shares of common stock, 624,360 shares subject to stock options and 2,049,360 shares of unvested restricted stock.
11.Includes 286,539 shares subject to stock options. Also includes 2,000,000 shares of common stock, 100,000 common shares issuable upon exercise of outstanding warrants, 6,169,953 shares of common stock issuable upon conversion of the principal and accumulated interest of a $700,000 convertible promissory note, 5,955,447 common shares issuable upon conversion of the principal and accumulated interest of another $700,000 convertible promissory note, and 2,808,687 common shares issuable upon conversion of the principal a $421,000 convertible promissory note, in each case, held of record by SOAdesk LLC. Mr. Castagno has shared voting and dispositive power with respect to the securities held by SOAdesk LLC.
12.Includes shares issuable upon conversion of shares of preferred stock and exercise of options and warrants as described in above notes for each officer and director.
13.The address of Mr. Gallen is 299 Park Avenue New York, New York 10171.
14.Ahab Partner, L.P. (“Partners”) and Ahab International, Ltd. (“International”, and together with Partners, the “Funds”) holds in aggregate 9,183,173 shares of common stock and 1,667,000 common shares issuable upon conversion of the Series B Preferred Stock. Jonathan Gallen has sole voting and dispositive power with respect to the securities held by the Funds. In addition, Jonathan Gallen held the power to direct the disposition of 100,000 shares of common stock held in private investment account.
15.Includes 1,193,934 shares of common stock, 1,000,000 common shares issuable upon conversion of the Series B Preferred Stock and 200,000 shares of common stock issuable upon exercise of outstanding warrants.
32


is immediately convertible upon issuance,
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities 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 in ownership with the SEC.  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, the Company believes that all Section 16(a) reports were filed in a timely manner.
EXECUTIVE COMPENSATION
General Compensation Philosophy

As a technology company, we operate in an extremely competitive and rapidly changing industry. We believe that the skill, talent, judgment and dedication of our executive officers are critical factors affecting the long term value of our Company. The Compensation Committee’s philosophy and objectives in setting compensation policies for executive officers are to align pay with performance, while at the same time providing fair, reasonable and competitive compensation that will fully amortize this beneficial conversion featureallow us to retain and attract superior executive talent. The Compensation Committee strongly believes that executive compensation should align executives’ interests with those of shareholders by rewarding achievement of specific annual, long-term and strategic goals by the Company, with an ultimate objective of providing long-term stockholder value. The specific goals that our current executive compensation program rewards are focused primarily on revenue growth and profitability. To that end, the Compensation Committee believes executive compensation packages provided by the Company to its executive officers should include a mix of both cash and equity based compensation that reward performance as measured against established goals. As a result, the principal elements of our executive compensation are base salary, non-equity incentive plan compensation, long-term equity incentives generally in the form of stock options and/or restricted stock and post-termination severance and acceleration of stock option vesting upon termination and/or a change in control.

Our goal is to maintain an executive compensation program that will fairly compensate our executives, attract and retain qualified executives who are able to contribute to our long-term success, induce performance consistent with clearly defined corporate goals and align our executives’ long-term interests with those of our stockholders. The decision on the datetotal compensation for our executive officers is based primarily on an assessment of issuance.each individual’s performance and the potential to enhance long-term stockholder value. Often, judgment is utilized in lieu of total reliance upon rigid guidelines or formulas in determining the amount and mix of compensation for each executive officer. Factors affecting such judgment include performance compared to strategic goals established for the individual and the Company at the beginning of the year, the nature and scope of the executive’s responsibilities and effectiveness in leading initiatives to achieve corporate goals.

Vote Required for Proposal 4Role of Chief Executive Officer in Compensation Decisions

The affirmative voteCompensation Committee of our Board of Directors determines the base salary (and any bonus and equity-based compensation) for each executive officer annually. John Broderick, our Chief Executive Officer, confers with members of the holdersCompensation Committee, and makes recommendations, regarding the compensation of a majorityall executive officers other than himself. He does not participate in the Compensation Committee's deliberations regarding his own compensation. In determining the compensation of our executive officers, the outstanding sharesCompensation Committee does not engage in any benchmarking 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.total compensation or any material element of compensation.

Components of Executive Compensation

The board of directors recommends that stockholders vote FOR Proposal 4.compensation program for our Executive Officers consists of:
•           Base salary;
•           Non-equity incentive compensation; and
•           Long-term equity incentive compensation.
 
33


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

When consideringThe Company provides our executive officers and other employees with base salary to compensate them for services rendered during the recommendationfiscal year. The Compensation Committee considered the scope and accountability associated with each executive officer’s position and such factors as the performance and experience of Level 8’s boardeach executive officer, individual leadership and level of directors, you shouldresponsibility when approving the base salary levels for fiscal year 2014.

Non-Equity Incentive Compensation

Non-equity incentive plan compensation for our executive officers is designed to reward performance against key corporate goals and for certain of our executives for performance against individual business development goals. Our executive officers’ incentive targets are designed to motivate management to exceed specific goals related to profitability objectives. We believe that these metrics correlate to stockholder value. Our Chief Executive Officer achieved a non-equity bonus of $25,000 in each of fiscal 2014 and 2013 and our Chief Technology Officer achieved a non-equity bonus of $7,632 in 2014 and $45,372 in 2013.

Our Chief Executive Officer is eligible for non-equity incentive plan compensation with a target bonus of $75,000 for achieving targeted pretax income for fiscal 2015.

Long-Term Equity Incentive Awards

The Company presently has one equity-based compensation plan under which grants may be aware that somemade, entitled Cicero Inc. 2007 Employee Stock Option Plan (the “2007 Plan”). The 2007 Plan provides for the grant of incentive and non-qualified stock options to employees, and the grant of non-qualified options to consultants and to directors and executive officers have interests inadvisory board members. In addition, various other types of stock-based awards, such a stock appreciation rights, may be granted under the Recapitalization, which may conflict with their interests as stockholders. Certain2007 Plan. The 2007 Plan is administered by the Compensation Committee of our directors own, or haveBoard of Directors, which determines the individuals eligible to receive options or warrants to acquire,other awards under the 2007 Plan, the terms and conditions of those awards, the applicable vesting schedule, the option price and term for any granted options, and all other terms and conditions governing the option grants and other awards made under the 2007 Plan. Under the 2007 Plan, 3,603,110 shares of our capitalcommon stock were issuable under granted options or restricted stock awards.  At July 30, 2015, 898,090 shares were available for future option grants and some of our directors are holders, or are affiliated with holders, of our preferred stock or debt. Accordingly, these directors mayawards.
To date, awards have interestsbeen mainly in the Recapitalizationform of non-qualified stock options granted under the 2007 Plan. The Compensation Committee grants these stock-based incentive awards from time to time for the purpose of attracting and retaining key executives, motivating them to attain the Company's long-range financial objectives, and closely aligning their financial interests with long-term stockholder interests and share value.
Grants to other employees are typically made upon initial employment and then periodically as the Compensation Committee so determines. The Compensation Committee has empowered our Chief Executive Officer to issue grants of up to 75,000 options to new employees at the fair market value of the stock on the date of employment. Any proposed option grants in excess of that are different from, or are in additionamount require Compensation Committee approval. Our stock options typically vest over two years with one third being immediately vested upon the date of grant and one third vesting on each of the next two anniversaries of the date of grant.  During fiscal 2014, the Company granted options to your interests. These interests include:purchase up to 15,000 shares of common stock to our employees.

·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.

34

Summary Compensation Table

The following summary compensation table sets forth the compensation earned by all persons serving as the Company’s executive officers (“named executive officers”) during fiscal years 2014 and 2013:

Name and Principal
Position
 
Fiscal
Year
 
Salary
($)
  
Non- Equity Incentive
Plan Compensation
($)
  
All Other
Compensation5
($)
  
Total
($)
 
John P. Broderick, 
2014
  175,0001  25,0003  7,340   207,340 
Chief Executive and Chief Financial Officer 
2013
  175,0001  25,0003  5,627   205,627 
                   
Antony Castagno, 
2014
  150,0002  7,6324  6,981   164,613 
Chief Technology Officer 
2013
  150,0002  45,3724  6,289   201,661 
__________
(1)Mr. Broderick is currently deferring $25,000 of his annual salary which commenced in July 2013.
(2)Mr. Castagno is currently deferring $25,000 of his annual salary which commenced in April 2014.
(3) Non-equity incentive plan compensation for Mr. Broderick includes a bonus for certain revenue transactions earned during fiscal year ended December 31, 2014 and 2013. The revenue transaction was the acceptance of the first contract greater than $300,000 for each fiscal year.
(4)Non-equity incentive plan compensation for Mr. Castagno includes a bonus for any revenues in excess of his base salary when engaged in consulting services on behalf of the Company.
(5)Other compensation includes the Company’s portion of major medical insurance premiums and long-term disability premiums for named executives during fiscal years ended December 31, 2014 and 2013, respectively.

Grants of Plan Based Awards

The Company did not award any stock options or any stock appreciation rights (SARs) to the named executive officers during fiscal 2014 and 2013.

Outstanding Equity Awards at December 31, 2014

The following table below illustratespresents the holdingsnumber and values of Mr. Piziexercisable options as of June 30, 2006 on a common equivalent basis before and afterDecember 31, 2014 by 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  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 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.
named executive officers:

·
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 $0.002 per share. These warrants are only issuable upon approval of the Recapitalization, and are to be automatically exercised in connection with the consummation of the
  Option Awards Stock Awards 
Name Number of Securities Underlying Unexercised Options Exercisable  Number of Securities Underlying Unexercised Options Unexercisable  
Option Exercise Price
($)
 Option Expiration Date Number of Shares of Stock That Have Not Vested  
Market Value of Shares of Stock That Have
Not Vested
($)
 
John P. Broderick
  549,3601  --   0.51 
08/17/2017
  549,3603  10,993 
   75,0002  --   0.09 08/20/2020  1,500,0004  30,000 
                      
Antony Castagno
  75,0002  --   0.09 
08/20/2020
        
__________
(1)These options were granted on August 17, 2007. This stock option vested in three equal installments with the first installment vesting on August 17, 2007.
(2)These options were granted on August 20, 2010. This stock option vested in three equal installments with the first installment vesting on August 20, 2010.
(3)These are restricted stock granted on August 17, 2007.  The shares will vest to him upon Mr. Broderick’s resignation or termination or a change of control.
(4)These are restricted stock granted on November 9, 2012.  The shares will vest to Mr. Broderick in the event of the termination, with or without cause, of his employment by the Company or his resignation from the Company with or without cause or in the event of a change of control.

35

Options Exercised

Recapitalization.The named executive officers did not exercise any options during the year ended December 31, 2014.

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

Under the employment agreement between the Company and Mr. Landis also holds,Broderick effective January 1, 2014, we agreed to pay Mr. Broderick an annual base salary of $175,000 and performance bonuses in connection withcash of up to $250,000 per annum based upon exceeding certain revenue goals and operating metrics, as determined by the Senior Reorganization notes, 3,057,206 Early Adopter Warrants which, upon consummationCompensation Committee, in its discretion.  Upon termination of Mr. Broderick’s employment by the Recapitalization, convert into 152,560 warrants at an exercise priceCompany without cause, we agreed to pay Mr. Broderick a lump sum payment of $2.00 per shareone year of Common Stock. As partMr. Broderick’s then current base salary within 30 days of termination and any unpaid deferred salaries and bonuses. In the Senior Reorganization Notesevent there occurs a substantial change in Mr. Landis advancedBroderick’s job duties, there is a decrease in or failure to provide the adjusted exercise price of 3,095,280 warrants. Upon consummation ofcompensation or vested benefits under the Recapitalization, Mr. Landis will receive 154,764 shares of Common Stockemployment agreement or there is a change in control of the Company, representingwe agreed to pay Mr. Broderick a lump sum payment of one year of Mr. Broderick’s then current base salary within thirty (30) days of termination. Additionally, as part of his employment agreement for fiscal 2012, Mr. Broderick will be entitled to receive 1,500,000 shares of the underlying shares supportingCompany’s common stock in the warrant exercise.event of the termination, with or without cause, of his employment by the Company or his resignation from the Company with or without cause or in the event of a change of control (as that term is defined in the Employment Agreement) of the Company.  Mr. Landis also holds $395,000Broderick 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 Convertible Bridge Notes which bear interest at 10%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 two (2) year after such termination, he will not directly or indirectly solicit or divert business from us or assist any business in attempting to do so or solicit or hire any person who was our employee 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. Castagno effective January 1, 2013, we agreed to pay Mr. Castagno an annual base salary of $150,000 and a performance cash bonus of up to $215,000 per annum based upon exceeding certain pre-tax operating net income metrics, as determined by and matured on September 15, 2005. Upon consummationat the discretion of the Recapitalization, these notesCompensation Committee.  If the Company terminates Mr. Castagno’s employment without cause, we agreed to pay Mr. Castagno an amount equivalent to six (6) months of Mr. Castagno’s then current base salary in equal semi-monthly installments over that six (6) month period following termination. If Mr. Castagno’s employment is terminated for any reason, Mr. Castagno has agreed that, for two (2) year after such termination, he will automatically convert into 15,800,000 sharesnot directly or indirectly solicit or divert business from us,  assist any business in attempting to solicit or divert business from us, solicit or hire any person who was our employee during the employment agreement term, or assist any business in attempting to solicit or hire any person who was our employee during the employment agreement term. During 2013 the Company amended Mr. Castagno’s employment agreement to provide that Mr. Castagno could engage in consulting services on behalf of Common Stock. The above conversions assumesthe Company and would be compensated for any revenues in excess of his base salary as a Reverse Stock Split Ratio of 20:1.bonus.

Estimated Payments and Benefits Upon Termination

The amount of compensation and benefits payable to the named executive officers has been estimated in the table below illustratesand assume a termination date of December 31, 2014.  Since all options held by the holdings of Mark and Carol Landis as of June 30, 2006 on a common equivalent basis before and 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)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 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.
named executive officers are out-of-the-money, we have not estimated any value for option acceleration. Deferred compensation reflects amounts voluntarily deferred from salaries during fiscal 2012 through 2014 that had not been paid in fiscal 2014.
 
·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 $0.002 per share. These warrants are
Name 
Base Salary
($)
  
Restricted
Shares Award
($)
  
Deferred Compensation
($)
  
Total Compensation and Benefits
($)
 
John P. Broderick            
Death  --   40,993   94,792   135,785 
Disability  --   40,993   94,792   135,785 
Involuntary termination without cause
  175,000   40,993   94,792   310,785 
Change in Control  175,000   40,993   94,792   310,785 
Anthony Castagno                
Death  --   --   18,750   18,750 
Disability  --   --   18,750   18,750 
Involuntary termination
without cause
  75,000   --   18,750   93,750 
Change in Control  75,000   --   18,750   93,750 
 
36


only issuable
The amounts shown in the table above do not include payments and benefits to the extent they are provided on a non-discriminatory basis to salaried employees generally upon approvaltermination, such as unreimbursed business expenses payable.

Stock Option Plan

In 2007, the Board of Directors approved the 2007 Cicero Employee Stock Option Plan (the “2007 Plan”) which permits the issuance of incentive and nonqualified stock options, stock appreciation rights, performance shares, and restricted and unrestricted stock to employees, officers, directors, consultants, and advisors. The aggregate number of shares of common stock that may be issued under the 2007 Plan shall not exceed 4,500,000 shares upon the exercise of awards and provide that the term of each award be determined by the Board of Directors. During fiscal year 2014, the Company granted options to purchase 15,000 shares to its employees; however, no grants were awarded to our named executive officers during fiscal years 2014 and 2013.

Director Compensation

No cash or non-cash compensation was paid during fiscal year 2014 by us to our non-employee directors who served during fiscal year 2014.

CERTAIN TRANSACTIONS
Transactions with related persons, promoters and certain control persons

On July 15, 2015, the Company entered into a Stock and Warrant Purchase Agreement (the “Purchase Agreement”) with investors named therein, including Privet Fund LP (“Privet”), five directors of the Recapitalization,Company, including John L. Steffens, Donald Peppers, Bruce D. Miller, Mark Landis and Thomas Avery, and three other persons (collectively the nine investors are referred to as the “Purchasers”), pursuant to which the Purchasers severally purchased, in the aggregate, 25,000,000 shares of the Company’s common stock and warrants to purchase up to an aggregate of 205,277,778 shares of the Company’s common stock for an aggregate consideration of $1,000,000

From time to time during 2012 through 2014, the Company entered into several short-term notes payable with John L. Steffens, the Chairman of the Board of Directors, for various working capital needs. The notes bear interest at 12% per year and are unsecured. In March 2013, Mr. Steffens agreed to be automatically exercisedextend the maturity date of all outstanding short-term notes until April 1, 2014.  In March 2014, Mr. Steffens agreed to extend the maturity date of all outstanding short-term notes until April 1, 2015. At December 31, 2014, the Company was indebted to Mr. Steffens in the approximate amount of $6,691,000 of principal and $1,139,000 in interest. In April 2015, the Company entered into an Exchange Agreement with Mr. Steffens to convert an aggregate of $6,950,514 of principal amount of debt into 69,505,140 shares of the Company’s common stock at a conversion rate of $0.10 per share. In connection with and as a condition to the consummation of the Recapitalization.Purchase Agreement (see above), Mr. Miller also holds,Steffens gave an option to the Company for it to require the conversion of outstanding interest due on previously converted notes in connection withfavor of Mr. Steffens at a conversion rate of $0.10 per share, which as of July 8, 2015, would have resulted in the Senior Reorganization Notes, 954,116 Early Adopter Warrants which, upon consummationissuance of 13,608,700 shares of the Recapitalization, convert into 47,706 warrantsCompany’s common stock if the Company option were exercised.

Mr. Steffens has continued to lend working capital to the Company and, at an exercise priceAugust 17, 2015, the amount of $2.00 per share of Common Stock. As partdebt aggregate $425,000. This indebtedness of the Senior Reorganization NotesCompany is in the form of an unsecured non-interest bearing promissory note, due December 31, 2015. It is expected that Mr. Miller advancedSteffens will continue to lend working capital to 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%
Company.
 

* Represents less than 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 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;
37


·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 NoteDuring 2012 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,2013, the Company entered into arrangementsseveral short-term notes payable with certain other partiesJohn Broderick, the Chief Executive Office and Chief Financial Officer, for various working capital needs. The notes bore interest at 12% and were unsecured. At December 31, 2013, the Company was indebted to Mr. Broderick in connection with the Recapitalization.approximate amount of $6,000 in principal and $500 in interest. The Company has verbally agreed with Lemery Greisler LLC, its former legal advisor, that a portion of its legal fees incurrednotes and directly attributable to the Recapitalization would beinterest were paid in Common Stock afterfull in 2014.

Antony Castagno, the RecapitalizationCompany’s Chief Technology Officer and former director, who resigned as a director only on July 15, 2015, is effective. Specifically, under the termspart-owner of the agreement,SOAdesk LLC which was acquired by the Company has agreed to issue 50,000 shares of Common Stock upon approval of the Recapitalization; andin 2010. During 2013, the Company has agreed as partentered into a short term note payable with Mr. Castagno for various working capital needs. The note bore interest of 10% and were unsecured. At December 31, 2014, the Company was indebted to Mr. Castagno in the approximate amount of $15,000 in principal and $1,400 in interest. The 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 are only issuable upon approval of the Recapitalization.
FEDERAL INCOME TAX CONSEQUENCES OF THE RECAPITALIZATIONinterest were paid in full in March 2015.

This section summarizes the material federal income tax consequencesPolicy and Procedures Governing Related Person Transactions

The Audit Committee is responsible for reviewing and approving transactions with related persons. In certain instances, our Board 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 thatDirectors may be relevant toreview and approve 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.transaction. 

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
 
38


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 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 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.

39


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.

40


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.
41

UNAUDITED PRO FORMA FINANCIAL STATEMENTS

The following unaudited pro forma condensed consolidated balance sheet as of December 31, 2005June 30, 2015 is based on Level 8’s auditedCicero’s unaudited consolidated balance sheet as of December 31, 2005June 30, 2015 and gives effect to the transactions described below as if each had occurred on December 31, 2005.June 30, 2015. The unaudited pro forma condensed consolidated statement of operations as of December 31, 2005June 30, 2015 has been derived from Level 8’s auditedCicero’s unaudited consolidated statement of operations for the yearsix months ended December 31, 2005. All conversions assumes a 20:1 reverse stock split ratio. Proposal 2 above seeks shareholder approval for a range of 20:1June 30, 2015 and gives effect to 100:1 with final determination made by the Company’s Board of Directors.transactions described below as if each had occurred on June 30, 2015.

 ·44,502,378 weighted average common shares outstanding$1 million gross proceeds from a private placement of the Company as of December 31, 2005, will convert into 2,225,11925,000,000 shares of the Company under the reverse split ratio within the recapitalization. See footnote (a) to the pro forma financial statements.Company’s common stock consummated on July 15, 2015; and

 ·$2,559,000The conversion 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 7,9571,499.6 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 CommonPreferred 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.

42


·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 2210,400 shares of Series A-1 preferred stock. See footnote (h)B Preferred Stock as a result of the proposed change to the pro forma financial statements.respective Certificate of Designations of the Series A-1 and Series B Preferred Stock to automatically convert into common shares.

·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.

43


Level 8 Systems,Cicero, Inc.
Unaudited Pro Forma Condensed Consolidated Balance SheetStatement of Equity as of December 31, 2005June 30, 2015

  Historical  Pro forma adjustments  Pro forma consolidated 
Stockholders' deficit:         
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized         
Series - A1 1,499.6 shares issued and outstanding at June 30, 2015.  No shares issued and outstanding post pro forma. $2  $(2) (b) $-- 
Series – B 10,400 shares issued and outstanding at June 30, 2015.  No shares issued and outstanding post pro forma.  10   (10) (c)  -- 
Common stock. $0.001 par value, 215,000,000 shares authorized.  155,353,377 shares issued and outstanding at June 30, 2015.  192,253,005 shares issued and outstanding post pro forma.            
       1,499(b)    
       10,400(c)    
       25,000(a)    
Common stock  155,353   36,899   192,252 
Accumulated paid-in capital:            
       (1,497) (b)    
       (10,390) (c)    
       975,000(a)    
Additional paid-in capital  244,087,466   963,113   245,050,579 
Accumulated deficit  (251,475,503)      (251,475,503)
Stockholders' deficit
 $(7,232,672)  1,000,000  $(6,232,672)
38

Cicero, Inc.
Unaudited Pro Forma Earnings per Share for the Six Months Ended June 30, 2015
(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 
44


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) 


  
Historical
  
Pro forma adjustments
  
Pro forma consolidated
 
Net loss
 $(1,535) $-  $(1,535)
8% preferred stock Series B dividend 
  62       62 
Loss per share applicable to common stockholders
 $(1,597) $-  $(1,597)
Net loss applicable to common stockholders - basic and diluted
 $(0.01)      (0.01)
Weighted average common shares outstanding - basic and diluted
  118,105   204(d) $118,309(d)
(a)As$1 million gross proceeds from a private placement of December 31, 2005, the Company had 44,502,378 weighted average common25,000,000 shares which under the terms(par value $0.001) 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 asCompany’s common stock.

45

 
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 fromRepresents 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 

46


(d)Convertible Promissory Notes in the amount of $992,000 convert into 7,9571,499.6 shares of Series A-1 preferred stock upon effectiveness(par value $0.001) into 1,499,628 shares 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:common stock.

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)(c)Represents the conversion of 1,57110,400 shares of Series A-3B preferred stock (par value $0.001) into 2210,400,000 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 preferredthe Company’s common 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.

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(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)(d)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.

48
  Cicero, Inc.  Issuances  Pro forma 
Weighted average shares outstanding at June 30, 2015  118,104,766      118,104,766 
25,000,000 Shares issued for $1 million investment      138,121   138,121 
Conversion of 1,499.6 Series A-1 preferred stock      8,285   8,285 
Conversion of 10,400 Series B preferred stock      57,458   57,458 
   118,104,766   203,864   118,308,630 

HOUSEHOLDING OF PROXY MATERIALS

OTHER MATTERS

Stockholder Proposals. OurThe SEC's rules permit companies and intermediaries such as brokers to satisfy delivery requirements for proxy statements and annual reports with respect to two or more stockholders may submit proposalssharing the same address by delivering a single proxy statement and annual report addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially provides extra convenience for stockholders and cost savings for companies. Some brokers household proxy materials and annual reports, delivering a single proxy statement and annual report to multiple stockholders sharing an address, although each stockholder will receive a separate proxy card. Once you have received notice from your broker that they believe shouldwill be voted onhouseholding materials to your address, householding will continue until you are notified otherwise or until you revoke your consent. If at our next annual meeting. Pursuantany time you no longer wish to Rule 14a-8 under the Securitiesparticipate in householding and Exchange Act of 1934 (the Exchange Act) some stockholder proposals may be eligible for inclusion in ourwould prefer to receive a separate proxy statement for our nextand annual meeting. Stockholder proposals must be submitted, along with proofreport, please notify your broker. If you would like to receive a separate copy of ownership of our stock in accordance with Rule 14a-8(b)(2)this year’s Proxy Statement from us directly, please contact us by writing to Cicero Inc., to our offices: Level 8 Systems, Inc.,Suite 542, 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
OTHER MATTERS
Our Board 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 proposalDirectors does not guaranteeknow of any matters that it willare to be included in our proxy statement. The Audit Committee reviews all stockholder proposals and makes recommendations to our Boardpresented for action on these proposals.

If a stockholder does not wantat the Annual Meeting other than those described in this Proxy Statement. Should any other matter come before the Annual Meeting, however, the persons named in the enclosed proxy will have discretionary authority 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 datevote all proxies with respect 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 votesuch matter in accordance with our best judgment on any stockholder proposal. To make a submission or to request atheir judgment.

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 callCompany's Annual Report to the Securities and Exchange Commission at 1-800-SEC-0330on Form 10-K for further information on the public reference room. Any person, including any beneficial owners, to whom this proxy statementyear ended December 31, 2014 is delivered may also obtain these materials from us at no cost by directing aavailable without charge upon written or oral request to us at Level 8 Systems,to: Cicero Inc., Suite 542, 8000 Regency Pkwy, Suite 542,Parkway, 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.Secretary.

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.

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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 information from documents previously filed with the Securities and Exchange Commission by Level 8 (file no.Cicero, Inc. (File No. 000-26392) are incorporated by reference hereininto this Proxy Statement and shall be deemed a part hereof:of this Proxy Statement:
 
(a)  (a)The Annual Report onItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, found of pages 13 through 18 of Company’s Form 10-K for the fiscal year ended December 31, 2005, and2014 (the “Form 10-K”);
(b)  (b) the Company’s audited financial  statements for the two year period ended December 31, 2014, found on pages F-1 through F-21 of the Form 10-K;
(c)  The Quarterly Report onItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, found of pages 14 through 20 of Company’s Form 10-Q for the fiscal quarter ended March 31, 2006.
(c)The Quarterly Report on Form 10-Q for the fiscal quarterquarterly period ended June 30, 2006.2015 (the “Form 10-Q”); and

49

(d)  the Company’s unaudited financial  statements for the three and six months ended June 30, 2015, found on pages 3 through 13 of the Form 10-Q.

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 containing the information incorporated by reference herein shall beare being delivered concurrently with this Proxy Statement.
 

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40


Annex A
SECOND AMENDED AND RESTATED CERTIFICATE OF DESIGNATIONSINCORPORATION
PREFERENCES AND RIGHTSOF

CICERO, INC.
OF

SERIES A-1 CONVERTIBLE PREFERRED STOCK

OF

LEVEL 8 SYSTEMS, INC.

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


Level 8 Systems,Cicero, Inc., a corporation organized and existing under the laws of the State of Delaware (the "CORPORATION"),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 A-1 Preferred Stock.
(iii)   No Fractional Shares. If any conversion of Series A-1 Preferred Stock would result in the issuance of a fractional share of Common Stock, such fractional share shall be payable in cash based upon the ten (10) day average Closing Bid Price at such time, and the number of shares of Common Stock 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 such dispute is not promptly resolved by discussion between the relevant holder and the Corporation, the Corporation shall submit the disputed calculations to an independent outside accountant via facsimile within three business days of receipt of the 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 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, and Regulation 13D-G thereunder. The restriction contained in this subparagraph may not be altered, amended, deleted or changed in any manner whatsoever unless the holders of a majority of the outstanding shares of Common Stock and the Majority Holders shall approve, in writing, such alteration, amendment, deletion or change.

V. RESERVATION OF SHARES OF COMMON STOCK

A.    Reserved Amount. On or prior to the Issuance Date, the Corporation shall reserve shares of its authorized but unissued shares of Common Stock for issuance upon conversion of the Series A-1 Preferred Stock and thereafter the number of authorized but unissued shares of Common Stock so reserved (the "RESERVED AMOUNT") shall at all times be sufficient to provide for the conversion of all of the Series A-1 Preferred Stock outstanding at the then current Conversion Ratio thereof. The Reserved Amount shall be allocated to the holders of Series A-1 Preferred Stock as provided in Article XV.C.

B.     Increases to Reserved Amount. If the Reserved Amount for any three consecutive trading days (the last of such three trading days being the "AUTHORIZATION TRIGGER DATE") shall be less than 100% of the number of shares of Common Stock issuable upon conversion of the then outstanding shares of Series A-1 Preferred Stock, the Corporation shall immediately notify the holders of Series A-1 Preferred Stock of such occurrence and shall take immediate action (including, if necessary, seeking stockholder approval to authorize the issuance of additional shares 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 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 (a "TRIGGERING EVENT"), from issuing all of the shares of Common Stock issuable

A-4


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), the 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 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 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 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 OTC by Bloomberg Financial Markets ("BLOOMBERG") or other nationally recognized reporting service, at the option of the holder hereof, for the ten consecutive trading days immediately preceding such date, or (ii) if the OTC is not the 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 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 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 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 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 sufficient to permit the payment to such holders of 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 means an 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 Certificate of Designations filed in respect thereof.

XI. ADJUSTMENTS TO THE CONVERSION RATIO

The Conversion Ratio shall be subject to 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 outstanding shares of Common Stock is increased by a stock split, stock dividend, combination, reclassification or other similar event, the 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 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 Corporation shall, upon the written request at any time of any holder of Series A-1 Preferred Stock, furnish to such holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Ratio at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of a 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 vote on all matters submitted to a vote of the stockholders of the Corporation and shall be entitled to that number of votes equal to the number of 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 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 (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 vote) as a single class on all matters submitted to the stockholders 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 the nearest whole number. In connection with the foregoing, the Corporation shall provide each holder of Series A-1 Preferred Stock with prior notification of any meeting of the stockholders (and copies of proxy materials and other information sent to stockholders) at the same time such notice and materials are provided to the holders of Common Stock.

B.     Series A-1 Preferred Stock Board Observer. The holders of a majority of the outstanding shares of the Series A-1 Preferred Stock 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 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 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 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 be filed and thereafter so long as any shares of Series A-1 Preferred Stock are outstanding, the Corporation shall deliver (or cause its transfer agent to deliver) to each holder a written report notifying the 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
OF
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 Cicero, Inc.  The corporation was incorporated under the name Level 8 Systems, Inc. (the “Corporation”).
II.The Corporation’sand the original Certificate of Designations of Series A-3 Convertible Preferred Stock (the “Series A-3 Certificate of Designations”), whichIncorporation was previously filed with the Delaware Secretary of State of the State of Delaware is hereby amended as set forth herein.and became effective on January 4, 2007.

III.The amendments to the Series A-3B.           This Second Amended and Restated Certificate of Designations as set forth herein haveIncorporation amends and restates the Certificate of Incorporation in its entirety, and has been duly adopted in accordance with the provisions of SectionSections 242 and 245 of the General Corporation Law of the State of Delaware and have been consented to in writing by holderswritten consent of at least 85% of the Corporation’s Series A-3 Convertible Redeemable Preferred Stockits stockholders 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).Delaware.

IV.Article VI shall beC.           The text of the Certificate of Incorporation is 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 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

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

B-1


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
follows.
 
ARTICLE I
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LEVEL 8 SYSTEMS, INC.
NAME
 
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF DESIGNATIONS
OF
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 (the “Corporation”) is Level 8 Systems,Cicero, Inc. (the “Corporation”).
 
II. ARTICLE II
REGISTERED ADDRESS, AGENT
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%address 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.

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 AMENDMENT OF
CERTIFICATE OF DESIGNATIONS
OF
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
OF
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

OF
LEVEL 8 SYSTEMS, INC.

Level 8 Systems, Inc. a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), hereby certifies as follows:

1.     The name of the Corporation is Level 8 Systems, Inc., that the Corporation was initially incorporated pursuant to a Certificate of Incorporation filed with the Secretary of State of Delaware on May 25, 1999.

2.     This Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) amends, restates and integrates the Corporation’s Certificate of Incorporation as heretofore amended and supplemented. The Certificate of Incorporation was duly adopted by the Board of Directors of the Corporation in accordance with the provisions of Sections 242 and 245 of the Delaware General Corporation Law, as amended from time to time (the “DGCL”), and was duly adopted by the stockholders of the Corporation, acting pursuant to Section 228 of the 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 to date, is hereby amended and restated in its entirety to provide as herein set forth in full:

FIRST: The name of the corporation is hereby changed to Cicero, Inc. (the "Corporation").

SECOND: The address, including street, number, city, and county, of thecurrent 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 name of its registered agent at such address is Corporation Service Company.

THIRD: ARTICLE III
PURPOSE
The naturepurpose of the business or purposes to be conducted or promotedCorporation is to engage in any lawful act or activity for which corporationsa corporation may be organized under the General Corporation Law of the State of Delaware.Delaware (the “DGCL”).

FOURTH:ARTICLE IV
AUTHORIZED SHARE CAPITAL
Section 4.01                      Total Authorized Shares.  The total number of shares of capital stock whichthat the Corporation is authorizedshall have authority to issue is two hundred twenty five million 225,000,000 shares, consisting of:

(i) Two Hundred Fifteen million (215,000,000)610,000,000, which shall be divided into 600,000,000 shares of Common Stock,common stock, par value $.001 per share ("$0.001 (the “Common Stock"Stock);, and

(ii) Ten million (10,000,000) 10,000,000 shares of preferred stock, par value $.001$0.001 per share ("preferred stock"(the “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

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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.Annex A

(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 preferredSection 4.02                      Shares Non-Assessable.  The capital stock of the Corporation shall uponnot be assessable.  The private property of the automatic conversionstockholders shall not be liable for the debts, obligations or liabilities of such shares into sharesthe Corporation.
Section 4.03                      Common Stock.
(a)           General. The voting, dividend and liquidation rights of Series A-1 preferred stockthe holders of the Common Stock are subject to and qualified by the rights of the holders of the Preferred Stock, if any.
(b)           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.
(c)           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.
(d)           Liquidation. Upon the dissolution or liquidation 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 eliminatedwhether voluntary or involuntary, 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 resultrights of the two preceding paragraphs,holders of Preferred Stock, if any, holders of Common Stock will be entitled to receive all series of preferred stockassets of the Corporation heretofore designated shall at the Effective Time be eliminated, other than Series A-1 available for distribution to its stockholders.
Section 4.04Preferred 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 and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation.

A.PREFERRED STOCK.

The Board of Directors is authorized to provide, without stockholder action, for the issuance of 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 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 other rights, voting powers, restrictions, limitations as 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 agreement, no Shareholder action is required for the authorization and issuance of such shares of preferred stock.

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

(a)           the number of shares constituting each series and 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 be cumulative and, if so, the date from which dividends shall be accumulated, and the relative rights of priority with respect to dividends;

2

Annex A
(c)           whetherWhether 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;

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(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 to the dates from and after which dividends thereon shall cumulate, if cumulative.

B.COMMON STOCK

ARTICLE V
(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.
DIRECTOR LIABILITY

(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 conferredTo the fullest extent permitted by statute, it is 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 eliminationDGCL, as now existing or limitation or liability of directors for breaches of fiduciary duty, nohereafter amended, a director of the Corporation shall not be personally liable to the Corporation or any of its stockholders for monetary damages for any breach of his or her fiduciary duty as director, notwithstanding any provision of law imposing such liability. Noa director.  Any amendment, tomodification or repeal of this provisionArticle V shall apply tobe prospective only and shall not adversely affect any limitation, right or have any effect on the liability or alleged liabilityprotection of anya director of the Corporation for orexisting under this Article V with respect to any actsact or omissions such director
omission occurring prior to such amendment.amendment, modification or repeal.  If the DGCL is amended after the effective date of this Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended.

SEVENTH: ARTICLE VI
INDEMNIFICATION
The Corporation shall, through its Bylaws or otherwise, indemnify and advance expenses to the fullfullest extent permitted by Section 145 ofunder the General Corporation Law of Delaware,DGCL, as it now exists or as hereafter amended from time to time, indemnify eachany 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 isits subsidiaries, and such right to indemnification shall continue as to a person who has ceased to be a director or was serving, or has agreed to serve, at the requestofficer of the Corporation as a director,and shall inure to the benefit of his or her heirs, executors and personal and legal representatives; provided, however, that the Corporation shall not be required to indemnify or advance expenses to any officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan), or by reason of 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
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actually and reasonably incurred by him or on his behalfdirector in connection with such action, suit or proceeding and any appeal therefrom.

Indemnification may include payment by the Corporation of 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 persondirector or officer, unless such proceeding (or part thereof) was authorized in the initiation thereof was approvedfirst instance 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.Directors.. The Corporation may, toby action of the extent authorized form time to time by its Board, of Directors, grant indemnificationprovide rights to indemnification and to advancement of expenses to such other employees or agents of the Corporation or its subsidiaries to such extent and to such effect as the Board shall determine to be appropriate and authorized by the DGCL. The rights to indemnification and to the advance of expenses conferred in this Article Eleventh shall not be exclusive of any other persons servingright which any person may have or hereafter acquire under this Amended and Restated Certificate of Incorporation, the Bylaws of the Corporation, any statute, agreement, vote of stockholders or disinterested directors or otherwise. Any amendment, repeal or modification of the foregoing provision of this Article Eleventh shall not adversely affect any right or protection of a director, officer, agent, or other person existing at the time of, or increase the liability of any director of this Corporation with respect to any acts or omissions of such director, officer or agent occurring prior to, such amendment, repeal or modification.
3

Annex A
ARTICLE VII
STOCKHOLDER ACTION BY WRITTEN CONSENT
At any time when the Privet Stockholder (as defined below) beneficially owns, in the aggregate, at least 30% in voting power of the stock of the Corporation entitled to vote generally in the election of directors, any action required or permitted to be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the books in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation’s registered office shall be made by hand, or by certified or registered mail, return receipt requested. At any time when the Privet Stockholder beneficially owns, in the aggregate, less than 30% in voting power of the stock of the Corporation entitled to vote generally in the election of directors, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders; provided, however, that any action required or permitted to be taken by the holders of Preferred Stock, voting separately as a series or separately as a class with one or more other such series, may be taken without a meeting, without prior notice and without a vote, to the extent expressly so provided by the applicable certificate of designation relating to such series of Preferred Stock.
ARTICLE VIII
SPECIAL MEETINGS OF STOCKHOLDERS
Except as otherwise required by law or provided in the Bylaws of the Corporation, and subject to the rights of the holders of any class or series of shares issued by the Corporation having a preference over the Common Stock as to dividends or upon liquidation to elect directors in certain circumstances, special meetings of the stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution approved by the affirmative vote of a majority of the directors then in office and not by any other person.
4

Annex A
ARTICLE IX
BYLAWS
The Board of Directors shall have the power to adopt, alter, amend or repeal the Bylaws of the Corporation by vote of a majority of the directors then in office.
ARTICLE X
COMPETITION AND CORPORATE OPPORTUNITIES
Section 10.01                                General Statement.  To the fullest extent permitted by Section 122(17) of the DGCL (or any successor provision) and except as may be otherwise expressly agreed in writing by the Corporation and the Privet Stockholder, the Corporation, on behalf of itself and its subsidiaries, renounces any interest or expectancy of the Corporation and its subsidiaries in, or in being offered an opportunity to participate in, business opportunities, that are from time to time presented to the Privet Stockholder or any of its officers, representatives, directors, agents, stockholders, members, partners, affiliates, subsidiaries (other than the Corporation and its subsidiaries), or any of their respective designees on the Corporation’s Board of Directors and/or any of their respective representatives who, from time to time, may act as officers of the Corporation, even if the opportunity is one that the Corporation or its subsidiaries might reasonably be deemed to have pursued or had the ability or desire to pursue if granted the opportunity to do so, and no such person shall be liable to the Corporation or any of its subsidiaries for breach of any fiduciary or other duty, as a director or officer or otherwise, by reason of the fact that such person pursues or acquires such business opportunity, directs such business opportunity to another person or fails to present such business opportunity, or information regarding such business opportunity, to the Corporation or its subsidiaries unless, in the case of any such person who is a director or officer of the Corporation, such business opportunity is expressly offered to such director or officer in writing solely in his or her capacity as a director or officer of the Corporation. Any person purchasing or otherwise acquiring any interest in any shares of stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article X. Neither the alteration, amendment or repeal of this Article X, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article X, nor, to the fullest extent permitted by Delaware law, any modification of law, shall eliminate or reduce the effect of this Article X in respect of any business opportunity first identified or any other matter occurring, or any cause of action, suit or claim that, but for this Article X, would accrue or arise, prior to such alteration, amendment, repeal, adoption or modification. If any provision or provisions of this Article X shall be held to be invalid, illegal or unenforceable as applied to any circumstance for any reason whatsoever: (a) the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Article X (including, without limitation, each portion of any paragraph of this Article X containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and (b) to the fullest extent possible, the provisions of this Article X (including, without limitation, each such portion of any paragraph of this Article X containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to permit the Corporation to protect its directors, officers, employees and agents from personal liability in respect of their good faith service to or for the benefit of the Corporation to the fullest extent permitted by law. This Article X shall not limit any protections or defenses available to, or indemnification or advancement rights of, any director, officer, employee or agent of the Corporation under this Certificate of Incorporation, the Corporation’s Bylaws, any other agreement between the Corporation and such rights maydirector, officer, employee or agent or applicable law. For purposes of this Certificate of Incorporation, the “Privet Stockholder” shall mean Privet Fund LP and its affiliates and their respective affiliates, subsidiaries, members, partners, directors, officers and employees (in each case other than the Corporation and its subsidiaries).
5

Annex A
Section 10.02                                Deemed Notice.  Any person or entity purchasing or otherwise acquiring any interest in any shares of the Corporation shall be equivalentdeemed to have notice and to have consented to the provisions of this Article X.
Section 10.03                                Severability.  The invalidity or greaterunenforceability of any particular provision, or less than, those set forthpart of any provision, of this Article X shall not affect the other provisions or parts hereof, and this Article X shall be construed in this Article.all respects as if such invalid or unenforceable provisions or parts were omitted.

EIGHTH: ARTICLE XI
SECTION 203 OF THE GENERAL CORPORATION LAW
The Corporation elects not to be governed by, and shall not be subject to the provisions of, Section 203 of the DGCL, “Business Combinations With Interested Stockholder,” as permitted under and pursuant to subsection (b)(3) thereof.
ARTICLE XI
AMENDMENT
This 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 the 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.ARTICLE XIII

[Remainder of page left intentionally blank.]FORUM
 
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THE UNDERSIGNED, being the Chief Executive Officer and Chief Financial Officer ofUnless the Corporation for the purpose of amending and restating the Corporation’s Certificate of Incorporation pursuantconsents in writing to the General Corporation Lawselection of an alternative forum, the State of Delaware, do execute this certificate, hereby declaringsole and certifying that his is my act and deedexclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, employee or agent of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim against the Corporation arising pursuant to any provision of the DGCL, this Certificate of Incorporation or the Corporation’s Bylaws (as either may be amended from time to time), or (iv) any action asserting a claim against the Corporation or any director or officer or other employee of the Corporation governed by the internal affairs doctrine, shall be a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware). Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article XIII.
ARTICLE XIV
EXISTENCE
The term of the existence of the Corporation shall be perpetual.
6

IN WITNESS WHEREOF, this Certificate of Incorporation has been signed this ____ day of 2006._______, 2015.
CICERO, INC.
By:
Name:
Title:
7

Annex B
Audit Committee Charter
CHARTER
of
The Audit Committee
of
Level 8 Systems, Inc.
The Audit Committee is appointed by the Board to assist the Board in monitoring (1) the integrity of the financial statements of the Company, (2)the compliance by the Company with legal and regulatory requirements and (3)the independence and performance of the Company's internal and external auditors.

The members of the Audit Committee shall meet the independence and experience requirements of the Nasdaq Stock Market, Inc. The members of the Audit Committee shall be appointed by the Board.
The Audit Committee shall have the authority to retain special legal, accounting or other consultants to advise the Committee. The Audit Committee may request any officer or employee of the Company or the Company's outside counsel or independent auditor to attend a meeting of the Committee or to meet with any members of, or consultants to, the Committee.
The Audit Committee shall make regular reports to the Board.

The Audit Committee shall:

  1. Review and reassess the adequacy of this Charter annually and recommend any proposed changes to the Board for approval.

  2. Review the annual audited financial statements with management,including major issues regarding accounting and auditing principles and practices as well as the adequacy of internal controls that could significantly affect the Company's financial statements.

  3. Review an analysis prepared by management and the independent auditor of significant financial reporting issues and judgments made in connection with the preparation of the Company's financial statements.

  4. Review with management and the independent auditor the Company's quarterly financial statements prior to the filing of its Form 10-Q.

  5. Meet periodically with management to review the Company's major financial risk exposures and the steps management has taken to monitor and control such exposures.

  6. Review major changes to the Company's auditing and accounting principles and practices as suggested by the independent auditor, internal auditors or management.

  7. Recommend to the Board the appointment of the independent auditor, which firm is ultimately accountable to the Audit Committee and the Board.

  8. Approve the fees to be paid to the independent auditor.


Annex B
  9. Receive periodic reports from the independent auditor regarding the auditor's independence consistent with Independence Standards Board Standard 1, discuss such reports with the auditor, and if so determined by the Audit Committee, take or recommend that the full Board take appropriate action to oversee the independence of the auditor.
  10. Evaluate together with the Board the performance of the independent auditor and, if so determined by the Audit Committee, recommend that the Board replace the independent auditor.

  11. Review the appointment and replacement of the senior internal auditing executive.

  12. Review the significant reports to management prepared by the internal auditing department and management's responses.

  13. Meet with the independent auditor prior to the audit to review the planning and staffing of the audit.

  14. Obtain from the independent auditor assurance that Section 10A of the Securities Exchange Act of 1934 has not been implicated.

  15. Obtain reports from management, the Company's senior internal auditing executive and the independent auditor that the Company's subsidiary/foreign affiliated entities are in conformity with applicable legal requirements and the Company's Code of Conduct.
  16. Discuss with the independent auditor the matters required to be discussed by Statement on Auditing Standards No. 61 relating to the conduct of the audit.

  17. Review with the independent auditor any problems or difficulties the auditor may have encountered and any management letter provided by the auditor and the Company's response to that letter. Such review should include:

    a. Any difficulties encountered in the course of the audit work, including any restrictions on the scope of activities or access to required information.

    b. Any changes required in the planned scope of the internal audit.

    c. The internal audit department responsibilities, budget and staffing.

  18. Prepare the report required by the rules of the Securities and Exchange Commission to be included in the Company's annual proxy statement.

  19. Advise the Board with respect to the Company's policies and procedures regarding compliance with applicable laws and regulations and with the Company's Code of Conduct.

Annex B
  20. Review with the Company's General Counsel legal matters that may have a material impact on the financial statements, the Company's compliance policies and any material reports or inquiries received from regulators or governmental agencies.

  21. Meet at least annually with the Chief Financial Officer, the senior internal auditing executive and the independent auditor in separate executive sessions.

  22. Comply in all respects with the rules and regulations of the Nasdaq Stock Market.

  While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the Company's financial statements are complete and accurate and are in accordance with generally accepted accounting principles. This is the responsibility of management and the independent auditor. Nor is it the duty of the Audit Committee to conduct investigations, to resolve disagreements, if any, between management and the independent auditor or to assure compliance with laws and regulations and the Company's Code of Conduct.

  Adopted this 16th day of June, 2000.

                              The Board of Directors of
                              Level 8 Systems, Inc.

CICERO, INC.

PROXY

2015 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON AUGUST 25, 2015

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF CICERO, INC.

The undersigned hereby appoints JOHN L. STEFFENS and JOHN BRODERICK, and each of them, as attorneys and proxies of the undersigned, with full power of substitution, and hereby authorizes them to vote, as designated below, all shares of common stock, par value $0.001 per share, of Cicero, Inc. (the “Company”) and all shares of preferred stock, par value $0.001 per share, on an as-converted basis, of the Company, if any, that the undersigned would be entitled to vote at the annual meeting of stockholders of the Company to be held on August 25, 2015, or any adjournments or postponements thereof, on any matters that may properly come before the meeting, including all matters described in the Company’s Notice of Annual Meeting and Proxy Statement for the 2015 Annual Meeting of Stockholders. If any nominee for director should be unavailable for election as a result of an unexpected occurrence, the foregoing proxyholders will vote for election of a substitute nominee proposed by management.

1. To elect seven (7) directors to serve for one-year terms ending in the year 2016 or until each of their successors are duly elected and qualified:
  By:
o FOR all nominees listed at left
o WITHHOLD AUTHORITY
John L. Steffens(except as written below to theTO VOTE for all nominees listed
John Broderickcontrary)at left
Mark Landis
Bruce D. Miller
Don Peppers
Ryan Levenson
Thomas Avery  
     
  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 authorizedInstruction: To withhold authority to represent and vote for an individual nominee, write the shares of the undersigned with all the powers the undersigned would possess, if personally present at the special meeting of 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 discussednominee's name 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 following proposals:
1. Amend the amended and restated certificate of incorporation to change the name of the Company to Cicero, Inc.;

FORAGAINSTABSTAIN
space provided above.

2. Effect a consolidation (a/k/a a reverse split)To amend the Company’s Amended and Restated Certificate of the common stock of the Company at a ratio within a range of 20:1 to 100:1.

FORAGAINSTABSTAIN

3. Amend the amended and restated certificate of incorporationIncorporation to increase the number of authorized shares of common stock, of the Companypar value $0.001 per share, from 85 million215,000,000 to 215 million; and600,000,000:

FORAGAINSTABSTAIN
oFOR oAGAINST oABSTAIN

3. [For the holders of the Series A-1 Preferred Stock only] To amend Article IV (Conversion) of the Series A-1 Convertible Preferred Stock Certificate of Designations to the effect that the Series A-1 Preferred Stock will automatically convert into common stock upon the Company consummating an equity financing for at least $1,000,000:

oFOR oAGAINST oABSTAIN

4. [ For the holders of the Series B Preferred Stock only] To amend the conversion prices at which allrequirement in Section 6 (Automatic Conversion) of the outstanding sharesSeries B Convertible Preferred Stock Certificate of Designations to the effect that the Series A-3, B-3, C-3B Preferred Stock will automatically convert into common stock upon the Company consummating an equity financing for at least $1,000,000:

oFOR oAGAINST oABSTAIN

5.  To amend the Company’s Amended and D preferred stockRestated Certificate of Incorporation to allow stockholders to be able to act by written consent only while Privet Fund LP and its affiliates own an aggregate of at least 30% of the Company convert into sharesCompany’s outstanding voting stock:

oFOR oAGAINST oABSTAIN

6.  To amend the Company’s Amended and Restated Certificate of common stockIncorporation to provide that only the Board of Directors may call a special meeting of stockholders 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-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 
Company:

oFOR oAGAINST oABSTAIN

7.  To amend the Company’s Amended and Restated Certificate of Incorporation to renounce the Company’s expectancy regarding certain corporate opportunities presented to a Privet Stockholder:

oFOR oAGAINST oABSTAIN




 Existing Series Preferred Stock
Number of Shares of Series
A-1 Preferred Stock
Series A-30.0142857
Series B-30.125
Series C0.20
Series D0.25

Title8.  To amend the Company’s Amended and Restated Certificate of each classIncorporation to Corporation to not be governed by the provisions of securities to which transaction applies:

FORAGAINSTABSTAIN
Section 203 of the Delaware General Corporation Law:

INSTRUCTIONS:oFOR oAGAINST oABSTAIN

9.  To amend the Company’s Amended and Restated Certificate of Incorporation establishing the courts located within the State of Delaware as the exclusive forum for the adjudication of certain legal actions by the stockholders:

oFOR oAGAINST oABSTAIN

10.  To amend the Company’s Amended and Restated Certificate of Incorporation to authorize 10,000,000 shares of “blank check” preferred stock, par value $0.001 per share:

oFOR oAGAINST oABSTAIN

11.  To approve, by non-binding vote, the Company’s executive compensation:

oFOR oAGAINST or oABSTAIN

12. To recommend, by non-binding vote, the frequency of advisory votes on executive compensation:

o1 YEAR o2 YEARS o3 YEARS oABSTAIN

13. To ratify the selection by the Audit Committee of Cherry Bekaert LLP as the Company’s independent registered public accounting firm for each proposal, check the appropriate box. Sharesfiscal year ending December 31, 2015:

oFOR oAGAINST oABSTAIN


The shares represented by this proxy will be voted as directed by stockholdersthe undersigned stockholder. If no direction is given, such shares will be voted “FOR” the proxies will havenominees listed in Proposal 1, “FOR” each of Proposals 2, 3, 4, 5, 6, 7, 8, 9, 10, 11 and 13, “3 YEARS” for Proposal 12, and in the authoritydiscretion of the proxy holder(s) with respect to voteother matters properly brought before the meeting, including any adjournments thereof.


PLEASE MARK, DATE, SIGN AND MAIL THIS PROXY IN THE ENVELOPE PROVIDED FOR Item 1, FOR Item 2, FOR Item 3 and FOR Item 4.THIS PURPOSE.

Please complete, sign and date this Proxy where indicated and return it promptly to Level 8 Systems, Inc., 8000 Regency Pkwy, Suite 542, Cary, North Carolina 27511, Attn: Chief Executive Officer.print the name(s) appearing on each share certificate(s) over which you have voting authority:

DATED:, 2006


SignatureSignature if held jointly
Date: ____________________, 2015

(Please sign above exactly as the shares are issued.Signature:  _____________________________________________________

Signature if held jointly: ___________________________________________

Note:  When shares are held by joint tenants, bothjointly, each holder should sign. When signing as attorney, executor, administrator, attorney, trustee or guardian, please give full title as such. If the signer is a corporation, please sign in full corporate name by president or otherduly authorized officer.officer, giving full title as such. If signer is a partnership, please sign in partnership name by authorized person.)