S-4

NOTE PURCHASE AGREEMENT

THIS NOTE PURCHASE AGREEMENT (this “Agreement”) is dated as of __________, 2004, by and between LEVEL 8 SYSTEMS, INC., a Delaware corporation (the “Company”), and the various purchasers listed on Schedule I hereto (each referred to herein as a “Purchaser” and, collectively, the “Purchasers”).

WHEREAS, the Company and the Purchasers are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Rule 506 under Regulation D as promulgated by the United States Securities and Exchange Commission (the “Commission”) under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”);

(i) WHEREAS, subject to the terms and conditions set forth in this Agreement, the Company desires to issue and sell to the Purchasers, and the Purchasers desire to acquire from the Company, a promissory note (“Promissory Note”) convertible upon Shareholder Approval (as described herein) at the Purchaser’s option into Senior Debt and Warrants as described in the Term Sheet (the “Term Sheet”) attached hereto as Exhibit A (the “Senior Debt and Warrants” and including shares of common stock issuable upon exercise of the warrants “Conversion Securities”)

(ii) WHEREAS, the conversion of the Notes into Senior Debt and Warrants is contingent and dependent upon the Company’s shareholders approving the merger and reorganization (“Recapitalization”) of the Company as further described in the Term Sheet (“Shareholder Approval”), and the Company filing a Form S-4 to facilitate the shareholder approval and the merger reorganization.

NOW, THEREFORE, in consideration of the promises and mutual covenants and agreements hereinafter, the Company and the Purchasers hereby agree as follows:

ARTICLE I.

PURCHASE AND SALE

1.1 Purchase and Sale. On the Closing Date (as defined below), subject to the terms and conditions set forth herein, the Company shall issue and sell to each Purchaser and each Purchaser, severally and not jointly, shall purchase from the Company the Promissory Notes as set forth on Schedule I (the “Notes”) convertible into the Senior Debt and Warrants set forth on Schedule I for such Purchaser. The aggregate purchase price for the Notes and Warrant purchased by the Purchasers shall not exceed $1,706,575, of which $925,928 has been purchased as of November 23, 2004.

1.2 Closing. The closing (the “Closing”) of the purchase and sale of the Notes shall take place at the offices of the Company, immediately following the execution hereof or such later date or dates or different location or locations as the parties shall agree, but in no event prior to the date that the conditions set forth in Section 4.1 have been satisfied or waived by the appropriate party (such date of the Closing, the “Closing Date”). At the Closing:

a. Each Purchaser shall deliver to the Company (1) this Agreement, duly executed by such Purchaser, (2) the purchase price as set forth next to its name on Schedule I in United States dollars in immediately available funds to an account or accounts designated in writing by the Company; and

b. The Company shall deliver to each Purchaser (1) this Agreement, duly executed by the Company, (2) a Promissory Note as set forth on Schedule I hereto.

ARTICLE II.

REPRESENTATIONS AND WARRANTIES

2.1 Representations and Warranties of the Company. The Company represents and warrants to each of the Purchasers that the statements contained in this Section 2.1 are true, correct and complete as of the date hereof, and will be true correct and complete as of the Closing Date (unless specifically made as of another date), except as specified to the contrary in the corresponding paragraph of the disclosure schedule prepared by the Company accompanying this Agreement (the “Company Disclosure Schedules”):

Organization and Qualification. The Company duly incorporated, validly existing and in good standing under the laws of Delaware, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, would not, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of any of this Agreement or the Transaction Documents (as defined in Section 2.1(b)) or any of the transactions contemplated hereby or thereby, (y) have or result in a material adverse effect on the results of operations, assets, or financial condition of the Company, taken as a whole or (z) impair the Company’s ability to perform fully on a timely basis its obligations under any Transaction Document (any of (x), (y) or (z), being a “Material Adverse Effect”).

Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement, and the Notes (collectively, the “Transaction Documents”), and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of each of this Agreement and the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action by the Company, provided, however, that the conversion of the Notes into Senior Debt and Warrants will require Shareholder Approval. Each of this Agreement and the Transaction Documents has been duly executed by the Company and when delivered in accordance with the terms hereof will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other

equitable principles of general application and except that rights to indemnification and contribution may be limited by Federal or state securities laws or public policy relating thereto.

Capitalization. As of the date hereof, the authorized capital stock of the Company is as set forth in Schedule 2.1(c). All of such outstanding shares of capital stock have been, or upon issuance will be, validly authorized and issued, fully paid and nonassessable. Except as specifically set forth in Schedule 2.1 (c), no securities of the Company are entitled to preemptive or similar rights, and no Person (as hereinafter defined) has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as specifically set forth in Schedule 2.1 (c), and except as a result of the purchase and sale of the Notes, there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company or any subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. The issue and sale of the Notes will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Purchasers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under such securities.

(Intentionally Deleted)

No Conflicts. The execution, delivery and performance of this Agreement and each of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby subject as applicable to Shareholder Approval, do not and will not (i) conflict with or violate any provision of the Certificate of Incorporation, Bylaws or other organizational documents of the Company, (ii) subject to obtaining the consents referred to in Section 2.1(f), conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument (evidencing a Company debt or otherwise) to which the Company is a party or by which any property or asset of the Company is bound or affected, except where such conflict or violation has not resulted or would not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Effect, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including Federal and state securities laws and regulations and the rules and regulations of the principal market or exchange on which the Common Stock is traded or listed), or by which any material property or asset of the Company is bound, except where such conflict has not resulted or would not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Effect.

Consents and Approvals. The Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority, regulatory or self regulatory agency, or other Person in connection with the execution, delivery and performance by the Company of this Agreement or the Transaction Documents, other than (i) the filing of a Form S-4 with the Commission, which shall be filed in connection with the

Shareholder Approval and implementation of the Recapitalization (ii) any filings, notices or registrations under applicable Federal or state securities laws (together with the consents, waivers, authorizations, orders, notices and filings referred to on Schedule 2.1(f), the “Required Approvals”), except where failure to do so has not resulted or would not reasonably result, individually, or in the aggregate, in a Material Adverse Effect. “Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

Litigation; Proceedings. Except as specifically set forth on Schedule 2.1(g)or in the SEC Documents (as hereinafter defined), there is no action, suit, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its subsidiaries or any of their respective properties before or by any court, governmental or administrative agency or regulatory authority (Federal, state, county, local or foreign) (collectively, an “Action”) which (i) adversely affects or challenges the legality, validity or enforceability of any of this Agreement or the Transaction Documents or (ii) would reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. Neither the Company nor any subsidiary, nor, to the knowledge of the Company, any officer thereof, is or has been, nor, to the knowledge of the Company, any director thereof is or has been for the last three years, the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and, to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director that was a director of the Company at any time during the last three years or officer of the Company. The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any subsidiary under the Exchange Act or the Securities Act.

No Default or Violation. The Company (i) is not in default under or in violation of any indenture, loan or other credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound and which is required to be included as an exhibit to any SEC Document (as defined in Section 2.1(j)) or will be required to be included as an exhibit to the Company’s next filing under either the Securities Act or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), (ii) is not in violation of any order of any court, arbitrator or governmental body applicable to it, (iii) is not in violation of any statute, rule or regulation of any governmental authority to which it is subject, (iv) is not in default under or in violation of its Certificate of Incorporation, Bylaws or other organizational documents, respectively in the case of (i), (ii) and (iii), except where such violations have not resulted or would not reasonably result, individually or in the aggregate, in a Material Adverse Effect.

Private Offering. The Company and all Persons acting on its behalf have not made, directly or indirectly, and will not make, offers or sales of any securities or solicited any offers to buy any security under circumstances that would require registration of the Notes or the issuance of such securities under the Securities Act. Subject to the accuracy and completeness of the representations and warranties of the Purchasers contained in Section 2.2, the offer, sale and issuance by the Company to the Purchasers of each of the Notes.

SEC Documents; Financial Statements. The Common Stock of the Company is registered pursuant to Section 12(g) of the Exchange Act. Since December 31, 2001, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it, with the Commission, pursuant to Section 13, 14 or 15(d) of the Exchange Act (the foregoing materials and all exhibits included therein and financial statements and schedules thereto and documents (other than exhibits to such documents) incorporated by reference therein being collectively referred to herein as the “SEC Documents”), on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Documents prior to the expiration of any such extension. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Documents, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements or the notes thereto, and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.

Material Changes. Since the date of the latest audited financial statements included within the SEC Documents, except as specifically disclosed in the SEC Documents , (i) there has been no event, occurrence or development that has had or that could result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company's financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (iii) the Company has not altered its method of accounting or the identity of its auditors, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, and (v) the Company has not issued any equity securities to any officer, director or affiliate, except pursuant to existing Company stock option plans. The Company does not have pending before the Commission any request for confidential treatment of information.

Patents and Trademarks. The Company and its subsidiaries own, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights that are necessary or material for use in connection with their respective businesses as described in the SEC Documents and which the failure to so own or have could have, or reasonably be expected to result in, a Material Adverse Effect (collectively, the “Intellectual Property Rights”). Except with respect to liabilities reflected in the Company’s financial statements or as otherwise described in the SEC Documents. The Intellectual Property Rights are not subject

to any lien, mortgage, pledge, security interest, encumbrance, claim, restriction on use, option, conditional sales agreement, or charge of any kind, or any rights of others, however evidenced or created which would reasonably be expected to have a Material Adverse Effect. The business as now conducted and as presently proposed to be conducted by the Company does not and will not cause the Company to infringe or violate any of the patents, trademarks, service marks, trade names, copyrights, domain names, licenses, trade secrets or other proprietary rights of any other person or entity. Neither the Company nor any subsidiary has received a written notice that the Intellectual Property Rights used by the Company or any subsidiary violates or infringes upon the rights of any Person which if determined adversely to the Company would, individually or in the aggregate have a Material Adverse Effect. To the knowledge of the Company, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights.

Transactions With Affiliates and Employees. Except as set forth in SEC Documents, none of the officers or directors of the Company and, to the knowledge of the Company, none of the employees of the Company is presently a party to any transaction with the Company or any subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner.

(Intentionally Deleted)

Broker’s Fees. No fees or commissions or similar payments with respect to the transactions contemplated by this Agreement or the Transaction Documents have been paid or will be payable by the Company to any third party broker, financial advisor, finder, investment banker, or bank. The Purchaser shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section 2.1(p) that may be due in connection with the transactions contemplated by this Agreement and the Transaction Documents.

Disclosure. Except for information regarding the transaction contemplated by this Agreement and the Transaction Documents and the terms and conditions hereof and thereof, the Company confirms that neither it nor any other Person acting on its behalf has provided any of the Purchasers or their agents or counsel with any information the Company believes constitutes material, non-public information. The Company understands and confirms that the Purchasers will rely on the foregoing representations in effecting transactions in securities of the Company. All disclosure provided to the Purchasers regarding the Company, its business and the transactions contemplated hereby, including the Schedules to this Agreement, furnished by or on behalf of the Company are true and correct and do not contain any untrue statement of a material fact or omit to state any material fact

necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading.

2.2 Representations and Warranties of the Purchasers. Each of the Purchasers, severally and not jointly, hereby represents and warrants to the Company as follows:

Organization; Authority. Such Purchaser, as applicable, is a corporation or a limited liability company or limited partnership duly formed, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation with the requisite power and authority, corporate or otherwise, to enter into and to consummate the transactions contemplated hereby and by this Agreement and the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The purchase by such Purchaser, as applicable, of the Note hereunder has been duly authorized by all necessary action on the part of such Purchaser. Each of this Agreement and the Transaction Documents has been duly executed and delivered by each Purchaser and constitutes the valid and legally binding obligation of each Purchaser, enforceable against such Purchaser in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights generally and to general principles of equity and except that rights to indemnification and contribution may be limited by Federal or state securities laws or public policy relating thereto.

Investment Intent. Such Purchaser is acquiring the Note for its own account and not with a present view to or for distributing or reselling the Note or the Conversion Securities or any part thereof or interest therein in violation of the Securities Act. Nothing contained herein shall be deemed a representation or warranty by such Purchaser to hold the Note or Conversion Securities for any period of time. Such Purchaser is acquiring the Note hereunder in the ordinary course of its business. Such Purchaser does not have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Note or Conversion Securities.

Purchaser Status. At the time such Purchaser was offered the Note and at the Closing Date and each date such Purchaser exercises the conversion option under the Note, (i) it was and will be an “accredited investor” as defined in Rule 501 under the Securities Act and (ii) such Purchaser, either alone or together with its representatives, had and will have such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Note and Conversion Securities. Such Purchaser is not a registered broker-dealer under Section 15 of the Exchange Act.

Reliance. Such Purchaser understands and acknowledges that (i) the Notes and Conversion Securities, are being offered and sold to the Purchaser without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act under Section 4(2) of the Securities Act or Regulation D promulgated thereunder and (ii) the availability of such exemption depends in part on, and the Company will rely upon the accuracy and truthfulness of, the representations set forth in this Section 2.2 and such Purchaser hereby consents to such reliance.

Information. Such Purchaser and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Note and Conversion Securities which have been requested by such Purchaser or its advisors. Such Purchaser and its advisors, if any, have been afforded the opportunity to ask questions of the Company. The Purchaser understands that its investment in the Note and Conversion Securities involves a significant degree of risk. Neither such inquiries nor any other investigation conducted by or on behalf of such Purchaser or its representatives or counsel shall modify, amend or affect such Purchaser's right to rely on the truth, accuracy and completeness of the Company's representations and warranties contained in this Agreement or the Transaction Documents.

Governmental Review. Such Purchaser understands that no United States Federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Notes or Conversion Securities.

Residency. Such Purchaser is a resident of the jurisdiction set forth immediately beside such Purchaser’s name on Schedule I hereto.

The Company acknowledges and agrees that the Purchasers make no representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 2.2.

ARTICLE III.

OTHER AGREEMENTS

3.1 Transfer Restrictions.

a. If any Purchaser should decide to dispose of the Note or Conversion Securities held by it, such Purchaser understands and agrees that it may do so (1) only pursuant to an effective registration statement under the Securities Act, (2) pursuant to an available exemption from the registration requirements of the Securities Act, (3) to an affiliate of the Purchaser, or (4) pursuant to Rule 144 promulgated under the Securities Act (“Rule 144”). In connection with any transfer of any Note or Conversion Securities other than pursuant to an effective registration statement, Rule 144, to the Company or to an affiliate of the Purchasers, the Company may require the transferor thereof to provide to the Company a written opinion of counsel experienced in the area of United States securities laws selected by the transferor, the form and substance of which opinion shall be customary for opinions of counsel in comparable transactions and reasonably acceptable to the Company, to the effect that such transfer does not require registration of such transferred securities under the Securities Act; provided, however, that if the Note or Conversion Securities may be sold pursuant to Rule 144(k), no written opinion of counsel shall be required from any Purchaser if such Purchaser provides reasonable assurances that such security can be sold pursuant to Rule 144(k). Notwithstanding the foregoing, the Company hereby consents to and agrees to register any transfer by any Purchaser to an affiliate of such Purchaser, provided that the transferee certifies to the Company that it is an “accredited investor” as defined in Rule 501(a) under the Securities Act. Any such transferee shall agree in writing to be bound by the terms of this Agreement and the Transaction Documents and shall have the

rights of a Purchaser under this Agreement and the Transaction Documents. The Company shall not require an opinion of counsel in connection with the transfer of the shares of Note and Conversion Securities to an affiliate of a Purchaser.

b. The Purchasers agree to the imprinting, so long as is required by this Section 3.1(b), of the following legend on the Note and Conversion Securities :

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

3.2 Stop Transfer Instruction. The Company may not make any notation on its records or give instructions to any transfer agent of the Company which enlarge the restrictions on transfer set forth in Section 3.1.

3.3 (Intentionally Deleted)

3.4 Furnishing of Information. As long as any Purchaser owns the Note the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. Upon the request of any such Person, the Company shall deliver to such Person a written certification of a duly authorized officer as to whether it has complied with the preceding sentence. As long as any Purchaser owns the Note, if the Company is not required to file reports pursuant to such laws, it will prepare and furnish to the Purchasers and make publicly available in accordance with Rule 144(c) such information as is required for the Purchasers to sell the Company Common Stock under Rule 144.

3.5 Integration. The Company shall not, and shall use its best efforts to ensure that no affiliate of the Company shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Notes hereunder in a manner that would require the registration under the Securities Act of the sale of the Notes to the Purchasers, or that would be integrated with the offer or sale of the Notes for purposes of the rules and

regulations of the Nasdaq National Market, if such integration would result in a violation of any such rule or regulation.

3.6 Use of Proceeds. The Company shall use the net proceeds from the sale of the Notes hereunder for working capital purposes.

3.7 Best Efforts. Each of the parties hereto shall use its best efforts to satisfy each of the conditions to be satisfied by it as provided in Article IV of this Agreement.

ARTICLE IV.

CONDITIONS

4.1 Closing.

Conditions Precedent to the Obligation of the Company to Sell the Notes. The obligation of the Company to sell the Notes is subject to the satisfaction or waiver by the Company, at or before the Closing Date, of each of the following conditions:

Accuracy of the Purchasers’ Representations and Warranties. The representations and warranties of each Purchaser in this Agreement shall be true and correct in all material respects as of the date when made and as of the Closing Date;

Performance by the Purchasers. Each Purchaser shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by such Purchaser at or before the Closing Date;

No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement or the Transaction Documents; and

Conditions Precedent to the Obligation of the Purchasers to Purchase the Notes at the Closing. The obligation of each Purchaser hereunder to acquire and pay for the Note at the Closing is subject to the satisfaction or waiver by Purchaser, at or before the Closing Date, of each of the following conditions:

(i) Accuracy of the Company’s Representations and Warranties. The representations and warranties of the Company set forth in this Agreement shall be true and correct in all respects as of the date when made and as of the Closing Date;

(ii) Performance by the Company. The Company shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or before the Closing Date;

(iii) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement and the Transaction Documents;

(iv) Required Approvals. All Required Approvals shall have been obtained;

ARTICLE V.

INDEMNIFICATION

5.1 Indemnification. The Company will indemnify and hold the Purchasers and their directors, officers, shareholders, partners, employees and agents (each, a “Purchaser Party”) harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys' fees and costs of investigation that any such Purchaser Party may suffer or incur as a result of or relating to (a) any misrepresentation, breach or inaccuracy, or any allegation by a third party that, if true, would constitute a breach or inaccuracy, of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents; or (b) any cause of action, suit or claim brought or made against such Purchaser Party and solely arising out of or solely resulting from the execution, delivery, performance or enforcement of this Agreement or any of the other Transaction Documents. The Company will reimburse such Purchaser for its reasonable legal and other expenses (including the cost of any investigation, preparation and travel in connection therewith) incurred in connection therewith, as such expenses are incurred. Notwithstanding the foregoing, the Company shall not be required to indemnify any the Purchaser under the terms of this Article V with respect to any claim or violation for which indemnification is expressly excluded under the Registration Rights Agreement.

ARTICLE VI.

MISCELLANEOUS

6.1 Entire Agreement. This Agreement, together with the Exhibits and Schedules hereto and the Transaction Documents contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters.

6.2 Notices. Whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties by another, or whenever any of the parties desires to give or serve upon another any such communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and either shall be delivered in person with receipt acknowledged or by registered or certified mail, return receipt requested, postage prepaid, or by telecopy and confirmed by telecopy answerback addressed as follows:

If to the Company:

Level 8 Systems, Inc.

1433 Highway 34, Building C

Farmingdale, New Jersey 07727

Attn: John P. Broderick

If to the Purchasers: To the address set forth on the counterpart signature page of such Purchaser, or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration or other communication hereunder shall be deemed to have been duly given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 6:30 p.m. (New York City time) on a business day, (b) the next business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a business day or later than 6:30 p.m. (New York City time) on any business day, (c) the business day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given. As used herein, a “business day” means any day except Saturday, Sunday and any day which shall be a federal legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

6.3 Amendments; Waivers. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by both the Company and each of the Purchasers or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter.

6.4 Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.

6.5 References. References herein to Sections are to Sections of this Agreement, unless otherwise expressly provided.

6.6 Successors and Assigns; Assignability. Neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof shall be assignable by either the Company or the Purchasers without the prior written consent of the other party. In the event such prior written consent is obtained and this Agreement is assigned by either party, all covenants contained herein shall bind and inure to the benefit of the parties hereto and their respective successors and assigns.

6.7 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.

6.8 Governing Law; Waiver of Jury Trial. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to the principles of conflicts of law thereof. Each party agrees that all proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) (each a “Proceeding”) shall be commenced exclusively in the state and federal courts sitting in the State of Delaware. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the State of Delaware for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of the any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such Proceeding is improper. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If either party shall commence a Proceeding to enforce any provisions of a Transaction Document, then the prevailing party in such Proceeding shall be reimbursed by the other party for its attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding.

6.9 Survival. The representations, warranties, agreements and covenants contained herein shall survive following the Closing.

6.10 Counterparts; Facsimile Signatures. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof.

6.11 (Intentionally Deleted)

6.12 Publicity. Neither the Company nor the Purchasers shall issue any press release or make any public disclosure regarding the transactions contemplated hereby unless such press release or public disclosure is approved by the other party hereto in advance. Notwithstanding the foregoing, each of the parties hereto may, in documents required to be filed by it with the SEC or other regulatory bodies, make such statements with respect to the transactions contemplated hereby as each may be advised by counsel is legally necessary or advisable, and may make such disclosure as it is advised by its counsel is required by law.

6.13 Severability. In case any one or more of the provisions of this Agreement shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute therefore, and upon so agreeing, shall incorporate such substitute provision in this Agreement.

6.14 Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

6.15 (Intentionally Deleted)

6.16 Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers and the Company will be entitled to specific performance under this Agreement or the Transaction Documents. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.

6.17 Independent Nature of Purchasers’ Obligations and Rights. The obligations of each Purchaser under this Agreement or any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser under this Agreement or any Transaction Document. Nothing contained herein or in any Transaction Document, and no action taken by any Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by this Agreement or any the Transaction Document. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose.

6.18 Fees and Expenses. Each Party shall pay the fees and expenses of its advisers, accountants and other experts.

IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized persons as of the day and year first above written.

LEVEL 8 SYSTEMS, INC.

By:
	John P. Broderick
	Chief Operating and Financial Officer

PURCHASERS

[COUNTERPART SIGNATURE PAGES FOLLOW]

IN WITNESS WHEREOF, the undersigned Purchaser has caused this Securities Purchase Agreement to be duly executed by its respective authorized persons as of the day and year first above written.

PURCHASER:

	(Print or Type Name of Purchaser)
By:
Name:
Title:

RESIDENCE:

ADDRESS:

Telephone:
Facsimile:
Attention:

AGGREGATE SUBSCRIPTION AMOUNT:

Face Value of Promissory Note:_______________________________________

[PURCHASER SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]

EXHIBIT “A”

Term Sheet

SCHEDULE I

Name and Address of Purchaser	Residence	Face Value of Promissory Note	Warrants @ $.002	Early Adopter Warrants 2:1
Advanced Systems Europe B.V. Azrieli Center 3, Triangle Bldg. 42^nd Floor Tel Aviv 67023 Israel	Israel	88,699.70	9,074,885	1,773,994
Douglas W. Baena 33 Twin Lane North Wantagh, NY 11793	NY	5,405.40	648,648
Marvin Bank The Rittenhouse, #2502 210 West Rittenhouse Square Philadelphia, PA 19103	PA	13,113.20	1,702,824	262,264
Jerald & Sara Berger 95 Thales Blvd. Bergenfield, NJ 07621	NJ	1,000.00	136,549
Dr. Richard H. Blanck Nine Hickory Road Manhasset Hills, NY 11040	NY	2,702.70	324,324
Larry Blisko 46 Mariner Way Monsey, NY 10952	PA	1,300.00	177,513
Lee V. Brower 1330 Vincenzo Drive Toms River, NJ 08753	NJ	4,000.00	546,195
Brown Simpson Partners I, Ltd. 152 West 57^th Street, 21^st Floor New York, NY 10019	NY	215,000.00	28,837,851	4,300,000
Joseph A. Calandra 436 Flanders Road Southington, CT 06489	CT	5,000.00	682,744
Narinder Chugh 26-20 Bayside Lane Flushing, NY 11358	NY	2,702.70	324,324
Conrad Clement 441 Orange Blvd. Sanford, FL 31771	FL	16,180.20	1,941,624

A -1

SCHEDULE I Continued

Name and Address of Purchaser	Residence	Face Value of Promissory Note	Warrants @ $.002	Early Adopter Warrants 2:1
Leonard J. Corwin, MD 90 Millburn Avenue Millburn, NJ 07041	NJ	1,111.10	133,332	22,222
Leonard J. Corwin, M.D. 90 Millburn Avenue Millburn, NJ 07041	NJ	10,000.00	1,365,488
Robert J. Davis, Jr. 35 Bristol Place Bay Head, NJ 08742	NJ	5,000.00	682,744
Delphi Partners, Ltd. 45 Sparks Avenue Nantucket, MA 02554	MA	10,203.49	2,201,136	351,372
Stuart Ditchek 1834 East 28^th Street Brooklyn, NY 11229	NY	1,000.00	136,549
Diamond Investments II, LLC 149 Knob Hill Road Mooresville, NC 28117	NC	1,333.30	159,996
C. Glen & Joan O. Dugdale 3609 Centerville Road Greenville, DE 19807	DE	26,937.78	3,749,596	559,962
William C. Dugdale 1909 Mt. Vernon Avenue Wilmington, DE 19806	DE	5,000.00	682,744
Devon D. Hathaway 6206 Blackburn Lane Baltimore, MD 21212	MD	5,000.00	682,744
Priscilla R. Dugdale 250 Fairview Road Coatesville, PA 19320	PA	10,000.00	1,365,488

A -2

SCHEDULE I Continued

Name and Address of Purchaser	Residence	Face Value of Promissory Note	Warrants @ $.002	Early Adopter Warrants 2:1
Ike Dweck 46 Ocean Avenue Deal, NJ 07723	NJ	4,886.11	1,146,457	115,394
Ike Dweck 46 Ocean Avenue Deal, NJ 07723	NJ	5,000.00	682,744
Alice Emerson 39 New Street P.O. Box 206 Siasconset, MA 02564	MA	1,388.90	166,668
Harold Falik 562 Winthrop Road Teaneck, NJ 07666	NJ	2,500.00	341,372
Marc Feder 37 Harborview West Lawrence, NY 11559	NY	1,644.70	326,604	32,894
Irving Forman 802 Westwood Avenue Staten Island, NY 10314	NY	3,289.50	653,228
Murray Forman 291 Ocean Avenue Lawrence, NY 11559	NY	15,776.51	3,099,521
Don L. Freeman The Touraine #700 1520 Spruce Street Philadelphia, PA 19102	PA	4,054.10	486,492
Aaron Friedman 24B Remsen Avenue Monsey, NY 10952	NY	1,000.00	136,549
Mark Friedman 17291 St. James Court Boca Raton, FL 33496	FL	3,378.40	405,408	67,568
Sidney Gable 111 Joseph Avenue Staten Island, NY 10314	NY	1,644.70	326,604

A -3

SCHEDULE I CONTINUED

Name and Address of Purchaser	Residence	Face Value of Promissory Note	Warrants @ $.002	Early Adopter Warrants 2:1
Anna Gertz 1419 E. 27^th Street Brooklyn, NY 11210	NY	1,000.00	136,549
Eugene Garb 30 Londonberry Drive Holmdel, NJ 07753	NJ	1,000.00	136,549
William Gononsky 653 Thames Blvd. Teaneck, NJ 07666	NJ	1,000.00	136,549
Jeffrey Grodko 1865 E. 28^th Street Brooklyn, NY 11229	NY	5,000.00	682,744
Phillip Grodko 3926 Bedford Avenue Brooklyn, NY 11229	NY	1,500.00	204,823
Sandra Grodko 596 South Forest Drive Teaneck, NJ 07666	NJ	15,000.00	1,800,000	300,000
Sandra Grodko 596 South Forest Drive Teaneck, NJ 07666	NJ	10,000.00	1,365,488
Steven Grodko 596 South Forest Drive Teaneck, NJ 07666	NJ	1,250.00	150,000	25,000
Leonard Grunstein 665 South Forest Drive Teaneck, NJ 07666	NJ	8,000.00	1,092,391
Haines Family Associates L.P. 3 Lucas Lane Freehold, NJ 07728	NJ	14,289.50	1,973,228	285,790
Haines Family Associates L.P. 3 Lucas Lane Freehold, NJ 07728	NJ	50,000.00	6,827,441
Roger Haines 3 Lucas Lane Freehold, NJ 07728	NJ	10,000.00	1,365,488
Leona Husarsky 1730 E. 27^th Street Brooklyn, NY 11229	NY	1,000.00	136,549
Joseph Huszcza 53 Mada Avenue Staten Island, NY 10310	NY	1,000.00	136,549

A -4

SCHEDULE I CONTINUED

Name and Address of Purchaser	Residence	Face Value of Promissory Note	Warrants @ $.002	Early Adopter Warrants 2:1
Joel Kaliroff 155 Kentucky Way Freehold, NJ 07728	NJ	5,000.00	682,744
David Katz 583 Winthrop Road New Jerey, NJ 07666	NJ	1,000.00	136,549
Richard Keates, M.D. 99 N. Main Street New Hope, PA 18938	PA	1,333.30	159,996	26,666
Richard Keates, M.D. 99 N. Main Street New Hope, PA 18938	PA	15,000.00	2,048,232
Manuel Koitz P.O. Box 346 Oakhurst, NJ 07755	NJ	7,000.00	955,842
Paul & Marjorie Krubiner 79 Golf View Terrace Fairfield, CT 06825	CT	2,702.70	324,324
Mark & Carolyn Landis 251 Crandon Blvd. Townhouse #161 Key Biscayne, FL 33149	FL	134,527.00	18,860,167	3,057,206
Philip C. Leavitt 7508 N. Red Ledge Drive Paradise Valley, AZ 85253	AZ	6,756.80	810,816
Arthur Lerner 3852 Shelly Road Huntingdon Valley, PA 19006	PA	1,351.40	162,168
Liraz Systems Ltd. 8 Maskit Street P.O. Box 2062 Herzlia 46120 Israel	Israel	8,223.70	1,633,059	164,474
Anna Loboda 1 Roseld Avenue P.O. Box 75 Deal, NJ 07723	NJ	2,000.00	273,098
David K. & Gina W. Loebell 20 Meadowbrook Drive East Windsor, NJ 08520	NJ	2,000.00	273,098
Estate of Martin Lustgarten 2900 Route 42 Sicklerville, NJ 08081	NJ	21,121.40	2,534,568	422,428

A -5

SCHEDULE I CONTINUED

Name and Address of Purchaser	Residence	Face Value of Promissory Note	Warrants @ $.002	Early Adopter Warrants 2:1
Scott Lustgarten 418 Hillbrook Road Bryn Mawr, PA 19010	PA	1,644.70	326,604	32,894
Scott Lustgarten 418 Hillbrook Road Bryn Mawr, PA 19010	PA	15,000.00	2,048,232
Earle I. Mack Family Trust II 2115 Linwood Avenue Fort Lee, NJ 07024	NJ	4,166.70	500,004	83,334
Earle I. Mack Family Trust II 2115 Linwood Avenue Fort Lee, NJ 07024	NJ	10,000.00	1,365,488
Fred Mack 2115 Linwood Avenue Fort Lee, NJ 07024	NJ	63,288.30	7,594,596	1,265,766
Fred Mack 4/30/92 Trust 2115 Linwood Avenue Fort Lee, NJ 07024	NJ	4,000.60	721,621	80,012
Fred Mack Trust (Hailey Mack) 2115 Linwood Avenue Fort Lee, NJ 07024	NJ	416.70	50,004	8,334
Fred Mack Trust (Jason Mack) 2115 Linwood Avenue Fort Lee, NJ 07024	NJ	416.70	50,004	8,334
Bruce D. Miller 45 Sparks Avenue Nantucket, MA 02554	MA	17,502.31	3,802,272	602,744
Bruce D. Miller 45 Sparks Avenue Nantucket, MA 02554	MA	15,000.00	2,048,232
Luciano Morelli 28 Mountainside Drive Morris Township, NJ 07960	NJ	30,000.00	4,096,465
Richard Nager 433 Gulf Street Milford, CT 06460	CT	3,289.50	653,228	65,790
Joseph A. & Michele K. Nappi 3267 Regal Crest Drive Longwood, FL 32779	FL	10,000.00	1,365,488
North Sound Legacy 53 Forest Avenue, Suite 203 Old Greenwich, CT 06870	CT	1,261.24	745,173	106,608

A -6

SCHEDULE I CONTINUED

Name and Address of Purchaser	Residence	Face Value of Promissory Note	Warrants @ $.002	Early Adopter Warrants 2:1
North Sound Legacy Institutional 53 Forest Avenue, Suite 203 Old Greenwich, CT 06870	CT	19,549.27	8,832,636	959,484
North Sound Legacy International 53 Forest Avenue, Suite 203 Old Greenwich, CT 06870	CT	42,251.64	14,907,771	1,006,126
Bruce Orlofsky 246 Elm Street West Hempstead, NY 11552	NY	1,000.00	136,549
Gary Orlofsky 18 Voyager Court Monsey, NY 10952	NY	1,200.00	163,859
Martin Orlofsky Family Trust 487 Langley Avenue West Hempstead, NY 11552	NY	2,500.00	341,372
Jeffrey O. Perl 1646 Ruth Road Madison, VA 22727	VA	5,000.00	682,744
Anthony Pizi 16 Blackhawk Court Princeton Junction, NJ 08550	NJ	40,000.00	7,443,841	1,166,666
Anthony Pizi 16 Blackhawk Court Princeton Junction, NJ 08550	NJ	200,000.00	26,924,444
Anthony Pizi 16 Blackhawk Court Princeton Junction, NJ 08550	NJ	150,000.00	20,623,795
Milton H. Polin Derech Hachoresh 34 Jerusalem 97278 Israel	Israel	1,000.00	136,549
Israel M. Popack 10 Hoover Avenue W. Orange, NJ 07052-2319	NJ	1,000.00	136,549
Jonathan P. Robinson 12 Great Woods Lane Malvern, PA 19355	PA	1,388.90	166,668
Larry Rutstein 2356 NW 60^th Street Boca Raton, FL 33496	FL	3,378.40	405,408	67,568

A -7

SCHEDULE I CONTINUED

Name and Address of Purchaser	Residence	Face Value of Promissory Note	Warrants @ $.002	Early Adopter Warrants 2:1
Steven Schneider 255 W. 94 St., Apt. 95 New York, NY 10025	NY	2,702.70	324,324
Kenneth Schwartz 192 Fen Way Syasset, NY 11791	NY	1,000.00	136,549
SDS Capital 53 Forest Avenue, Suite 203 Old Greenwich, CT 06870	CT	63,062.15	20,716,485	2,107,068
Joseph Shelanski 710 Mill Creek Road Gladwyne, PA 19035	PA	3,889.68	983,824
Dr. Philip Simkovitz 78 North Park Avenue Easton, CT 06612	CT	4,216.20	505,944
James Simpson 53 Coronado Pointe Laguna Niguel, CA 92677	CA	1,666.70	200,004
Richard F. Siracusa 57 Mallard Road Middletown, NJ 07748	NJ	5,000.00	682,744
Sobol , Tziporah 2701 Avenue P Brooklyn, NY 11229	NY	2,000.00	273,098
Bernard Spain 233 S. 6^th Street #2505 Philadelphia, PA 19106	PA	27,027.00	3,243,240
David Spivak 1 Island Drive, Unit 21 Norwalk, CT 06855	CT	1,111.10	133,332
James M. Stevens 8818 Ashridge Park Drive Spring, TX 77379	TX	27,502.00	4,592,891	603,056
Frank Tamberelli 2515 Arbroath Trace Gastonia, NC 28054	NC	657.90	130,646
William & Barbara Turner 393 N. Lake Shore Drive Fontana, WI 53125	WI	2,000.00	240,000	40,000
Eli Robert Vegh 749 Westwood Avenue Staten Island, NY 10314	NY	1,644.70	326,604

A -8

SCHEDULE I CONTINUED

Name and Address of Purchaser	Residence	Face Value of Promissory Note	Warrants @ $.002	Early Adopter Warrants 2:1
Stanley Waintraub 480 Winthrop Road Teaneck, NJ 07666	NJ	1,000.00	136,549
Michael Weiss 25 Briarwood Lane Lawrence, NY 11559	NY	3,964.90	682,578	79,298
Hervey Weitzman 68 North Park Avenue Easton, CT 06612	CT	1,388.90	166,668	27,778
Hervey Weitzman 68 North Park Avenue Easton, CT 06612	CT	5,000.00	682,744
Hal Wenig 141-22 73^rd Terrace Kew Garden Hills, NY 11367	NY	2,500.00	341,372
Jacqueline Whyte 2007 Aspen Circle Springfield, PA 19064	PA	1,486.50	178,380
James Wilkins 21 Clark Road Woodbridge, CT 06525	CT	1,388.90	166,668
Roger Wittenbach 10 Woodward Lane Latherville, MD 21093	MD	1,388.90	166,668
Matthew Yaakovian Dugdale Chariable Remainder Trust 3609 Centerville Road Greenville, DE 19807	DE	2,777.80	333,336	55,556
Roselyn Zelman 1649 E. 28^th Street Brooklyn, NY 11229	NY	3,000.00	409,646

A -9

CICERO, INC.

2005 EMPLOYEE STOCK OPTION PLAN

TABLE OF CONTENTS

		Page
ARTICLE I.	PURPOSE	1
ARTICLE II.	DEFINITIONS	1
ARTICLE III.	ADMINISTRATION	3
ARTICLE IV.	SHARE AND OTHER LIMITATIONS	5
ARTICLE V.	ELIGIBILITY	6
ARTICLE VI.	STOCK OPTION GRANTS	6
ARTICLE VII.	NON-TRANSFERABILITY	9
ARTICLE VIII.	CHANGE IN CONTROL PROVISIONS	9
ARTICLE IX.	TERMINATION OR AMENDMENT OF PLAN	11
ARTICLE X.	UNFUNDED PLAN	11
ARTICLE XI.	GENERAL PROVISIONS	11
ARTICLE XII.	EFFECTIVE DATE OF PLAN	13
ARTICLE XIII.	TERM OF PLAN	13
ARTICLE XIV.	NAME OF PLAN	13

CICERO, INC.

2005 EMPLOYEE STOCK OPTION PLAN

ARTICLE I

PURPOSE

The purpose of this Cicero, Inc. 2005 Employee Stock Option Plan (the “Plan”) is to enhance the profitability and value of Cicero, Inc. (the “Company”) for the benefit of its shareholders by enabling the Company to offer certain employees and Consultants (as defined herein) of the Company and its Subsidiaries (as defined herein) and non-employee directors of the Company stock based incentives in the Company, thereby creating a means to raise the level of stock ownership by employees, Consultants and non-employee directors in order to attract, retain and reward such individuals and strengthen the mutuality of interests between such individuals and the Company’s shareholders.

ARTICLE II

DEFINITIONS

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

2.1. “Board” shall mean the Board of Directors of the Company.

2.2. “Cause” shall mean, with respect to a Participant’s Termination of Relationship, unless otherwise determined by the Committee at grant, willful misconduct in connection with the Participant’s employment of consultancy or willful failure to perform his or her employment of consultancy responsibilities in the best interests of the Company (including, without limitation, breach by the Participant of any provision of any employment, non-disclosure, non-competition or other similar agreement between the Participant and the Company), as determined by the Committee, which determination shall be final, conclusive and binding. With respect to a Participant’s Termination of Directorship, Cause shall mean any act or failure to act that constitutes “cause” for removal of a director under applicable New Jersey law.

2.3. “Change in Control” shall have the meaning set forth in Article VIII.

2.4. “Code” shall mean the Internal Revenue Code of 1986, as amended. Any reference to any section of the Code shall also be a reference to any successor provision.

2.5. “Committee” shall mean a committee of the Board appointed from time to time by the Board, which Committee shall be intended to consist of three or more directors who are non-employee directors as defined in Rule 16b-3 (as defined herein) and outside directors as defined under Section 162(m) of the Code (as defined herein). If for any reason the appointed Committee does not meet the requirements of Rule 16b-3 or Section 162(m) of the Code, such noncompliance with the requirements of Rule 16b-3 or Section 162(m) of the Code shall not affect the validity of the awards, grants, interpretations or other actions of the Committee. Notwithstanding the forgoing, with respect to grants of Options to non-employee directors and any action hereunder relating to Options held by non-employee directors, the Committee shall mean the Board. If and to the extent that no Committee exists which has the authority to administer the Plan, the functions of the Committee shall be exercised by the Board.

2.6. “Common Stock” means the Common Stock, par value $0.001 per share, of the Company.

2.7. “Consultant” means any advisor or consultant to the Company or its subsidiaries who is eligible pursuant Article V to be granted Options under this Plan.

2.8. “Disability” shall mean total and permanent disability, as defined in Section 22(e)(3) of the Code.

2.9. “Effective Date” shall mean the effective date of the Plan as defined in Article XII.

2.10. “Eligible Employee” shall mean the employees of the Company and its subsidiaries who are eligible pursuant to Article V to be granted Options under this Plan.

2.11. “Exchange Act” shall mean the Securities Exchange Act of 1934.

2.12. “Fair Market Value” for purposes of this Plan, unless otherwise required by an applicable provision of the Code or any regulations issued thereunder, shall mean, as of any date, the last sales price reported for the Common Stock on the applicable date (i) as reported by the principal national securities exchange in the United States on which it is then traded, or (ii) if not traded on any such national securities exchange, as quoted on an automated quotation system sponsored by the National Association of Securities Dealers. If the Common Stock is not readily tradable on a national securities exchange or any system sponsored by the National Association of Securities Dealers, its Fair Market Value shall be set in good faith by the Committee. For purposes of the grant of any Option, the applicable date shall be the date for which the last sales price is available at the time of the grant.

2.13. “Good Reason” shall mean, with respect to a Participant’s Termination of Relationship, unless otherwise determined by the Committee at grant, a voluntary termination due to “good reason,” as the Committee, in its sole discretion, decides to treat as a Good Reason termination. Notwithstanding the foregoing, with respect to a Participant’s Termination of Employment, Good Reason shall mean, in the case where there is an employment agreement between the Company or a Subsidiary and the Participant in effect at the time of the grant that defines “good reason” (or words of like import), a termination that is or would be deemed “good reason” (or words of like import) as defined under such employment agreement at the time of grant.

2.14. “Incentive Stock Option” shall mean any Stock Option awarded under this Plan intended to be, and designated as, an “Incentive Stock Option” within the meaning of Section 422 of the Code.

2.15. “Non-Qualified Stock Option” shall mean any Stock Option awarded under this Plan that is not an Incentive Stock Option.

2.16. “Participant” shall mean the following persons to whom an Option has been granted pursuant to this Plan: (i) Eligible Employees of the Company or its Subsidiaries; (ii) Consultants of the Company or its Subsidiaries; and (iii) non-employee directors of the Company.

2.17. “Retirement” with respect to a Participant’s Termination of Relationship shall mean a Termination of Relationship without Cause from the Company and/or a Subsidiary by a Participant who has attained (i) at least the age of sixty-five (65) or (ii) such earlier date after age fifty-five (55) as approved by the Committee with regard to such Participant. With respect to a Participant’s Termination of Directorship, Retirement shall mean the failure to stand for reelection or the failure to be reelected after a Participant has attained the age of sixty-five (65).

2.18. “Rule 16b-3” shall mean Rule 16b-3 under Section 16(b) of the Exchange Act as then in effect or any successor provision.

2.19. “Section 162(m) of the Code” shall mean the exception for performance based compensation under Section 162(m) of the Code and any Treasury regulations thereunder.

2.20. “”Stock Options” or “Option” shall mean any option to purchase shares of Common Stock granted to Eligible Employees, Consultants or non-employee directors pursuant to Article VI.

2.21. “Subsidiary” shall mean any corporation that is defined as a subsidiary corporation in Section 424(f) of the Code.

2.22. “Ten Percent Shareholder” shall meant a person owning Common Stock of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company as defined in Section 422 of the Code.

2.23. “Termination of Consultancy” shall mean (i) an individual is no longer acting as a Consultant to the Company or a Subsidiary or (ii) when an entity which is retaining a Participant as a Consultant ceases to be a Subsidiary, unless the Participant thereupon is retained as a Consultant by the Company or another Subsidiary.

2.24. “Termination of Directorship” shall mean, with respect to a non-employee director, that the non-employee director has ceased to be a director of the Company for any reason.

2.25. “Termination of Employment” shall mean (i) a termination of service (for reasons other than a military or personal leave of absence granted by the Company) of a Participant from the Company and its Subsidiaries or (ii) when an entity which is employing a Participant ceases to be a Subsidiary, unless the Participant thereupon becomes employed by the Company or another Subsidiary.

2.26. “Termination of Relationship” shall mean a Termination of Employment or a Termination of Consultancy, as applicable.

2.27. “Transfer” or “Transferred” shall mean anticipate, alienate, attach, sell, assign, pledge, encumber, charge or otherwise transfer.

2.28. “Withholding Election” shall have the meaning set forth in Section 11.4.

ARTICLE III

ADMINISTRATION

3.1. The Committee. The Plan shall be administered and interpreted by the Committee.

3.2. Awards. The Committee shall have full authority to grant Stock Options, pursuant to the terms of this Plan. In particular, the Committee shall have the authority:

(a) to select the Eligible Employees, Consultants and non-employee directors to whom Stock Options may from time to time be granted hereunder;

(b) to determine whether and to what extent Stock Options are to be granted hereunder to one or more Eligible Employees, Consultants or non-employee directors;

(c) to determine, in accordance with the terms of the Plan, the number of shares of Common Stock to be covered by each Stock Option granted to an Eligible Employee, Consultant or non-employee director;

(d) to determine the terms and conditions, not inconsistent with the terms of this Plan, of any Stock Options granted hereunder to an Eligible Employee, Consultant or non-employee director (including, but not limited to, the share price, any restriction or limitation, any vesting schedule or acceleration thereof, or any forfeiture restrictions or waiver thereof, and the share of Common Stock relating thereto, based on such factors, if any, as the Committee shall determine, in its sole discretion);

(e) to determine whether and under what circumstances a Stock Option may be settled in cash and/or Common Stock under Subsection 6.3(d);

(f) to determine whether, to what extent and under what circumstances to provide loans (which shall be on a recourse basis and shall bear a reasonable rate of interest) to Eligible Employees, Consultants or non-employee directors in order to exercise Options under the Plan; and

(g) to determine whether to require Eligible Employees, Consultants, and non-employee directors, as a condition of the granting of any Option, to not sell or otherwise dispose of shares acquired pursuant to the exercise of an Option for a period of time as determined by the Committee, in its sole discretion, following the date of the acquisition of such Option.

3.3. Guidelines. Subject to Article IX hereof, the Committee shall have the authority to:

(a) adopt, alter and repeal such administrative rules, guidelines and practices governing this Plan and perform all acts, including the delegation of its administrative responsibilities, as it shall, from time to time, deem advisable;

(b) construe and interpret the terms and provisions of this Plan and any Option granted under this Plan (and any agreements relating thereto); and

The Committee may correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any agreement relating thereto in the manner and to the extent it shall deem necessary to carry this Plan into effect, but only to the extent any such action would be permitted under the applicable provisions of Rule 16b-3 (if any) and the applicable provisions of Section 162(m) of the Code (if any). The Committee may adopt special guidelines and provisions for persons who are residing in, or subject to, the taxes of, countries other than the United States to comply with applicable tax and securities laws. If and solely to the extent applicable, this Plan is intended to comply with Rile 16b-3 and Section 162(m) of the Code and shall be limited, construed and interpreted in a manner so as to comply therewith.

3.4. Decisions Final. Any decision, interpretation or other action made or taken in good faith by or at the direction of the Company, the Board or the Committee (or any of its members) arising out of or in connection with the Plan shall be within the absolute discretion of all and each of them, as the case may be, and shall be final, conclusive and binding on the Company and all employees, directors, consultants and Participants and their respective heirs, executors, administrators successors and assigns.

3.5. Reliance on Counsel. The Company, the Board or the Committee may consult with legal counsel, who may be counsel for the Company or other counsel, with respect to its obligations or duties hereunder, or with respect to any action or proceeding or any question of law, and shall not be liable with respect to any action taken or omitted by it in good faith pursuant to the advice of such counsel.

3.6. Procedures. If the Committee is appointed, the Board shall designate one of the member of the Committee as chairman and the Committee shall hold meetings, subject to the Bylaws of the Company, at such times and places as it shall deem advisable. A majority of the Committee members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. Any decision or determination reduced to writing and singed by all Committee members in accordance with the Bylaws of the Company shall be fully effective as if it had been made by a vote at a meeting duly called and held. The Committee shall keep minutes of its meetings and shall make such rules and regulations for the conduct of its business as it shall deem advisable.

3.7. Designation of Advisors - Liability.

(a) The Committee may designate employees of the Company and professional advisors to assist the Committee in the administration of the Plan and may grant authority to employees to execute agreements or other documents on behalf of the Committee.

b) The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion received from any such counsel or consultant and any computation received from such consultant or agent. Expenses incurred by the Committee or Board in the engagement of any such counsel, consultant or agent shall be paid by the Company. The Committee, its members and any person designated pursuant to paragraph 3.7.1 above shall not be liable for any action or determination made in good faith with respect to the Plan. To the maximum extent permitted by applicable law, no officer or former officer of the Company or member or former member of the Committee or the Board shall be liable of any action or determination made in good faith with respect to the Plan or any Stock Option granted under it. To the maximum extent permitted by applicable law and the Certificate of Incorporation and Bylaws of the Company and to the extent not covered by insurance, each officer or former officer and member and former member of the Committee or the Board shall be indemnified and held harmless by the Company against any cost or expense (including reasonable fees of counsel reasonably acceptable to the Company) or liability (including any sum paid in settlement of a claim with the approval of the Company), and advanced amounts necessary to pay the foregoing at the earliest time and to the fullest extent permitted, arising out of any act or omission to act in connection with the Plan, except to the extent arising out of such officer’s or former officer’s, member’s or former member’s own fraud or bad faith. Such indemnification shall be in addition to any rights of indemnification the officers, directors or members or former officers, director or members may have under applicable law or under the Certificate of Incorporation or Bylaws of the Company or Subsidiary. Notwithstanding anything else herein, this indemnification will not apply to the actions or determinations made by an individual with regard to Stock Options granted to him or her under this Plan.

ARTICLE IV

SHARE AND OTHER LIMITATIONS

4.1. Shares.

(a) General Limitation. The aggregate number of shares of Common Stock which may be issued under this Plan with respect to which Stock Options may be granted shall not exceed 3,000,000 shares (subject to increase or decrease pursuant to Section 4.2) which may be either authorized and unissued Common Stock or Common Stock held or acquired for the treasury of the Company. If any Stock Option granted under this Plan expires, terminates or is cancelled for any reason without having been exercised in full or the Company repurchases any Stock Option pursuant to Section 6.3(f), the number of shares of Common Stock underlying the repurchased Option, and/or the number of shares of Common Stock underlying any unexercised Option shall again be available for the purposes of Options under the Plan.

(b) Individual Participant Limitations. The maximum number of shares of Common Stock subject to any Option which may be granted under this Plan to each Participant shall not exceed 500,000 shares (subject to any increase or decrease pursuant to Section 4.2) during any fiscal year of the Company.

4.2. Changes.

(a) The existence of the Plan and the Options granted hereunder shall not affect in any way the right or power of the Board or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation of the Company or any Subsidiary, any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting Common Stock, the dissolution or liquidation of the Company or any Subsidiary, any sale or transfer of all or part of the assets or business or any other corporate act of proceeding.

(b) In the event of any such change in the capital structure or business of the Company by reason of any stock dividend or distribution, stock split or reverse stock split, recapitalization, reorganization, merger, consolidation, split-up, combination or exchange of shares, distribution with respect to its outstanding Common Stock or capital stock other than Common Stock, sale or transfer of all or part of the assets or business, reclassification of its capital stock, or any similar changes affecting the Company’s capital structure or business and the Committee determines an adjustment is appropriate under the Plan, the number and kind of shares or other property (including cash) to be issued upon exercise of an outstanding Option and the purchase price thereof shall be appropriately adjusted consistent with such change in such manner as the Committee may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, Participants under this Plan or as otherwise necessary to reflect the change, and, any such adjustment determined by the Committee shall be final, conclusive and binding on the Company and all Participants and employees and their respective heirs, executors, administrators, successors and assigns.

(c) Fractional Shares of Common Stock resulting from any adjustment in Options pursuant to this Article IV shall be aggregated until, and eliminated at, the time of exercise by rounding down from fractions less than one-half (1/2) and rounding up for fractions equal to or greater than one-half (1/2). No cash settlements shall be made with respect to fractional shares eliminated by rounding. Notice of any adjustment shall be given by the Committee to each Participant whose Option has been adjusted and such adjustment (whether or not such notice is given) shall be effective and binding for all purposes of the Plan.

(d) In the event of a merger or consolidation in which the Company is not the surviving entity or in the event of any transaction that results in the acquisition of all or substantially all of the Company’s outstanding Common Stock by a single person or entity or by a group of persons or entities acting in concert, or in the event of the sale or transfer of all or substantially all of the Company’s assets (all of the foregoing being referred to as “Acquisition Events”), then the Committee may, in its sole discretion, terminate all outstanding Options of Eligible Employees, Consultants and non-employee directors, effective as of the date of the Acquisition Event, by delivering notice of termination to each such Participant at least twenty (20) days prior to the date of consummation of the Acquisition Event; provided, however, that during the period from the date on which such notice of termination is delivered to the consummation of the Acquisition Event, , each such Participant shall have the right to exercise in full all of his or her Options that are outstanding (without regard to exercisability otherwise contained in the Option Agreement) but contingent on occurrence of the Acquisition Event, and provided that if the Acquisition Event does not take place within the specified period after giving such notice for any reason whatsoever, the notice and exercise shall be null and void.

If the Acquisition Event occurs, to the extent the Committee does not terminate the outstanding Options pursuant to this Section 4.2(d), then the provisions of Section 4.2(b) shall apply.

ARTICLE V

ELIGIBILITY

All employees and Consultants of the Company and its subsidiaries and all non-employee directors of the Company are eligible to be granted Stock Options under this Plan. Eligibility under this Plan may be determined by the Committee in its sole discretion.

ARTICLE VI

STOCK OPTION GRANTS

6.1. Options. Each Stock Option granted hereunder shall be one of two types: (i) an Incentive Stock Option intended to satisfy the requirements of Section 422 of the Code; or (ii) a Non-Qualified Stock Option.

6.2. Grants. The Committee shall have the authority to grant to any Eligible Employee one or more Incentive Stock Options, Non-Qualified Stock Options or both types of Stock Options. The Committee shall have the authority to grant to any Consultants one or more Non-Qualified Stock Options. The Board shall have the authority to grant to any non-employee director one or more Non-Qualified Stock Options. To the extent that any Stock Option does not qualify as an Incentive Stock Option (whether because of its provisions or the time or manner of its exercise or otherwise), such Stock Option or the portion thereof which does not qualify, shall constitute a separate Non-Qualified Stock Option.

6.3. Terms of Options. Options granted under this Plan shall be subject to the following terms and conditions, and shall be in such form and contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem desirable:

(a) Option Price. The option price per share of Common Stock purchasable under an Incentive Stock Option shall be determined by the Committee at the time of grant but shall not be less than 100% of the Fair Market Value of the share of Common Stock at the time of grant; provided, however, if an Incentive Stock

Option is granted to a Ten Percent Shareholder, the purchase price shall be no less than 110% of the Fair Market Value of the Common Stock. The purchase price of shares of Common Stock subject to Non-Qualified Stock Options shall be determined by the Committee.

(b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than ten (10) years after the date the Option is granted; provided, however, that the term of an Incentive Stock Option granted to a Ten Percent Shareholder may not exceed five (5) years.

(c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at grant. If the Committee provides, n its sole discretion, that any Stock Option is exercisable subject to certain limitations (including, without limitation, that it is exercisable only in installments or within certain time periods), the Committee may waive such limitations on the exercisability at any time at or after the grant date in whole or in part (including, without limitation, that the Committee may waive the installment exercise provisions or accelerate the time which Options may be exercised), based on such factors, if any, as the Committee shall determine, in its sole discretion.

(d) Method of Exercise. Subject to whatever installment exercise and waiting period provisions apply under 6.3(c) above, Stock Options may be exercised in whole or in part at any time during the Option term, by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price in such form, or other arrangement for the satisfaction of the purchase price, as the Committee may accept. If and to the extent determined by the Committee in its sole discretion at or after the grant, payment in full or in part may also be made in the form of Common Stock withheld from the shares to be received on the exercise of the Stock Option hereunder or Common Stock owned by the Participant (and for which the Participant has good title, free and clear or all liens and encumbrances) based on the Fair Market Value of the Common Stock on the payment date as determined by the Committee. No shares of Common Stock shall be issued until payment, as provided herein, therefore has been made or provided for and the Participant shall have none of the rights of a holders of shares of Common Stock until such shares of Common Stock have been issued.

(e) Incentive Stock Option Limitations. To the extent that the aggregate Fair Market value (determined as of the time of grant) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by an Eligible Employee during any calendar year under the Plan and/or other stock option plan of the Company or any Subsidiary or parent corporation (within the meaning of Section 424(e) of the Code) exceeds $100,000, such Options shall be treated as Options which are not Incentive Stock Options.

Should the foregoing provision not be necessary in order for the Stock Options to qualify as Incentive Stock Options, or should any additional provisions be required, the Committee may amend the Plan accordingly, without the necessity of obtaining the approval of the shareholders of the Company.

(f) Buy Out and Settlement Provisions. The Committee may at any time on behalf of the Company offer to buy out an Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the Participant at the time that such offer is made.

(g) Form, Modification, Extension and Renewal of Options. Subject to the terms and conditions and within the limitations of the Plan, an Option shall be evidenced by such form of agreement or grant as approved by the Committee, and the Committee may modify, extend or renew outstanding Options granted under the Plan (provided that the rights of a Participant are not reduced without his consent), or accept the surrender of outstanding Options (up to the extent not theretofore exercised) and authorize the granting of new Options in substitution thereof (to the extent not theretofore exercised).

(h) Other Terms and Conditions. Options may contain such other provisions, which shall not be inconsistent with any of the foregoing terms of the Plan, as the Committee shall deem appropriate including, without limitation, permitting “reloads” such that the same number of Options are granted as the number of Options exercised, shares used to pay for the exercise price of Options or shares used to pay withholding taxes (“Reloads”). With respect to Reloads, the exercise price of the new Stock Option shall be the Fair Market Value on the date of the

Reload and the term of the Stock Option shall be the same as the remaining term of the Options that are exercised, if applicable, or such other exercise price and term as determined by the Committee.

6.4. Termination of Relationship. The following rules apply with regard to Options upon the Termination of Relationship of a Participant:

(a) Termination by Reason of Death. If a Participant’s Termination of Relationship is by reason of death, any Stock Option held by such Participant, unless otherwise determined by the Committee at grant or, if no rights of the Participant’s estate are reduced, thereafter, may be exercised, to the extent exercisable at the Participant’s death, by the legal representative of the estate, at any time within a period of one (1) year from the date of such death, but in no event beyond the expiration of the stated term of the Stock Option.

(b) Termination by Reason of Disability. If a Participant’s Termination of Relationship is by reason of Disability, any Stock Option held by such Participant, unless otherwise determined by the Committee at grant or, if no rights of the Participant are reduced, thereafter, may be exercised, to the extent exercisable at the Participant’s termination, by the Participant (or the legal representative of the Participant’s estate if the Participant dies after termination) at any time within a period of one (1) year from the date of such termination, but in no event beyond the expiration of the stated term of such Stock Option.

(c) Termination by Reason of Retirement. If a Participant’s Termination of Relationship is by reason of Retirement, any Stock Option held by such Participant, unless otherwise determined by the Committee at grant, or, if no rights of the Participant are reduced, thereafter, shall be fully vested and may thereafter be exercised by the Participant at any time within a period of one (1) year from the date of such termination, but in no event beyond the expiration of the stated term of such Stock Option; provided, however, that, if the Participant dies within such exercise period, any unexercised Stock Option held by such Participant shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of one (1) year (or such other period as the Committee may specify at grant or, if no rights of Participant’s estate are reduced, thereafter) from the date of such death, but in no event beyond the expiration of the stated term of such Stock Option.

(d) Involuntary Termination Without Cause or Termination for Good Reason. If a Participant’s Termination of Relationship is by involuntary termination without Cause or for Good Reason, any Stock Option held by such Participant, unless otherwise determined by the Committee at grant or, if no rights of the Participant are reduced, thereafter, may be exercised, to the extent exercisable at termination, by the Participant at any time within a period of ninety (90) days from the date of such termination, but in no event beyond the expiration of the stated term of such Stock Option.

(e) Termination Without Good Reason. If a Participant’s Termination of Relationship is voluntary but without Good Reason and such Termination of Relationship occurs prior to, or more than ninety (90) days after, the occurrence of an event which would be grounds for Termination of Relationship by the Company for Cause (without regard to any notice or cure period requirements), any Stock Option held by the Participant, unless otherwise determined by the Committee at grant or, if no rights of the Participant are reduced, thereafter, may be exercised, to the extent exercisable at termination, by the Participant at any time within a period of thirty (30) days from the date of such Termination of Relationship, but in no event beyond the expiration of the stated term of such Stock Option.

(f) Other Termination. Unless otherwise determined by the Committee at grant or, if no rights of the Participant are reduced, thereafter, if a Participant’s Termination of Relationship is for any reason other than death, Disability, Retirement, Good Reason, involuntary termination without Cause or voluntary termination as provided in Subsection 6.4(e) above, any Stock Option held by such Participant shall thereupon terminate and expire as of the date of termination, provided that (unless the Committee determines a different period upon grant or, if no rights of the Participant are reduced, thereafter) in the event such termination is for Cause or is a voluntary termination without Good Reason or voluntary resignation within ninety (90) days after occurrence of an event which would be grounds for Termination of Relationship by the Company for Cause (without regard to any notice or cure period requirement), any Stock Option held by Participant at the time of occurrence of the event which would be grounds for Termination of Relationship for Cause shall be deemed to have terminated and expired upon occurrence of the event which would be grounds for Termination of Relationship by the Company for Cause.

6.5. Termination of Directorship. The following rules apply with regard to Options upon Termination of Directorship:

(a) Death, Disability or Otherwise Ceasing to be a Director Other than for Cause. Except as otherwise determined by the Committee at grant or, if no rights of the Participant are reduced, thereafter, upon the Termination of Directorship, on account of Disability, death, Retirement, resignation, failure to stand for reelection or failure to be reelected or otherwise other than as set forth in 6.5(b) below, all outstanding Options then exercisable and not exercised by the Participant prior to such Termination of Directorship shall remain exercisable, to the extent exercisable at the Termination of Directorship, by the Participant or, in the case of death, by the Participant’s estate or by the person given authority to exercise such Options by his or her will or by operation of law, for a one (1) year period commencing on the date of the Termination of Directorship, provided that such one (1) year period shall not extend beyond the expiration of the stated term of such Options.

(b) Cause. Upon removal, failure to stand for reelection or failure to be re-nominated for Cause, or if the Company obtains or discovers information after Termination of Directorship that such Participant had engaged in conduct that would have justified a removal for Cause during such directorship, all outstanding Options of such Participant shall immediately terminate and shall be null and void.

(c) Cancellation of Options. No Options that were not exercisable during the period such person serves as a director shall thereafter become exercisable upon a Termination of Directorship for any reason or no reason whatsoever, and such Options shall terminate and become null and void upon Termination of Directorship.

ARTICLE VII

NON-TRANSFERABILITY

No Stock Option shall be Transferable by the Participant otherwise than by will or by the laws of descent and distribution. All Stock Options shall be exercisable, during the Participant’s lifetime, only by the Participant. No Stock Option shall, except as otherwise specifically provided by law or herein, be Transferable in any manner, and any attempt to Transfer any such Option shall be void, and no such Option shall in any manner be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person who shall be entitled to such Option, nor shall it be subject to attachment or legal process for or against such person.

ARTICLE VIII

CHANGE IN CONTROL PROVISIONS

8.1 Benefits. In the event of a Change in Control of the Company (as defined below), except as otherwise provided by the Committee upon the grant of an Option, the Participant shall be entitled to the following benefits:

(a) Subject to paragraph (b) below, all outstanding Options of the Participants granted prior to the Change in Control shall be fully vested and immediately exercisable in their entirety. The Committee, in its sole discretion, may provide for the purchase of any such Stock Options by the Company for an amount of cash equal to the excess of the Change in Control price (as defined below) of the shares of Common Stock covered by the Stock Options, over the aggregate exercise price of such Stock Options. For purposes of this Section 8.1, Change in Control price shall mean the higher of (i) the highest price per share of Common Stock paid in any transaction related to the Change in Control of the Company or (ii) the highest Fair Market Value per share of Common Stock at any time during thr sixty (60) day period preceding a Change in Control.

(b) Notwithstanding anything to the contrary herein, unless the Committee provides otherwise at the time an Option is granted to an Eligible Employee or Consultant hereunder or thereafter, no acceleration of exercisability shall occur with respect to such Option if the Committee reasonably determines in good faith, prior to the occurrence of the Change in Control, that the Options shall be honored or assumed, or new

rights substituted therefore (each such honored, assumed or substituted option hereinafter called an “Alternative Option”), by such Participant’s employer (or the parent of such employer), or in the case of a Consultant, by the entity (or its parent or subsidiary) which retains the Consultant, immediately following the Change in Control, provided that any such Alternative Option must meet the following criteria:

(i) the Alternative Option must be based on stock which is traded on an established securities market, or which will be traded within thirty (30) days of the Change in Control;

(ii) the Alternative Option must provide such Participant with rights and entitlements substantially equivalent to or better then the rights, terms and conditions applicable under such Option, including, but not limited to, an identical or better exercise schedule; and

(iii) the Alternative Option must have economic value substantially equivalent to the value of such Option (determined at the time of the Change in Control).

For purposes of Incentive Stock Options, any assumed or substituted Option shall comply with the requirements of Treasury regulation §1.425-1 (and any amendment thereto).

8.2 Change in Control. A Change in Control shall be deemed to have occurred:

(a) upon any “person” as such term is used in Section 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, any company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership in Common Stock of the Company), becoming the owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities (including, without limitation, securities owned at the time of any increase in ownership);

(b) during any period of two consecutive years, a change in the composition of the Board of Directors of the Company such that the individuals who, as of the date hereof, comprise the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided, however, for purposes of this subsection, that any individual who becomes a member of an Incumbent Board subsequent to the date hereof, whose election, or nomination for election by the Company’s shareholders, was approved in advance or contemporaneously with such election by a vote of at least a majority of those individuals who are members of the Incumbent Board (or deemed to be such pursuant to this provision) shall be considered as though such individual were a member of the Incumbent Board; but, provided further, that any such individual whose assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors of the Company or actual or threatened tender offer for shares of the Company or similar transaction or other contest for corporate control (other than a tender offer by the Company) shall not be so construed as a member of the Incumbent Board;

(c) upon a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more then fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or

(d) upon the shareholders’ of the Company approval of a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets other than the sale of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale.

ARTICLE IX

TERMINATION OR AMENDMENT OF PLAN

9.1 Termination or Amendment. Notwithstanding any other provisions of this Plan, the Board may at any time, and from time to time, amend, in whole or in part, any or all of the provisions of the Plan, or suspend or terminate it entirely, retroactively or otherwise; provided, however, that, unless otherwise required by law or specifically provided herein, the rights of a Participant with respect to the Options granted prior to such amendment, suspension or termination, may not be impaired without the consent of the Participant and, provided further, without the approval of the shareholders of the Company, if and to the extent required by the applicable provisions of Rule 16b-3 or under the applicable provisions of Section 162(m) of the Code or, with regard to Incentive Stock Options, Section 422 of the Code, no amendment may be made which would: (i) increase the maximum individual Participant limitations under Section 4.1(b); (ii) change the classification of employees eligible to receive Options under this Plan; (iii) extend the maximum option period under Section 6.3; or (iv) require shareholder approval in order for the Plan to continue to comply with the applicable provisions, if any, of Section 162(m) of the Code or, with regards to Incentive Stock Options, Section 422 of the Code. In no event may the Plan be amended without the approval of the shareholders of the Company in accordance with applicable law or other requirements to increase the aggregate number of shares of Common Stock that may be issued under the Plan or to make any other amendment that would require shareholder approval under the rules of any exchange or system on which the Company’s securities are listed or traded at the request of the Company.

The Committee may amend the terms of any Option theretofore granted, prospectively or retroactively, but, subject to Article IV above or as otherwise specifically provided herein, no such amendment or other action by the Committee shall impair the rights of any holder without the holder’s consent.

ARTICLE X

UNFUNDED PLAN

10.1. Unfunded Status if Plan. This Plan is intended to constitute an “unfunded” plan for incentive compensation. With respect to any payments as to which a Participant has a fixed and vested interest but which are not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company.

ARTICLE XI

GENERAL PROVISIONS

11.1. Legend. The Committee may require each person receiving shares of Common Stock pursuant to the exercise of a Stock Option under the Plan to represent to and agree with the Company in writing that the Participant is acquiring the shares without a view to distribution thereof. In addition to any legend required by this Plan, the certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on Transfer.

All certificates for shares of Common Stock delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirement of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed or any national securities association system upon whose system the Common Stock is then quoted, any applicable federal or state securities law, and any applicable corporate law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.

11.2. Other Plans. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases.

11.3. No Rights to Employment/Consultancy/Directorship. Neither this Plan nor the grant of any Option hereunder shall give any Participant or other individual any right with respect to continuance of employment or consultancy by the Company or any Subsidiary, nor shall there be a limitation in any way on the right of the Company or any Subsidiary by which an employee is employed or if a consultant, retained, to terminate his employment or consultancy at any time. Neither this Plan nor the grant of any Option hereunder shall impose any obligation on the Company to retain any Participant as a director, nor shall it impose on the part of any Participant any obligation to remain as a director of the Company.

11.4. Withholding of Taxes. The Company shall have the right, if necessary or desirable (as determined by the Company), to deduct from any payment to be made to a Participant, or to otherwise require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash hereunder, payment by the Participant of, any Federal, state or local taxes required by law to be withheld.

The Committee may permit any such withholding obligation with regard to any Participant to be satisfied by reducing the number of shares of Common Stock otherwise deliverable or by delivering shares of Common Stock already owned. Any fraction of a share of Common Stock required to satisfy such tax obligations shall be disregarded and the amount due shall be paid instead of cash by the Participant.

11.5. Listing and Other Conditions.

(a) As long as the Common Stock is listed on a national securities exchange or system sponsored by a national securities association, the issue of any shares of Common Stock pursuant to the exercise of an Option shall be conditioned upon such shares being listed on such exchange or system. The Company shall have no obligation to issue such shares unless and until such shares are so listed, and the right to exercise any Option with respect to such shares shall be conditioned upon such listing and shall be suspended until such listing has been effected.

(b) If at any time counsel to the Company shall be of the opinion that any sale or delivery of shares of Common Stock pursuant to the exercise of an Option is or may in the circumstances be unlawful or result in the imposition of excise taxes on the Company under the statutes, rules or regulations of any applicable jurisdiction, the Company shall have no obligation to make such sale or delivery, or to make any application of to effect or to maintain any qualification or registration under the Securities Act of 1933, as amended, or otherwise with respect to the shares of Common Stock, and the right to exercise any Option shall be suspended until, in the opinion of said counsel, such sale or delivery shall be lawful or will not result in the imposition of excise taxes on the Company.

(c) Upon termination of any period of suspension under this Section 11.5, any Option affected by such suspension which shall not have expired or terminated shall be reinstated as to all shares available before suspension and as to shares which would otherwise have become available during the period of such suspension, but no such suspension shall extend the term of any Option.

11.6. Governing Law. This Plan shall be governed and constructed in accordance with the laws of the State of New Jersey (regardless of the law that might otherwise govern under applicable New Jersey principals of conflicts of laws).

11.7. Construction. Wherever any words are used in this Plan in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would so apply.

11.8. Other Benefits. No Stock Option granted under this Plan shall be deemed compensation for purposes of computing benefits under any retirement plan of the Company or its Subsidiaries nor affect any benefits under any other benefit plan now or subsequently in effect under which the availability or amount of benefits is related to the level of compensation.

11.9. Costs. The Company shall bear all expenses included in the administering this Plan, including expenses of issuing Common Stock pursuant to the exercise of any Options hereunder.

11.10. No Right to Same Benefits. The provisions of Options need not be the same with respect to each Participant, and such Options to individual Participants need not be the same in subsequent years.

11.11. Death/Disability. The Committee may in its discretion require the transferee of a Participant to supply it with written notice of the Participant’s death or Disability and to supply it with a copy of the will (in the case of a Participant’s death) or such other evidence as the Committee deems necessary to establish the validity of the transfer of an Option. The Committee may also require the agreement of the transferee to be bound by all of the terms and conditions of the Plan.

11.12. Section 16(b) of the Exchange Act. All elections and transactions under the Plan by persons subject to Section 16 of the Exchange Act involving shares of Common Stock are intended to comply with any applicable exemptive condition under Rule 16b-3. To the extent applicable, the Committee may establish and adopt written administrative guidelines, designated to facilitate compliance with Section 16(b) of the Exchange Act, as it may deem necessary or proper for the administration and operation of the Plan and the transaction of business thereunder. For purposes of this paragraph, the Company shall be deemed publicly held when and if the Company has a class of common equity securities registered under Section 12 of the Exchange Act.

11.13. Severability of Provisions. If any provision of the Plan shall be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provisions had not been included.

11.14. Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan and shall not be employed in the construction of the Plan.

ARTICLE XII

EFFECTIVE DATE OF PLAN

The Plan shall take effect upon adoption by the Board, but the Plan (and any grants of Options made prior to the shareholder approval mentioned herein) shall be subject to the requisite approval of the shareholders of the Company. In the absence of such approval, such Options shall be null and void.

ARTICLE XIII

TERM OF PLAN

No Stock Option shall be granted pursuant to the Plan on or after the tenth anniversary of the earlier of the date the Plan is adopted or the date of shareholder approval, but Options granted prior to such tenth anniversary may extend beyond that date.

ARTICLE XIV

NAME OF PLAN

This Plan shall be known as the Cicero, Inc. 2005 Employee Stock Option Plan.

LEVEL 8 SYSTEMS, INC.		CICERO, INC.
(Exact name of registrant as specified in its charter)		(Exact name of registrant as specified in its charter)
Delaware		Delaware
(State of other jurisdiction of incorporation or organization)		(State of other jurisdiction of incorporation or organization)
11-2920559		20-2199504
(I.R.S. Employer Identification Number)		(I.R.S. Employer Identification Number)

CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be registered	Amount to be Registered	Proposed Maximum Offering Price Per Unit (1)	Proposed Maximum Aggregate Offering Price (1)	Amount of Registration Fee (1)
Cicero, Inc. common stock, par value $.001 per share	31,003,193	$2.50	$77,507,983	$9,122.69

	PAGE NO.
QUESTIONS ABOUT THE MERGER	1
SUMMARY	2
RISK FACTORS	7
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS	11
THE ANNUAL MEETING OF STOCK HOLDERS	12
PROPOSAL I - APPROVAL AND ADOPTION OF THE MERGER AGREEMENT	14
THE MERGER AGREEMENT	18
PRICE RANGE OF OUR COMMON STOCK	27
BUSINESS	28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	39
MANAGEMENT	57
EXECUTIVE OFFICERS	58
PRINCIPAL STOCKHOLDERS	59
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS	60
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	61
DESCRIPTION OF CAPITAL STOCK	61
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES	62
LEGAL MATTERS	62
EXPERTS	62
AVAILABLE INFORMATION	63
PROPOSAL II - APPROVAL AND ADOPTION OF THE 2005 CICERO, INC. EMPLOYEE STOCK OPTION PLAN	64
PROPOSAL III - ELECTION OF DIRECTORS	66
FISCAL 2003 YEAR-END OPTIONS HOLDINGS AND VALUES	75
PROPOSAL IV - RATIFICATION OF MARGOLIS & COMPANY AS INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	77
TAX SERVICES	78
RESTRICTED SERVICES	78
INDEX TO FINANCIAL STATEMENTS	F-1
SIGNATURES	F-46
INDEX TO EXHIBITS	F-47

	Year Ended December 31,															Nine Months Ended September 30,
	(in thousands, except per share data)
	1999			2000			2001			2002			2003			2003			2004
SELECTED STATEMENT OF OPERATIONS DATA																(unaudited)
Revenue	$	52,920		$	83,729		$	17,357		$	3,101		$	530		$	433		$	506
Loss from continuing operations		(15,477	)		(28,367	)		(58,060	)		(13,142	)		(9,874	)		(7,866	)		(8,618	)
Loss from continuing operations per common share - basic and diluted	$	(1.78	)	$	(2.10	)	$	(3.70	)	$	(0.75	)	$	(0.54	)	$	(0.42	)	$	(0.25	)
Weighted average common and common equivalent shares outstanding- basic and diluted		8,918			14,019			15,958			18,877			21,463			20,104			34,334

	At December 31,														Nine Months Ended September 30,
	1999			2000		2001			2002			2003					2003			2004
SELECTED BALANCE SHEET DATA																(unaudited)
Working capital (deficiency)	$	(36	)	$	28,311	$	(4,529	)	$	(6,254	)	$	(6,555	)		$	(6,267	)	$	(8,864	)
Total assets		133,581			169,956		35,744			11,852			5,362				6,509			1,147
Long-term debt, including current maturities		27,593			27,133		4,845			2,893			2,756				2,701			4,158
Senior convertible redeemable preferred stock		--			--		--			--			3,355				3,530			2,692
Loans from related companies, net of current maturities		4,000			--		--			--			--				--			--
Stockholders' equity (deficit)		72,221			117,730		13,893			1,653			(6,103	)			(5,322	)		(11,705	)

	•	filing another proxy with a later date; or
	•	by attending the Annual Meeting and voting in person, although attendance at the Annual Meeting will not by itself revoke a proxy.

	Common Stock
Name of Beneficial Owner	No. of Shares	Percent of Ownership
Landis, Mark and Carolyn	8,108,487 (1)	26.2%
Anthony C. Pizi	3,505,973 (2)	11.3%
Brown Simpson Partners I, LTD	2,057,738 (3)	6.6%
SDS Merchant Fund, L.P.	1,534,418 (4)	4.9%
North Sound Legacy International, Ltd.	1,408,089 (5)	4.5%

The Company		Cicero, Inc.
The ownership of the Company before the Recapitalization Merger, and before the mandatory exercise of the Initial and Additional Warrants, on a fully diluted basis is as follows, as well as a listing of the shareholders owning in excess of 5% of the issued and outstanding stock.		The ownership of Cicero, Inc. after the Recapitalization Merger, and after the mandatory exercise of the Initial and Additional Warrants, on a fully diluted basis is as follows, as well as a listing of the shareholders owning in excess of 5% of the issued and outstanding stock.

Authorized Capital	95,000,000	Authorized Capital	60,000,000

Issued and Outstanding	86,361,726	Issued and Outstanding	31,003,193

Common Stock	50.3%	Common Stock	9.4%
Preferred Stock Series A-3	0.2%	Preferred Stock Series A-1	33.5%
Preferred Stock Series B-3	2.8%
Preferred Stock Series C	3.5%
Preferred Stock Series D	4.9%
Warrants	23.1%	Warrants	45.7%
Options	8.7%	Options	11.4%
Convertible Notes	6.6%
Landis, Mark and Carolyn	6.8%	Landis, Mark and Carolyn	26.2%
Brown Simpson Partners I, Ltd	6.4%	Brown Simpson Partners I, LTD	6.6%
		Pizi, Anthony	11.3%
		SDS Merchant Fund, L.P.	4.9%
		North Sound Legacy International, Ltd.	4.5%

The Company	Cicero, Inc.
The holders of Company common stock and holders 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 2/3 (85% in the case of the Series A-3, B-3 and C Preferred Stock) 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: a) alter or change the rights, preferences or privileges of any series of the preferred stock; b) alter or change the rights, preferences of 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 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 Series 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 of common stock at a price per share less than the conversion price then applicable to such series of preferred stock.	The holders of CI 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 share of Company common stock into which the preferred stock is convertible. Until the closing by the Company of an additional $5,000 equity financing from institutional investors, approval of the holders of at least 2/3 of the outstanding shares of the Series A-1 Preferred voting together separately as a class will be required in order for CI to: a) a merger, sale of all, or substantially all of the assets or intellectual property, recapitalization, or reorganization of the CI; 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 (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 repurchase of the Series A-1 Preferred) or the payment of dividends or other distributions on equity securities by the CI (other than on the Series A-1 Preferred); d) any amendment or repeal of any provision of the CI’s certificate of incorporation or by-laws that would adversely affect the rights, preferences, or privileges of the Series A-1 Preferred; e) a significant change in the principal business of CI as conducted (by the Company) at the time of the consummation of the closing of the Merger; 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 CI; g) the making of any loan or advance to any person, including, without limitation, any employee or director of the CI 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 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, the holders of the Series A-1 Preferred may temporarily or permanently exchange their board observer rights for two seats on the board of directors, each having one vote.

Company Series A-3, B-3, C and D Preferred Stock	Cicero, Inc. Series A-1 Preferred Stock
Voting Rights	Voting Rights
The holders of Company 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 2/3 (85% in the case of the Series A-3, B-3 and C Preferred Stock) 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: a) alter or change the rights, preferences or privileges of any series of the preferred stock; b) alter or change the rights, preferences of 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 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 Series 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 of common stock at a price per share less than the conversion price then applicable to such series of preferred stock.	The holders of CI 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 Company common stock into which the preferred stock is convertible. Until the closing by the Company of an additional $5,000 equity financing from institutional investors, approval of the holders of at least 2/3 of the outstanding shares of the Series A-1 Preferred Stock voting together separately as a class will be required for: a) a merger, sale of all, or substantially all of the assets or intellectual property, recapitalization, or reorganization of the CI; 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 repurchase of the Series A-1 Preferred Stock) or the payment of dividends or other distributions on equity securities by the Cicero (other than on the Series A-1 Preferred); d) any amendment or repeal of any provision of the CI’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 CI as conducted (by the Company) at the time of the consummation of the closing of the Merger; 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 CI; g) the making of any loan or advance to any person, including, without limitation, any employee or director of the CI or any subsidiary, except advances and similar expenditures in the ordinary course of business or under the terms of an employee stock or option plan approved by the board of directors or h) the guarantee, directly or indirectly, of any indebtedness or obligations, except for trade accounts of any subsidiary arising in the ordinary course of business.
	The holders of a majority of the outstanding shares of the Series A-1 Preferred Stock shall be entitled to appoint two board observers who shall be entitled to receive all information received by the board of directors and to attend and participate without vote at meetings of the board of directors and its committees. At the option of the holders of a majority of the outstanding shares of the Series A-1 Preferred Stock, the holders of the Series A-1 Preferred Stock may temporarily or permanently exchange their board observer rights for two seats on the board of directors, each having one vote.

Board of Directors	Board of Directors
The holders of Company 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 Company 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. In addition, if CI does not have aggregate consolidated revenues of more than $1,500 as reflected on its financial statements for the six months ended December 31, 2004, the holders of the Series A-1 Preferred Stock shall have the right, but not the obligation, to elect a majority of the voting members of the board of directors.
Dividends	Dividends
The holders of the Company’s Series C and Series D Preferred Stock are entitled to receive equivalent dividends on an as-converted basis whenever the Company declares a dividend on its common stock, other than dividends payable in shares of common stock. The holders of the Company’s Series A-3 and B-3 Preferred Stock are not entitled to dividends unless declared by the board of directors.	The holders of CI A-1 Preferred Stock are entitled to receive equivalent dividends on an as-converted basis whenever Cicero declares a dividend on its common stock, other than dividends payable in shares of common stock.
Redemption	Redemption
The Company’s 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 Company 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. The Company’s 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 Designation for Series D Preferred Stock.	The CI A-1 Preferred Stock is not redeemable.
Conversion	Conversion
The Company’s 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 $8.333 per share; Series B-3 $12.531 per share; Series C $0.38 per share; and Series D $0.32 per share.	The CI A-1 Preferred Stock is convertible at any time at the option of the holder into an initial conversion ratio of 1,000 shares of common stock of CI for each share of CI A-1 Preferred Stock. The initial conversion ratio shall be adjusted in the event of any stock splits, stock dividends and other recapitalizations of C I. The CI A-1 Preferred Stock is also convertible on a mandatory basis in the event that (i) CI closes on an additional $5,000 equity financing from strategic or institutional investors, or (ii) CI has four consecutive quarters of positive cash flow as reflected on CI’s financial statements prepared in accordance with generally accepted accounting principals (“GAAP”) and filed with the Securities and Exchange Commission (“SEC”).
Anti-Dilution Protection	Anti-Dilution Protection
The Company’s Series C Preferred Stock conversion price shall be adjusted upon any dividends, stock splits, reverse stock splits, and the issuance by the Company to all common stockholders of rights to purchase common stock at a lower price than the conversion price, or the issuance to all common stockholders of any indebtedness or assets or rights to purchase any securities. The Company’s 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 Company’s Series D Preferred Stock conversion price shall be adjusted upon any dividends, stock splits, reverse stock splits, merger, consolidation or other corporate changes, and the issuance by the Company to all common stockholders of distributions or spin-offs, or the issuance to all common stockholders of any rights to purchase the Company’s common stock.	The initial conversion ratio shall be adjusted in the event of any stock splits, stock dividends and other recapitalizations of CI.
Liquidation Preference	Liquidation Preference
The holders of each series of preferred stock are entitled to a liquidation preference of $1,000 per share of preferred stock upon the liquidation of the Company.	The holders of the CI A-1 Preferred Stock are entitled to a liquidation preference of $500 per share of CI A-1 Preferred Stock upon the liquidation of CI.
Other Rights	Other Rights
The holders of the Company’s Series A-3 and B-3 Preferred Stock are also entitled to receive warrants to purchase common stock upon either a subsequent financing or a loan from an unaffiliated lender. In addition, the occurrence of certain events will trigger a 14% per annum dividend that will accrue until such events are cured. Until the second anniversary of the issuance date of the Series D Preferred Stock, the holders of the Company’s 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 CI A-1 Preferred Stock are not entitled to any additional rights except as may be set forth in the Certificate of Designation.

	2004		2003		2002		2001
Quarter	High	Low	High	Low	High	Low	High	Low
First	$0.45	$0.35	$0.40	$0.15	$ 3.19	$ 1.26	$ 6.38	$ 2.39
Second	$0.39	$0.12	$0.35	$0.24	$ 1.70	$ 0.34	$ 3.25	$ 2.75
Third	$0.17	$0.09	$0.77	$0.24	$ 0.71	$ 0.25	$ 4.99	$ 1.45
Fourth	$0.14	$0.05	$0.48	$0.28	$ 0.56	$ 0.17	$ 3.10	$ 1.20

	Year Ended December 31,			Nine Months Ended September 30,
	2003	2002	2001	2004	2003
Revenue:
Software	19.3 %	48.1 %	9.6 %	23.1 %	20.3 %
Maintenance	59.6 %	18.4 %	53.3 %	43.9 %	57.1 %
Services	21.1 %	33.5 %	37.1 %	33.0 %	22.6 %
Total	100.0 %	100.0 %	100.0 %	100.0 %	100.0 %

Cost of revenue:
Software	783.4 %	238.5 %	85.3 %	884.0 %	747.1 %
Maintenance	70.4 %	5.8 %	18.7 %	56.9 %	67.9 %
Services	171.3 %	29.0 %	31.6 %	158.3 %	148.5 %
Total	1,025.1 %	273.3 %	135.6 %	1,099.2 %	963.5%

Gross margin (loss)	(925.1)%	(173.3)%	(35.6)%	(999.2)%	(863.5)%

Operating expenses:
Sales and marketing	317.0 %	90.6 %	63.6 %	185.8 %	330.3 %
Research and product development	191.9 %	61.3 %	30.9 %	174.3 %	178.5 %
General and administrative	482.6 %	126.9 %	55.5 %	250.0 %	452.4 %
Amortization of intangible assets	0.0 %	0.0 %	36.1 %	(0.6) %	(4.4)%
Impairment of intangible assets	0.0 %	0.0 %	45.7 %	116.0 %	0.0 %
(Gain)/loss on disposal of assets	78.3 %	14.9 %	(36.6)%	0.0 %	(192.6)%
Restructuring, net	(157.4)%	41.9 %	49.8 %	0.0 %	0.0 %
Total	912.4 %	335.6 %	245.0 %	725.5 %	764.2 %

Loss from operations	(1,837.5)%	(508.9)%	(280.6)%	(1,724.7)%	(1,627.7)%
Other income (expense), net	(25.5)%	80.1%	(51.0)%	21.5 %	(188.9)%
Loss before taxes	(1,863.0)%	(428.8)%	(331.6)%	(1,703.2)%	(1,816.6)%
Income tax provision (benefit)	0.0 %	(5.0)%	2.9 %	0.0 %	0.0 %

Loss from continuing operations	(1,863.0)%	(423.8)%	(334.5)%	(1,703.2)%	(1,816.6)%
Loss from discontinued operations	(24.9)%	(162.5)%	(271.2)%	(4.5)%	(28.6)%
Net loss	(1,887.9)%	(586.3)%	(605.7)%	(1,707.7)%	(1,845.2)%

	Year Ended December 31,			Nine Months Ended September 30,
	2003	2002	2001	2004	2003

United States	90 %	96 %	36 %	98 %	89 %
Europe	9 %	4 %	55 %	2 %	10 %
Asia Pacific	--	--	3 %	--	--
Middle East	--	--	4 %	--	--
Other	1 %	--	2 %	--	1%
Total.	100 %	100 %	100 %	100 %	100 %

	Desktop Integration			Messaging/Application Engineering			TOTAL
2003:
Total revenue	$	466		$	64		$	530
Total cost of revenue		5,371			62			5,433
Gross margin (loss)		(4,905	)		2			(4,903	)
Total operating expenses		4,999			256			5,255
Segment profitability (loss)	$	(9,904	)	$	(254	)	$	(10,158	)

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

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

	Desktop Integration			Messaging and Application Engineering			TOTAL
2004:
Total revenue	$	469		$	37		$	506
Total cost of revenue		5,348			214			5,562
Gross margin (loss)		(4,879	)		(177	)		(5,056	)
Total operating expenses		2,771			316			3,087
Segment profitability (loss)	$	(7,650	)	$	(493	)	$	(8,143	)
2003:
Total revenue	$	375		$	58		$	433
Total cost of revenue		4,099			73			4,172
Gross margin (loss)		(3,724	)		(15	)		(3,739	)
Total operating expenses		3,956			206			4,162
Segment profitability (loss)	$	(7,680	)	$	(221	)	$	(7,901	)

	2004		2005		2006		2007		Total
Short and long-term debt, including interest payments	$	2,625	$	--	$	--	$	131	$	2,756
Service purchase commitments		400		--		--		--		400
Operating leases		214		221		84		--		519
Total	$	3,239	$	221	$	84	$	131	$	3,675

	Common Stock
Name of Beneficial Owner	No. of Shares			Percent of Class

Brown Simpson Partners I, Ltd. (1)		5,936,921 (2	)		13.7	%
Mark and Carolyn P. Landis (3)		10,404,575 (4	)		24.0	%
Anthony C. Pizi		3,707,468 (5	)		5.5	%
John P. Broderick		732,510 (6	)		1.7	%
Nicholas Hatalski		256,250 (7	)		*
Kenneth W. Nielsen		100,000 (8	)		*
Bruce W. Hasenyager		100,000 (8	)		*
Jay R. Kingley		100,000 (8	)		*
All current directors and executive officers as a group (6 persons)		4,996,228 (9	)		11.5	%

Submitted by:	THE COMPENSATION COMMITTEE

	Frank Artale
	Nicholas Hatalski
	Jay Kingley (as of June 2003)

Name and Principal Position	Fiscal Year		Salary		Bonus		Securities Underlying Options		All Other Annual Compensation
Anthony C. Pizi Chief Executive Officer, Chief Technology Officer and Chairman (1)		2003 2002 2001	$ $ $	200,000(2) 337,500(3) 527,038	$ $ $	100,000 -- --		500,000 500,000 500,000	$ $ $	-- -- --
John P. Broderick Chief Operating and Financial Officer, Corporate Secretary		2003 2002 2001	$ $ $	200,000(4) 200,000 146,788	$ $ $	60,000 40,000 40,000		500,000 100,000 165,900	$ $ $	-- -- --

Option Grants in Fiscal 2003 Individual Grants
Name	Number of Securities Underlying Options Granted		Percent of Total Options Granted to Employees in Fiscal Year		Exercise Price ($/share)		Expiration Date		Potential Realizable Value at Assumed Annual Rates of Appreciation for Option Term 5% ($) 10% ($)
Anthony C. Pizi		500,000		19.48%	$	0.26		04/17/13		81,756	207,187
John P. Broderick		500,000		19.48%	$	0.26		04/17/13		81,756	207,187

					Number of Securities Underlying Unexercised Options at December 31, 2003				Value of Unexercised In-the-Money Options at December 31, 2003(1)
Name	Shares Acquired on Exercise		Value Realized		Exercisable		Unexercisable		Exercisable		Unexercisable
Anthony C. Pizi		--		--		666,616		833,384		43,329		86,671
John P. Broderick		--		--		310,571		455,329		43,329		86,671

Plan Category	Number of Securities to be issued upon exercise of outstanding options		Weighted-average exercise price of outstanding options		Number of securities remaining available under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved by stockholders		5,625,878	$	2.43		4,111,065
Equity compensation plans not approved by stockholders (1)		--		--		--
Total		5,625,878	$	2.43		4,111,065

		December 31, 2003		December 31, 2002
Audit fees (1)	$	103,026	$	121,255
Audit-related fees (2)		11,000		133,487
Tax fees (3)		--		83,578
All other fees (4)		15,728		10,000
Total fees	$	129,754	$	348,320

Audited Consolidated Financial Statements as of December 2002 and 2003 and for the years ended December 31, 2001, 2002, and 2003	F-4

Notes to Consolidated Financial Statements	F-11

Unaudited Consolidated Financial Statements as of September 30, 2003 and 2004 and for the nine months ended September 30, 2003 and 2004	F-33

Notes to Unaudited Consolidated Financial Statements	F-37

	December 31, 2003			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	19		$	199
Cash held in escrow		776			--
Assets of operations to be abandoned		149			453
Trade accounts receivable, net		12			1,291
Receivable from related party		--			73
Notes receivable, net		--			867
Prepaid expenses and other current assets		270			731
Total current assets		1,226			3,614
Property and equipment, net		26			162
Software product technology, net		4,063			7,996
Other assets		47			80
Total assets	$	5,362		$	11,852
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short term debt	$	2,625		$	2,893
Accounts payable		2,545			3,537
Accrued expenses:
Salaries, wages, and related items		508			107
Restructuring		--			772
Other		1,613			1,332
Liabilities of operations to be abandoned		451			916
Deferred revenue		39			311
Total current liabilities		7,781			9,868
Long-term debt		131			--
Warrant liability		198			331
Senior convertible redeemable preferred stock		3,355			--
Commitments and contingencies (Notes 19 and 20)
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized. Series A3 - 10,070 shares issued and 4,070 and 10,070 shares outstanding at December 31, 2003 and 2002, respectively, $1,000 per share liquidation preference (aggregate liquidation value of $4,070) Series B3 - 30,000 shares issued and outstanding, $1,000 per share liquidation preference (aggregate liquidation value of $30,000) Series C - 1,590 shares issued and 1,340 and 1,590 outstanding at December 31, 2003 and 2002, respectively, $1,000 per share liquidation preference (aggregate liquidation value of $1,340)		-- -- --			-- -- --
Common stock, $0.001 par value, 85,000,000 and 60,000,000 shares authorized at December 31, 2003 and 2002, respectively; 26,645,062 and 19,202,763 issued and outstanding at December 31, 2003 and 2002, respectively		27			19
Additional paid-in-capital		206,149			202,916
Accumulated other comprehensive loss		(6	)		(717	)
Accumulated deficit		(212,273	)		(200,565	)
Total stockholders' equity (deficit)		(6,103	)		1,653
Total liabilities and stockholders' equity (deficit)	$	5,362		$	11,852

	Common Stock Shares Amount					Preferred Stock Shares Amount					Additional Paid-in Capital			Accumulated (Deficit)			Accumulated Other Comprehensive Income			Total
Balance at December 31, 2000		15,786		$	16		42		$	--	$	196,944		$	(75,327	)	$	(3,903	)	$	117,730
Shares issued as compensation		369			--							1,199									1,199
Preferred stock dividend															(926	)					(926	)
Reclassification of warrant liability												(2,100	)								(2,100	)
Foreign currency translation adjustment																		(287	)		(287	)
Reclassification of unrealized loss included in income-other than temporary decline																		3,765			3,765
Unrealized losses on marketable securities																		(353	)		(353	)
Net loss															(105,135	)					(105,135	)
Balance at December 31, 2001		16,155			16		42			--		196,043			(181,388	)		(778	)		13,893
Shares issued as compensation		108			--							139									139
Shares issued in private placement of common stock		2,382			3							3,571									3,574
Shares issued for litigation settlement		142			--							270									270
Shares issued for Cicero license agreement		250			--							622									622
Shares forfeited for repayment of notes receivable		(15	)		--							(21	)								(21	)
Shares issued in private placement of series C preferred					--		2					1,590									1,590
Conversion of preferred shares to common		181			--		(2	)				--									--
Warrants issued for financing												373			(373	)					--
Accretion of preferred stock												329			(329	)					--
Deemed dividend															(293	)					(293	)
Foreign currency translation adjustment																		61			61
Net loss															(18,182	)					(18,182	)
Balance at December 31, 2002		19,203			19		42			--		202,916			(200,565	)		(717	)		1,653
Conversion of preferred shares to common		1,378			1		(6	)				--									1
Shares issued as compensation		95			--							48									48
Shares issued for bank guarantee		150			--							51									51
Exercises of stock options		27			--							6									6
Conversion of warrants		3,352			4							402									406
Conversion of senior convertible redeemable preferred stock		546			1							174									175
Accretion of preferred stock												640			(640	)					--
Shares issued in private placement of common stock		1,894			2							850									852
Deemed dividend												1,062			(1,062	)					--
Foreign currency translation adjustment .																		(6	)		(6	)
Reclassification of unrealized loss included in income																		717			717
Net loss															(10,006	)					(10,006	)
Balance at December 31, 2003		26,645		$	27		36		$	--	$	206,149		$	(212,273	)	$	(6	)	$	(6,103	)

	2003			2002
Current trade accounts receivable	$	20		$	1,434
Less: allowance for doubtful accounts		(8	)		(143	)
	$	12		$	1,291

	2003			2002
Computer equipment	$	242		$	206
Furniture and fixtures		8			8
Office equipment		138			138
		388			352
Less: accumulated depreciation and amortization		(362	)		(190	)

	$	26		$	162

	2003		2002
Term loan (a)	$	1,971	$	2,512
Note payable; related party (b)		85		--
Notes payable (c)		444		381
Short term convertible note (d)		125		--
	$	2,625	$	2,893

	Plan Activity			Option Price Per Share		Weighted Average Exercise Price
Balance at December 31, 2000		3,857,517			1.37 - 39.31		15.83

Granted		3,037,581			1.74 - 6.13		3.60
Forfeited		(2,528,945	)		1.37 - 39.31		16.38
Balance at December 31, 2001		4,366,153			1.37 - 39.31		6.92

Granted		1,942,242			0.34 - 1.70		0.58
Forfeited		(2,474,016	)		0.39 -39.31		6.76
Balance at December 31, 2002		3,834,379			0.34 -39.31		3.81

Granted		2,566,126			0.22 - 0.57		0.24
Exercised		(121,434	)		0.22 - 0.22		0.22
Forfeited		(653,193	)		0.22 - 39.31		2.60
Balance at December 31, 2003		5,625,878			0.20 - 39.31		2.43

EXERCISE PRICE	NUMBER OUTSTANDING		REMAINING CONTRACTUAL LIFE FOR OPTIONS OUTSTANDING		NUMBER EXERCISABLE		WEIGHTED AVERAGE EXERCISE PRICE

$ 0.22 - 3.93		4,514,878		8.8		1,870,153	$	0.62
3.94 -7.86		846,650		5.4		635,623		6.27
7.87-11.79		93,650		4.3		93,650		8.92
11.80-15.72		40,000		0.5		40,000		12.29
15.73-19.66		7,500		6.6		7,500		18.81
19.67-23.59		3,000		6.5		3,000		20.00
23.60-27.52		0		0.0		0		0.00
27.53-31.45		3,000		6.0		3,000		30.25
31.46-35.38		0		0.0		0		0.00
35.39-39.32		117,200		1.0		117,200		38.03

		5,625,878		8.0		2,770,126	$	4.05

	Expected Life in Years	Expected Volatility	Risk Free Interest Rate	Expected Dividend	Fair Value of Common Stock

December 2000 Commercial Lender Warrants	4	87%	5%	None	$6.19
Preferred Series A3 and B3 Warrants	4	108%	4%	None	$1.89
2002-2003 Financing Warrants	5	97%	2%	None	$0.40
Preferred Series C Warrants	5	117%	3%	None	$0.38
Preferred Series D-1 Warrants	5	117%	3%	None	$0.07
Preferred Series D-2 Warrants	5	102%	3%	None	$0.20
Private Placement	3	102%	3%	None	$0.45

	2003		2002
Desktop Integration	$	4,089	$	8,096
Messaging/Application Engineering		-		62

Total assets	$	4,089	$	8,158

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
2003:
Net revenues	$	143		$	177		$	113		$	97
Gross profit/(loss)		(1,037	)		(968	)		(1,734	)		(1,164	)
Net loss from continuing operations		(2,974	)		(2,424	)		(2,468	)		(2,008	)
Net loss discontinued operations		(46	)		(20	)		(58	)		(8	)
Net loss		(3,020	)		(2,444	)		(2,526	)		(2,016	)
Net loss/share continued operations - basic and diluted	$	(0.19	)	$	(0.12	)	$	(0.12	)	$	(0.11	)
Net loss/share discontinued operations -- basic and diluted		--			--			--			--
Net loss/share -basic and diluted	$	(0.19	)	$	(0.12	)	$	(0.12	)	$	(0.11	)

2002:
Net revenues	$	446		$	630		$	823		$	1,202
Gross profit/(loss)		(3,548	)		(1,749	)		(422	)		343
Net loss from continuing operations		(5,409	)		(5,062	)		(1,948	)		(723	)
Net loss discontinued operations		(676	)		(5,481	)		484			633
Net loss		(6,085	)		(10,543	)		(1,464	)		(90	)
Net loss/share continued operations - basic and diluted	$	(0.29	)	$	(0.26	)	$	(0.12	)	$	(0.07	)
Net loss/share discontinued operations -- basic and diluted	$	(0.04	)	$	(0.29	)	$	0.03		$	0.03
Net loss/share -basic and diluted	$	(0.33	)	$	(0.55	)	$	(0.09	)	$	(0.04	)

	September 30, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	37		$	19
Cash held in escrow		779			776
Assets of operations to be abandoned		143			149
Trade accounts receivable, net		37			12
Prepaid expenses and other current assets		133			270
Total current assets		1,129			1,226
Property and equipment, net		18			26
Software product technology, net		--			4,063
Other assets		--			47
Total assets	$	1,147		$	5,362
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
Current liabilities:
Short-term debt	$	3,991		$	2,625
Accounts payable		2,443			2,545
Accrued expenses:
Salaries, wages, and related items		920			508
Other		1,968			1,613
Liabilities of operations to be abandoned		504			451
Deferred revenue		167			39
Total current liabilities		9,993			7,781
Long-term debt		167			131
Warrant liability		--			198
Senior convertible redeemable preferred stock		2,692			3,355
Stockholders' equity (deficit):
Preferred Stock		--			--
Common Stock		37			27
Additional paid-in-capital		209,177			206,149
Accumulated other comprehensive loss		(5	)		(6	)
Accumulated deficit		(220,914	)		(212,273	)
Total stockholders' equity (deficit)		(11,705	)		(6,103	)
Total liabilities and stockholders' equity (deficit)	$	1,147		$	5,362