CICERO INC (Form: 10-K, Received: 04/16/2012 17:10:41)

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm for the years ended December 31, 2011 and 2010			F-2

Financial Statements:

Consolidated Balance Sheets			F-3

Consolidated Statements of Operations			F-4

Consolidated Statements of Stockholders' Deficit			F-5

Consolidated Statements of Cash Flows			F-6

Notes to Consolidated Financial Statements			F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the Board of Directors and Stockholders of

Cicero Inc.

Cary, North Carolina

We have audited the accompanying consolidated balance sheets of Cicero Inc. and subsidiaries (the "Company") as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' deficit and cash flows for the years then ended. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cicero Inc. and subsidiaries as of December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Marcum LLP

Bala Cynwyd, Pennsylvania

April 16, 2012

F-2

CICERO INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	December 31, 2011			December 31, 2010
ASSETS
Current assets:
Cash	$	184		$	43
Trade accounts receivable, net		861			137
Prepaid expenses and other current assets		404			279
Total current assets		1,449			459
Property and equipment, net		32			40
Intangible asset, net (Note 6)		729			1,430
Goodwill (Note 6)		2,832			2,832
Total assets	$	5,042		$	4,761
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term debt (Note 7)	$	6,137		$	1,473
Accounts payable		3,170			1,357
Accrued expenses:
Salaries, wages, and related items		1,407			1,251
Earn-out contingency (Note 3)		--			789
Other		424			1,741
Deferred revenue (Note 2)		1,611			374
Total current liabilities		12,749			6,985
Long-term debt (Note 8)		1,916			4,440
Total liabilities		14,665			11,425

Commitments and contingencies (Notes 15 and 16)

Stockholders' deficit:
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized Series A-1 – 1,542.6 shares issued and outstanding at December 31, 2011 and 1,543.6 shares issued and outstanding at December 31, 2010, $500 per share liquidation preference (aggregate liquidation value of $772)		--			--
Series B – 10,400 shares issued and outstanding at December 31, 2011 and 2010, $500 per share liquidation preference (aggregate liquidation value of $5,200)		--			--
Common stock, $0.001 par value, 215,000,000 shares authorized at December 31, 2011 and 2010, respectively; 47,444,524 issued and outstanding at December 31, 2011 and 47,098,185 issued and outstanding at December 31, 2010 (Note 10)		47			47
Additional paid-in-capital		232,506			232,369

Accumulated deficit		(242,176	)		(239,080	)
Total stockholders' deficit		(9,623	)		(6,664	)
Total liabilities and stockholders' deficit	$	5,042		$	4,761

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

F-3

CICERO INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Years Ended December 31,
	2011			2010
Revenue:
Software	$	676		$	1,086
Maintenance		1,540			1,427
Services		1,038			463
Total operating revenue		3,254			2,976
Cost of revenue:
Software		701			672
Maintenance		114			146
Services		1,062			912
Total cost of revenue		1,877			1,730
Gross margin		1,377			1,246
Operating expenses:
Sales and marketing		1,893			1,978
Research and product development		969			876
General and administrative		1,189			1,260
Total operating expenses		4,051			4,114
Loss from continuing operations before other income (charges)		(2,674	)		(2,868	)
Other income (charges):
Interest expense		(813	)		(740	)
Other (Note 1)		517			3,149
		(296	)		2,409

Net loss		(2,970	)		(459	)
Deemed dividend on preferred stock and 8% preferred stock Series B dividend		126			184
Net loss applicable to common stockholders	$	(3,096	)	$	(643	)

Loss per share – basic and diluted	$	(0.07	)	$	(0.01	)

Average shares outstanding – basic and diluted		47,341			47,098

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

F-4

CICERO INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

(in thousands)

	Common Stock				Preferred Stock				Additional Paid-in		Accumulated
	Shares		Amount		Shares		Amount		Capital		(Deficit)			Total
Balance at December 31, 2009		47,098		47		2		--	$	230,464	$	(238,437	)	$	(7,926	)
Issuance of preferred B stock for cash						4				700					700
Issuance of preferred B stock for loan conversion						6				860					860
Dividend for preferred B stock												(117	)		(117	)
Deemed dividend										67		(67	)		--
Beneficial conversion of preferred B stock										175					175
Options issued as compensation										67					67
Restricted shares issued as compensation										36					36
Net loss												(459	)		(459	)
Balance at December 31, 2010		47,098	$	47		12		--	$	232,369	$	(239,080	)	$	(6,664	)
Dividend for preferred B stock												(126	)		(126	)
Beneficial conversion of preferred A stock		1													--
Issuance of stock for payment of interest		345								26					26
Options issued as compensation										75					75
Restricted shares issued as compensation										36					36
Net loss												(2,970	)		(2,970	)
Balance at December 31, 2011		47,444	$	47		12		--	$	232,506	$	(242,176	)	$	(9,623	)

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

F-5

CICERO INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Years Ended December 31,
	2011			2010
Cash flows from operating activities:
Net loss	$	(2,970	)	$	(459	)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization		722			694
Stock compensation expense		111			103
Bad debt expense		14			--
Amortization of debt discount		--			175
Gain on write off of liabilities		--			(2,010	)
Gain on write down of earn out contingency		(517	)		(1,050	)
Changes in assets and liabilities:
Trade accounts receivable and related party receivables		(738	)		88
Prepaid expenses and other assets		(125	)		66
Accounts payable and accrued expenses		1,063			586
Deferred revenue		1,237			131
Net cash used in operating activities		(1,203	)		(1,676	)
Cash flows from investing activities:
Purchases of property and equipment		(13	)		(22	)
Cash Paid for Acquisition of SOAdesk assets		--			(300	)
Net cash used in investing activities		(13	)		(322	)
Cash flows from financing activities:
Issuance of Series B convertible preferred stock		--			700
Borrowings under short and long-term debt		2,021			2,116
Repayments of short and long-term debt		(664	)		(787	)
Net cash provided by financing activities		1,357			2,029
Net increase in cash		141			31
Cash at beginning of year		43			12
Cash at end of year	$	184		$	43

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes	$	21		$	10
Interest	$	225		$	198

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

F-6

CICERO INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

Non-Cash Investing and Financing Activities

2011

During March 2011, the Company converted $9,000 of interest payable to a private lender by issuing 145,339 shares of its common stock.

During May 2011, the Company converted $17,000 of note payable to a private lender by issuing 200,000 shares of its common stock.

2010

During January 2010, the Company converted $860,000 of promissory notes into 5,733 shares of its Series B Convertible Preferred B stock.

During January 2010, the Company paid $300,000, entered into notes payable agreements of $2,225,000 and accrued $2,410,000 for an earn-out contingency to acquire substantially all the assets of SOAdesk LLC, which included $2,832,000 of Goodwill and $1,803,000 of software.

F-7

CICERO INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.

SUMMARY OF OPERATIONS, SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Cicero Inc., (''Cicero'' or the ''Company''), is a provider of business integration software which enables organizations to integrate new and existing information and processes at the desktop. Business integration software addresses the emerging need for a company's information systems to deliver enterprise-wide views of the company's business information processes.

Going Concern and Management Plans:

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Although the Company has incurred an operating loss of approximately $2,970,000 for the year ended December 31, 2011 and has a history of operating losses, management feels that the Company has repositioned itself in the marketplace. Its products have already contracted several new and significant customers in 2011 and 2012 which should generate significant cash flows to sustain operations in the forthcoming year. See Note 2 In addition, during 2012, the Company has already retired $1,900,000 of assorted notes and interest payable, has converted over $3,800,000 of other short term debt, interest payable and accrued Series B preferred stock dividend into common stock and has received notification of debt forgiveness of approximately $404,000. The Company has extended the maturity dates of several other debt obligations that were due in 2012 to 2013, to assist with liquidity.

Principles of Consolidation:

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All of the Company's subsidiaries are wholly-owned for the periods presented.

All significant inter-company accounts and transactions are eliminated in consolidation.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates. Significant estimates include the recoverability of long-lived assets, valuation and recoverability of goodwill, stock based compensation, deferred taxes and related valuation allowances and valuation of equity instruments.

Financial Instruments:

The carrying amount of the Company’s financial instruments, representing accounts receivable, accounts payable and short-term debt approximate their fair value due to their short term nature.

The fair value and carrying amount of long-term debt were as follows:

	December 31,
	2011		2010
Fair Value	$	1,887,709	$	4,244,579
Carrying Value	$	1,916,000	$	4,440,000

Valuations for long-term debt are determined based on borrowing rates currently available to the Company for loans with similar terms and maturities.

F-8

Foreign Currency Translation:

Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Cash:

The Company places substantially all cash with various financial institutions. At times, such cash and cash equivalents may be in excess of FDIC insurance limits.

Trade Accounts Receivable:

Trade accounts receivable are stated in the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to the allowance of doubtful accounts based on its assessment of the current status of individual accounts. Balances still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance of doubtful accounts and a credit to trade accounts receivable. Changes in the allowance for doubtful accounts have not been material to the financial statements.

Property and Equipment:

Property and equipment purchased in the normal course of business is stated at cost, and property and equipment acquired in business combinations is stated at its fair market value at the acquisition date. All property and equipment is depreciated using the straight-line method over estimated useful lives.

Expenditures for repairs and maintenance are charged to expense as incurred.

The cost and related accumulated depreciation of property and equipment are removed from the accounts upon retirement or other disposition and any resulting gain or loss is reflected in the Consolidated Statements of Operations.

Software Development Costs:

The Company capitalizes certain software costs after technological feasibility of the product has been established. Generally, an original estimated economic life of three years is assigned to capitalized software costs, once the product is available for general release to customers. Costs incurred prior to the establishment of technological feasibility are charged to research and product development expense.

Capitalized software costs are amortized over related sales on a product-by-product basis using the straight-line method over the remaining estimated economic life of the product.

The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technologies.

Long-Lived Assets:

The Company reviews the recoverability of long-lived intangible assets when circumstances indicate that the carrying amount of assets may not be recoverable. This evaluation is based on various analyses including undiscounted cash flow projections. In the event undiscounted cash flow projections indicate impairment, the Company would record an impairment based on the fair value of the assets at the date of the impairment. The Company accounts for impairments under the Financial Accounting Standards Board ("FASB") guidance now codified as ASC 360 “Property, Plant and Equipment”.

F-9

Revenue Recognition:

We derive revenue from three sources: license fees, recurring revenue and professional services. Recurring revenue include software maintenance and support. Maintenance and support consists of technical support. Professional services primarily consist of consulting, implementation services and training. Significant management judgments and estimates are made and used to determine the revenue recognized in any accounting period. Material differences may result in changes to the amount and timing of our revenue for any period if different conditions were to prevail. We present revenue, net of taxes collected from customers and remitted to governmental authorities.

We apply the provisions of Accounting Standards Codification, or ASC 985-605, Software Revenue Recognition, to all transactions involving the licensing of software products. In the event of a multiple element arrangement for a license transaction, we evaluate the transaction as if each element represents a separate unit of accounting taking into account all factors following the accounting standards. When such estimates are not available, the completed contract method is utilized. Under the completed contract method, revenue is recognized only when a contract is completed or substantially complete.

When licenses are sold together with system implementation and consulting services, license fees are recognized upon delivery, provided that (i) payment of the license fees is not dependent upon the performance of the consulting and implementation services, (ii) the services are available from other vendors, (iii) the services qualify for separate accounting as we have sufficient experience in providing such services, have the ability to estimate cost of providing such services, and we have vendor-specific objective evidence of fair value, and (iv) the services are not essential to the functionality of the software.

We use signed software license and services agreements and order forms as evidence of an arrangement for sales of software, maintenance and support. We use signed engagement letters to evidence an arrangement for professional services.

License Revenue

We recognize license revenue when persuasive evidence of an arrangement exists, the product has been delivered, no significant obligations remain, the fee is fixed or determinable, and collection of the resulting receivable is probable. In software arrangements that include rights to multiple software products and/or services, we use the residual method under which revenue is allocated to the undelivered elements based on vendor- specific objective evidence of the fair value of such undelivered elements. The residual amount of revenue is allocated to the delivered elements and recognized as revenue, assuming all other criteria for revenue recognition have been met. Such undelivered elements in these arrangements typically consist of software maintenance and support, implementation and consulting services.

Software is delivered to customers electronically. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction. We have standard payment terms included in our contracts. We assess collectability based on a number of factors, including the customer’s past payment history and its current creditworthiness. If we determine that collection of a fee is not reasonably assured, we defer the revenue and recognize it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period.

We consider a software element to exist when we determine that the customer has the contractual right to take possession of our software. Professional services are recognized as described below under “Professional Services Revenue.” If vendor-specific evidence of fair value cannot be established for the undelivered elements of an agreement, the entire amount of revenue from the arrangement is recognized ratably over the period that these elements are delivered.

F-10

Maintenance Revenue

Included in professional services revenue is revenue derived from system implementation, consulting and training. For software transactions, the majority of our consulting and implementation services and accompanying agreements qualify for separate accounting. We use vendor-specific objective evidence of fair value for the services to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Our consulting and implementation service contracts are bid on a fixed-fee basis. For fixed fee contracts, where the services are not essential to the functionality, we recognize revenue as services are performed. If the services are essential to functionality, then both the product license revenue and the service revenue are deferred until the services are performed.

Professional Services Revenue

Training revenue that meets the criteria to be accounted for separately is recognized when training is provided.

Cost of Revenue:

The primary component of the Company's cost of revenue for its software products is the amortization of software for the assets acquired from SOAdesk in January 2010. (See Note 6)

The primary component of the Company's cost of revenue for maintenance and services is compensation expense.

Advertising Expenses:

The Company expenses advertising costs as incurred. Advertising expenses were approximately $395,000 and $439,000, for the years ended December 31, 2011 and 2010, respectively.

Research and Product Development:

Research and product development costs are expensed as incurred. Research and development expenses were approximately $969,000 and $876,000, for the years ended December 31, 2011 and 2010, respectively.

Other Income/(Charges):

Other income (net) in fiscal 2011 consists of an additional adjustment of $517,000 to the SOAdesk LLC earn-out. Other income (net) in fiscal 2010 consists of an adjustment to the SOAdesk LLC earn-out of $1,050,000 along with $1,712,000 of write offs of accounts payables that were in excess of 7 years old. The Company has not had any contact from these vendors and has taken the position that the statute of limitations precludes any vendor from enforcing collection on these amounts.

Income Taxes:

The Company uses FASB guidance now codified as ASC 740 “Income Taxes”', to account for income taxes. This statement requires an asset and liability approach that recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events, other than enactments of changes in the tax law or rates, are generally considered. A valuation allowance is recorded when it is ''more likely than not'' that recorded deferred tax assets will not be realized. (See Note 9.)

Loss Per Share:

Basic loss per share is computed based upon the weighted average number of common shares outstanding. Diluted loss per share is computed based upon the weighted average number of common shares outstanding and any potentially dilutive securities. During 2011 and 2010, potentially dilutive securities included stock options, warrants to purchase common stock, and preferred stock.

F-11

The following table sets forth the potential shares that are not included in the diluted net loss per share calculation because to do so would be anti-dilutive for the periods presented:

	2011		2010
Stock options		4,296,193		3,503,157
Warrants		3,888,285		3,989,400
Preferred stock		11,942,618		11,943,618
		20,127,096		19,436,175

$126,000 and $117,000 was accrued for dividends on the Series B Preferred Stock in fiscal 2011 and 2010, respectively. During March 2012, the Company converted $264,000 of accrued dividends into 1,765,333 of common shares of the Company.

Stock-Based Compensation:

The Company adopted Financial Accounting Standards Board (“FASB”) guidance now codified as ASC 718 “Compensation – Stock Compensation”, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards under ASC 718. The Company granted 880,000 options in fiscal 2011 at exercise prices between $0.06 and $0.10 per share and recognized approximately $75,000 of stock-based compensation. The Company granted 1,444,750 options in fiscal 2010 at an exercise price of $0.09 per share and recognized approximately $67,000 of stock-based compensation. Additionally, the Company recognized as stock-based compensation approximately $36,000 in fiscal 2011 and 2010 for the restricted shares issued in 2007 to John Broderick, the Chief Executive Officer.

The fair value of the Company's stock-based awards to employees was estimated as of the date of the grant using the Black-Scholes option-pricing model, using the following weighted-average assumptions:

	2011			2010
Fair value of common stock	$	0.07		$	0.09
Expected life (in years)	10.0 years			10.0 years
Expected volatility		140	%		158	%
Risk free interest rate		0.12	%		0.19	%
Expected dividend yield		0	%		0	%

Recent Accounting Pronouncements:

In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment (ASU 2011-08), to simplify how entities test goodwill for impairment. ASU 2011-08 allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If greater than 50 percent likelihood exists that the fair value is less than the carrying amount then a two-step goodwill impairment test as described in Topic 350 must be performed. The guidance provided by this update becomes effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. The Company adopted this standard during the year ended December 31, 2011, and it did not have material impact on the Company’s consolidated financial position and results of operations.

In December 2010 the FASB issued ASU 2010-28, “Intangibles – Goodwill and Other (Topic 350): When to perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”. ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts by requiring an entity to perform step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. This update will be effective for fiscal years beginning after December 15, 2010. The adoption of this standard did not have a material impact on the Company’s consolidated financial positions and results of operations.

F-12

NOTE 2. DEFERRED REVENUE

In December 2011, the Company entered into a contract with a major Business Process Outsourcer in the amount of $1,200,000. The contract contained multiple elements and under ASC 985-605, the Company evaluated those elements for vendor specific objective evidence. Included in the multiple elements were licenses and advanced training that is scheduled to last approximately six months. The Company was unable to establish vendor specific evidence of the value of the training and as such was required to defer recognition of income on the entire contract until 2012. The Company is amortizing this income over the initial six months in 2012. The Company received $600,000 in proceeds at the time of the sale and has recognized $600,000 as a receivable as of December 31, 2011.

NOTE 3. SOAdesk ACQUISITION

On January 15, 2010, the Company entered into an Asset Purchase Agreement with SOAdesk, LLC (“SOAdesk”) and Vertical Thought, Inc. (“VTI” and, together with SOAdesk, the “Sellers”), pursuant to which the Company acquired the Sellers’ “United Desktop” and “United Data Model” software technology, as well as substantially all of the other assets owned by the Sellers directly or indirectly used (or intended to be used) in or related to Sellers’ business of providing customer interaction consulting and technology services for organizations and contact centers throughout the world (the “Business”). The Company also assumed certain liabilities of the Sellers related to the Business, as described in the Asset Purchase Agreement.

The aggregate consideration payable by the Company to the Sellers consists of the following:

● $300,000 paid in cash to the Sellers on the closing date;

● an unsecured convertible note in the aggregate principal amount of $700,000, payable to SOAdesk, with an annual interest rate of 5% and an original maturity date of March 31, 2010. On March 31, 2010, the maturity date of the unsecured Convertible Note was extended from March 31, 2010 to September 30, 2010 and was secured by shares of the Company’s Series B Preferred Stock (the “Convertible Note”). At September 30, 2010 the maturity date was extended from September 30, 2010 to March 31, 2011. In March 2011, the maturity date was extended to March 31, 2012. In March 2012, the maturity date was extended to December 31, 2012;

● $525,000, payable in cash to SOAdesk on March 31, 2010 (subsequently converted into a convertible promissory note as stated below);

● an unsecured convertible note in the aggregate principal amount of $1,000,000, payable to SOAdesk and convertible into shares of the Company’s Common Stock; and

● certain earn-out contingencies of $2,410,000 based on product and enterprise revenue performance targets being met.

The terms of the Asset Purchase Agreement were amended on March 31, 2010, and the Company issued a $525,000 convertible promissory note to SOAdesk in lieu of the $525,000 payment. This note, which carries an annual interest rate of 5%, is convertible into shares of the Company’s Series B Preferred Stock (Note 7) at the holder’s option and originally matured on June 30, 2010. The Company paid principal in the amount of $100,000 in April 2010. On June 30, 2010, the convertible note was amended to extend the maturity date from June 30, 2010 to September 30, 2010. As of September 30, 2010, the convertible note was further amended to extend the maturity date from September 30, 2010 to March 31, 2011. The total outstanding debt as of December 31, 2011 is $421,000. In March 2011, the Company and SOAdesk LLC agreed to extend the maturity date until March 31, 2012. In accordance with ASC 470-20 “Debt with Conversion and Other Options”, the Company has determined the embedded conversion option is beneficial and has intrinsic value to the holder. The total debt discount to be recognized was $175,000 and the Company had reduced the note by that amount and increased Additional Paid in Capital by the same amount. As of December 31, 2010, the Company has fully amortized the debt discount of $175,000 in the statement of operations. In April 2012, the Company paid this note in full.

F-13

The Company was obligated to make additional payments of up to $2,410,000 over an 18 month period from January 15, 2010 through July 31, 2011, based upon the achievement of certain revenue performance targets. Such payments are payable quarterly during the 18 month period over which the performance targets are being measured. The earn-out award is to be calculated, subject to adjustment, based upon the cumulative effect of achieved revenue performance targets during the applicable earn-out period. The obligation was determined by management after consultation with an independent appraiser using the income approach methodology analyzing the Company’s discounted cash flow and management’s input on probability of attaining the different revenue performance targets. As of March 31, 2011, the Company had determined that the earn-out targets originally recorded as part of the acquisition will not be completely met. The Company therefore recorded a gain of $517,000 in the first quarter of 2011, in addition to the $1,050,000 gain recorded in the fourth quarter of 2010, in the statement of operations from the reversal of part of the earn-out accrual. At December 31, 2011 the Company has recorded $843,000 in accounts payable for the earn-out earned through July 31, 2011.

We account for contingent consideration payable to sellers of the acquired assets in accordance with the provisions of ASC Topic 805 “Business Combinations” to ensure that we account for any post combination payments made to sellers of acquired businesses as either additional purchase consideration or compensation based upon the (i) economic form of the transaction and (ii) subsequent involvement (if any) of the sellers in the business on a post combined basis.

Consideration:
Cash paid	$	300,000
Cnvertible notes payable		2,225,000
Earn-out contingency		2,410,000
Total Consideration	$	4,935,000
Allocated to:
Software	$	2,103,000
Goodwill ($141,000 is expected to be deductible for tax purposes)	$	2,832,000
	$	4,935,000

Simultaneously with the acquisition of the assets of SOAdesk LLC, the Company also closed an initial round of Series B Convertible Preferred Stock, of approximately $1,560,000 including $700,000 in cash, the cancellation of $710,000 of existing indebtedness and the cancellation of a note of $150,000 to memorialize an advance of payment for Series B Stock prior to issuance. The Series B Convertible Preferred Stock bears an annual dividend of 8% and provides warrants to purchase common stock of the Company at a strike price of $0.25 per share. The Series B stock may convert into common stock at a conversion rate of $0.15 per share. Of the $1,560,000 raised, the Company’s Chairman, Mr. John Steffens invested $910,000 through a combination of cash and debt retirement. Dividends accrued at December 31, 2011 amounted to $244,000. In March 2012, the Company converted this amount into 1,626,667 shares of common stock of the Company.

NOTE 4. ACCOUNTS RECEIVABLE

Trade accounts receivable was composed of the following at December 31 (in thousands):

		2011				2010
Current trade accounts receivable		$	861			$	137

F-14

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment was composed of the following at December 31 (in thousands):

	2011			2010
Computer equipment	$	322		$	310
Furniture and fixtures		24			24
Office equipment		169			169
		515			503
Less: accumulated depreciation and amortization		(483	)		(463	)

	$	32		$	40

Depreciation and amortization expense of property and equipment was $21,000 for the years ended December 31, 2011 and 2010.

NOTE 6. INTANGIBLE ASSET, NET AND GOODWILL

The Company accounts for goodwill in accordance ASC Topic 350 “Intangibles – Goodwill and Other” which requires that goodwill and intangible assets with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.

Goodwill includes the excess of the purchase price over the fair value of net assets acquired of $2,832,000 in connection with the SOAdesk LLC acquisition in Note 2. The Codification requires that goodwill be tested for impairment at the reporting unit level. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgment is required to estimate the fair value of reporting units which includes estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment.

Pursuant to recent authoritative accounting guidance, the Company elects to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The Company is not required to calculate the fair value of a reporting unit unless the Company determines that it is more likely than not that its fair value is less than its carrying amount. If the Company determines that it is more likely than not that its fair value is less than its carrying amount, then the two-step goodwill impairment test is performed. The first step, identifying a potential impairment, compares the fair value of the reporting unit with its carrying amount. If the carrying value exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of that goodwill. Any excess of the goodwill carrying value over the respective implied fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. Through December 31, 2011, no impairment of goodwill has been identified.

The Company’s intangible asset with a finite life in the amount of $2,103,000 is being amortized over its estimated useful life of 3 years for software acquired from SOAdesk LLC. Amortization expense is $701,000 and $673,000 for fiscal 2011 and 2010, respectively. At December 31, 2011, the net balance of the intangible asset is $729,000. At December 31, 2011, the estimated future amortization expense for each of the succeeding years is as follows: $701,000 for fiscal year 2012, and $28,000 for fiscal year 2013. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives or other relevant factors.

Based upon our annual evaluation testing, we have determined that the fair value of goodwill and the intangible asset exceeds the carrying value of the net assets acquired as of December 31, 2011.

NOTE 7. SHORT-TERM DEBT

Term loan, notes payable, and notes payable to related party consist of the following at December 31 (in thousands):

	2011		2010
Term loan (a)	$	753	$	671
Note payable asset purchase agreement (b)		1,121		--
Note payable related parties (c)		2,959		9
Notes payable (d)		1,304		793
	$	6,137	$	1,473

F-15

(a)

In October 2007, the Company agreed to restructure the note payable to Bank Hapoalim and guaranty by BluePhoenix Solutions. Under a new agreement with BluePhoenix, the Company made a principal reduction payment to Bank Hapoalim in the amount of $300,000. Simultaneously, BluePhoenix paid $1,671,000 to Bank Hapoalim, thereby discharging that indebtedness. The Company and BluePhoenix entered into a new note in the amount of $1,021,000, bearing interest at LIBOR plus 1.0% and maturing on December 31, 2011. In addition, BluePhoenix acquired 2,546,149 shares of the Company’s common stock in exchange for $650,000 paid to Bank Hapoalim to retire that indebtedness. Of the new note payable to BluePhoenix, approximately $350,000 was due on January 31, 2009 and the balance was due on December 31, 2011. During 2008, the Company paid $200,000 against the principal and BluePhoenix converted $50,000 of principal into 195,848 shares of Cicero common stock. In January 2009, the Company paid $100,000 against the principal. In January 2012, the Company entered into an addendum to the original note to extend the maturity of all outstanding principal and interest of $752,594 to December 31, 2012. At the time of the extension, the Company paid $150,000 towards principal and interest on this note. The unpaid principal and accumulated interest shall bear interest at a rate of LIBOR (3 months $ LIBOR, 0.518%) plus 6.7% per annum calculated quarterly. In March 2012, the Company made a $50,000 principal reduction payment. In April 2012, the Company paid the note at a discount in the amount of $380,000 and recognized approximately $170,000 as a gain.

(b)	At December 31, 2011, the Company was indebted to SOAdesk LLC for the remaining portion of the related long term debt of $1,121,000. (See Note 8)

(c)

From time to time during 2010 and 2011, the Company entered into several short term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The notes bear interest at 12% per year and are unsecured. At December 31, 2011, the Company was indebted to Mr. Steffens in the amount of $3,065,000 of which $1,665,000 was reclassified from long term debt. (See Note 8) In March 2012, Mr. Steffens converted $3,000,000 of his debt, which included $350,000 which was lent to the Company in the first quarter of 2012, into 20,000,000 shares of common stock of the Company. In March 2012, Mr. Steffens agreed to refinance $115,000 of debt and $417,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013. As such this amount has been reclassified to long term debt. (See Note 8)

From time to time the Company entered into promissory notes with one of the Company’s former directors and the former Chief Information Officer, Anthony Pizi. The notes bear interest at 12% per annum. As of December 31, 2011 and 2010, the Company was indebted to Anthony Pizi in the amount of $9,000. In March 2012, Mr. Pizi converted his indebtedness into 171,487 shares of common stock of the Company.

(d)

The Company has issued a series of short term promissory notes with private lenders, which provide for short term borrowings, both secured by accounts receivable and unsecured. The notes in the amount of $718,000 bear interest between 10% and 36% per annum. In March 2012, the Company converted $235,000 of these notes into 1,566,667 shares of Company’s Common Stock. In March 2012, certain private lenders agreed to refinance $83,000 of debt and $301,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013. As such this amount has been reclassified to long term debt. (See Note 8).

At December 31, 2011, the Company was indebted for the remaining portion of the related long term debt for several secured Promissory Notes with certain investors in the aggregate amount of $650,000 that were secured by the amount due under the Company’s support contract with Merrill Lynch. (See Note 8) In March 2012, these notes were paid in full.

In August 2011, the Company entered into a promissory note with an employee for various working capital needs. The note bears interest at 6% per year and is unsecured. As of December 31, 2011, the Company was indebted to this employee in the amount of $19,000.

F-16

NOTE 8. LONG-TERM DEBT

Long-term loan and notes payable to related party consist of the following at December 31(in thousands):

	2011		2010
Note payable – asset purchase agreement (a)	$	--	$	1,125
Note payable – related party (b)		532		1,665
Other long-term debt (c)		1,384		1,650
	$	1,916	$	4,440

(a)

In January 2010, per the Asset Purchase Agreement, the Company entered into an unsecured convertible promissory note with SOAdesk for $700,000 with an annual interest rate of 5%. The note was originally scheduled to mature on March 31, 2010 but was subsequently amended to extend the maturity date to September 30, 2010 and was secured with shares of the Company’s Series B Preferred Stock. As of September 30, 2010, the maturity date was extended to March 31, 2011. In March 2011, the Company and SOAdesk LLC agreed to extend the maturity on the note to March 31, 2012. At December 31, 2011 and 2010, the Company was indebted to SOAdesk in the amount of $700,000 of which the amount at December 31, 2011, has been reclassified to short term debt (See Note 7). In March 2012, the Company and SOAdesk LLC agreed to extend the maturity on the note to December 31, 2012.

The note is convertible into shares of Series B Convertible Preferred Stock at the rate of one share per every $150 of principal and interest due under the note. The Company is obligated to repay any principal of the loan with fifty percent of any gross proceeds of any Series B Preferred capital raise through maturity of the note. The note is convertible at the holder’s option at any time or at maturity .

Also, as part of the Asset Purchase Agreement, the Company was to pay to the shareholders of SOAdesk LLC the sum of $525,000 on March 31, 2010. In March 2010, the terms of the Asset Purchase Agreement were amended and the Company issued a $525,000 convertible promissory note to SOAdesk in lieu of the $525,000 payment originally due on March 31, 2010. This note, which carries an annual interest rate of 5%, is secured by shares of the Company’s Series B Preferred Stock. The note was to mature on June 30, 2010 but was subsequently amended to extend the maturity date to September 30, 2010. As of September 30, 2010, the maturity date was further extended to March 31, 2011. In March 2011, the Company and SOAdesk LLC agreed to extend the maturity on the note until March 31, 2012. In March 2012, the Company and SOAdesk LLC agreed to extend the maturity on the note until December 31, 2012. In April 2010 and May 2011, the Company paid $100,000 and $4,000, respectively, against the principal resulting in the balance SOAdesk due of $421,000 and $425,000 at December 31, 2011 and 2010, respectively, the balance of which was reclassified to short term debt (See Note 7). In April 2012, the note was paid in full.

The note is convertible into shares of Series B Convertible Preferred Stock at the rate of one share per every $150 of principal and interest due under the note. The Company is obligated to repay any principal of the loan with fifty percent of any gross proceeds of any Series B Preferred capital raise through maturity of the note. The note is convertible into Series B Preferred Stock at the holder’s option at any time or at maturity.

In accordance with ASC 470-20 “Debt with Conversion and Other Options”, the Company has determined the embedded conversion option is beneficial and has intrinsic value to the holder. The total debt discount to be recognized is $175,000 and the Company has reduced the note by that amount and increased Additional Paid in Capital by the same amount. As of December 31, 2010, the Company had amortized $175,000 in the statement of operations.

F-17

(b)

From time to time during 2010, the Company entered into several short term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The notes bear interest at 12% per year and are unsecured. At December 31, 2010, the Company was indebted to Mr. Steffens in the amount of $1,665,000. In March 2011, the Company and Mr. Steffens agreed to extend the maturity on the notes until March 31, 2012. At December 31, 2011, the balance was reclassified to short term debt. (See Note 7) In March 2012, Mr. Steffens agreed to refinance $115,000 of debt and $417,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013. As such this amount has been reclassified to long term debt. (See Note 7)

(c)

In March 2009, the Company entered into several secured Promissory Notes with certain investors in the aggregate amount of $750,000. The notes bear interest at 15% and mature on January 31, 2012. The notes are secured by the amount due under the Company’s support contract with Merrill Lynch. In addition, each investor was issued a warrant to purchase common stock of the Company. Under the terms of the warrant, which expires in five years, each note holder is entitled to purchase 1,000 shares of Cicero common stock for every $1,000 of principal due under the note. The exercise price on the warrant is $0.20 per share. The shares of common stock underlying the warrants have registration rights and a cashless exercise provision in the event no registration statement is effective for resale, if required. The Company has allocated the proceeds received from the Note and Warrant Offering based on relative fair value and is amortizing such amount under the terms of the notes as additional interest expense in the amount of $50,349. In February 2010, the Company reduced the principal indebtedness by $100,000. At December 31, 2011 and 2010, the Company was indebted to these investors in the amount of $650,000 of which the amount at December 31, 2011 has been reclassified to short term debt. (See Note 7) In March 2012, these notes were paid in full.

In January 2010, as part of the Asset Purchase Agreement, the Company entered into an unsecured Convertible Promissory Note with SOAdesk in the amount of $1,000,000. The note bears interest at 5% and is due November 14, 2015. The note is only convertible into shares of the Company’s common stock at the rate of one share for every $0.15 of principal and interest due under the note. The note is convertible at the option of the holder with one-third convertible in January 2011, two-thirds convertible in January 2012, and the entire note convertible in January 2013 or at maturity. In March 2012, SOAdesk elected to convert $300,000 of the outstanding note balance into 2,000,000 shares of Company’s Common Stock.

In March 2012, certain private lenders agreed to refinance $83,000 of debt and $301,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013. As such this amount has been reclassified to long term debt. (See Note 7)

Scheduled maturities of the above long-term debt are as follows:

Year
2013	$	916,000
2015	$	1,000,000
	$	1,916,000

NOTE 9. INCOME TAXES

The Company follows the provisions of FASB ASC Topic 740, “Income Taxes”, and recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement with the relevant tax authority. The Company applies ASC Topic 740 to all tax positions for which the statute of limitations remains open.

The Company has identified its federal tax return and its state tax return in North Carolina as “major” tax jurisdictions. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The evaluation was performed for the tax years 2008 through 2011, and may be subject to audits for amounts related to net operating loss carryforwards generated in periods prior to December 31, 2008. The Company believes that its income tax positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position.

The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense. There were no amounts accrued for penalties and interest as of or during the period for the tax years 2010 and 2011. The Company does not expect its uncertain tax position to change during the next twelve months. Management is currently unaware of any issues under review that could result in significant payment, accruals or material deviations from its position.

F-18

A reconciliation of expected income tax at the statutory federal rate with the actual income tax provision is as follows for the years ended December 31 (in thousands):

	2011			2010
Expected income tax benefit at statutory rate (34%)	$	(1,010	)	$	(156	)
State taxes, net of federal tax benefit.		(176	)		(27	)
Effect of change in valuation allowance		(15,568	)		(125	)
Non-deductible expenses		12			6
Expiration of net operating loss deductions		16,742			302
Total	$	--		$	--

Significant components of the net deferred tax asset (liability) at December 31 were as follows:

	2011			2010
Current assets:
Accrued expenses, non-tax deductible	$	344		$	296
Deferred revenue		645			149
Contingent payments		(627	)		(420	)
Noncurrent assets:
Stock compensation expense		513			469
Loss carryforwards		79,811			95,211
Depreciation and amortization		2,486			3,035
		83,172			98,740

Less: valuation allowance		(83,172	)		(98,740	)

	$	--		$	--

At December 31, 2011, the Company had net operating loss carryforwards of approximately $199,530,000, which may be applied against future taxable income. These carryforwards will expire at various times between 2012 and 2031. Net operating loss carryforwards include tax deductions for the disqualifying dispositions of incentive stock options. When the Company utilizes the net operating losses related to these deductions, the tax benefit will be reflected in additional paid-in capital and not as a reduction of tax expense. The total amount of these deductions included in the net operating loss carryforwards is $21,177,000.

The Company provided a full valuation allowance on the total amount of its deferred tax assets at December 31, 2011 and 2010 since management does not believe that it is more likely than not that these assets will be realized.

NOTE 10. STOCKHOLDERS’ EQUITY

Preferred Stock :

In April 2010, the Company issued to a certain accredited investor 1,333 shares of Series B Convertible Preferred Stock at $150 per share for a total of $200,000. The Series B Convertible Preferred Stock bears an annual dividend of 8%. The Series B stock may convert into common stock at a conversion rate of $0.15 per share. Additionally, the Series B stock provides warrants to purchase common stock of the Company at a strike price of $0.25 per share. The warrants expire in five years. 333,333 warrants were issued to the investor. In accordance with ASC 470-20 “Debt with Conversion and Other Options”, the Company has allocated the proceeds received from the Convertible Series B Preferred Stock and Warrant Offering based upon relative fair value. Using Black-Scholes, the Company has determined that the fair value of the warrants issued is $54,455 and the beneficial conversion amount is $66,667. Since this beneficial conversion feature is immediately convertible upon issuance, the Company has fully amortized this beneficial conversion feature in the Statement of Operations during the year ended December 31, 2010.

F-19

In January 2010, the Company issued to certain accredited investors 9,067 shares of Series B Convertible Preferred Stock at $150 per share for a total of $1,360,000, including $500,000 in cash, the cancellation of $710,000 of existing indebtedness and the cancellation of a note of $150,000 to memorialize an advance of payment for Series B Stock prior to issuance. The Series B Convertible Preferred Stock bears an annual dividend of 8%. The Series B stock may convert into common stock at a conversion rate of $0.15 per share. Additionally, the Series B stock investors were issued warrants to purchase common stock of the Company at a strike price of $0.25 per share. The warrants expire in five years. 2,266,667 warrants were issued to these investors.

Common Stock :

In May 2011, the Company issued 200,000 shares of common stock for the conversion of debt of $17,000 to an investor who had entered into a short term promissory note with the Company in August 2010.

In March 2011, the Company issued 145,339 shares of common stock for the conversion of interest payable of $9,000 to an investor who had a short term promissory with the Company.

Stock Grants :

In August 2007, the Company issued Mr. John P. Broderick, our Chief Executive Officer, a restricted stock award in the amount of 549,360 shares which will vest to him upon his resignation or termination. The Company used the Black-Scholes method to value these shares and assumed a life of 10 years. The Company recorded compensation expense of approximately $36,000 for fiscal 2011 and 2010.

Stock Options :

In 2007, the Board of Directors approved the 2007 Cicero Employee Stock Option Plan which permits the issuance of incentive and nonqualified stock options, stock appreciation rights, performance shares, and restricted and unrestricted stock to employees, officers, directors, consultants, and advisors. The aggregate number of shares of common stock which may be issued under this Plan shall not exceed 4,500,000 shares upon the exercise of awards and provide that the term of each award be determined by the Board of Directors. The Company also has a stock incentive plan for outside directors and the Company has set aside 1,200 shares of common stock for issuance under this plan.

Under the terms of the Plans, the exercise price of the incentive stock options may not be less than the fair market value of the stock on the date of the award and the options are exercisable for a period not to exceed ten years from date of grant. Stock appreciation rights entitle the recipients to receive the excess of the fair market value of the Company's stock on the exercise date, as determined by the Board of Directors, over the fair market value on the date of grant. Performance shares entitle recipients to acquire Company stock upon the attainment of specific performance goals set by the Board of Directors. Restricted stock entitles recipients to acquire Company stock subject to the right of the Company to repurchase the shares in the event conditions specified by the Board are not satisfied prior to the end of the restriction period. The Board may also grant unrestricted stock to participants at a cost not less than 85% of fair market value on the date of sale. Options granted vest at varying periods up to five years and expire in ten years.

Activity for stock options issued under these plans for the years ending December 31, 2011 and 2010 was as follows:

	Number of Options			Option Price Per Share		Weighted Average Exercise Price		Aggregate Intrinsic Value
Balance at December 31, 2009		2,707,006			0.10-3,931.25	$	1.10
Granted		1,444,750			0.09	$	0.09
Forfeited		(648,599	)		0.09-3,931.25	$	1.21
Balance at December 31, 2010		3,503,157			0.09-581.00	$	0.60
Granted		880,000			0.06-0.10	$	0.07
Forfeited		(85,000	)		0.09-0.10	$	0.10
Expired		(1,964	)		174.00-581.00	$	234.78
Balance at December 31, 2011		4,296,193			0.06-39.00	$	0.39	$	0.00

Activity for non-vested stock options under these plans for the fiscal year ending December 31, 2011 and 2010 was as follows:

	Number of Options			Option Price Per Share		Weighted Average Exercise Price
Balance at December 31, 2009		338,334			0.10-0.25	$	0.15
Granted		1,444,750			0.09	$	0.09
Vested		(669,915	)		0.09-0.25	$	0.11
Forfeited		(91,666	)		0.09-0.25	$	0.16
Balance at December 31, 2010		1,021,503			0.09	$	0.09
Granted		880,000			0.06-0.10	$	0.07
Vested		(945,756	)		0.06-0.15	$	0.08
Forfeited		(3,333	)		0.09	$	0.09
Balance at December 31, 2011		952,414			0.06-0.10	$	0.08

F-20

There were 880,000 options granted during 2011 and 1,444,750 options granted during 2010. The weighted average grant date fair value of options issued during the years ended December 31, 2011 and 2010 was equal to $0.07 and $0.09 per share, respectively. There were no option grants issued below fair market value during 2011 and 2010.

At December 31, 2011, there was unrecognized compensation cost of $54,000 related to stock options which is expected to be recognized over a weighted-average amortization period of 2 years.

At December 31, 2011 and 2010, options to purchase 3,343,779 and 2,481,654 shares of common stock were exercisable, respectively, pursuant to the plans at prices ranging from $0.06 to $39.00. The following table summarizes information about stock options outstanding at December 31, 2011:

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

$	0.06-0.08		892,500		9.6		410,000	$	0.07
	0.09		1,359,750		8.6		906,503		0.09
	0.10-0.37		390,000		7.1		373,333		0.15
	0.38-46.00		1,653,943		5.58		1,653,943		0.88

			4,296,193		7.5		3,343,779	$	0.48

Preferred Stock :

As part of the recapitalization plan approved by shareholders in November 2006, the Company offered to exchange its existing Series A-3, B-3, C and D preferred shares at reduced conversion rates in exchange for shares of a new Series A-1 preferred stock in Cicero Inc. This proposal also required approval by existing preferred shareholders as a class. The new conversion prices with respect to the Series A-3, B-3 and D preferred stock were negotiated with the holders of each series based upon such factors as the current conversion price in relation to the market, the dollar amount represented by such series and, waiver of anti-dilution, liquidation preferences, seniority and other senior rights. The conversion price for the Series C preferred stock was determined in relation to the conversion price for the Series D preferred stock. The Board of Directors determined the new conversion price of each series of Level 8 preferred stock after discussion and review of those rights, ranks and privileges that were being waived by the present holders of preferred stock. Among those rights being waived are anti-dilution protection, liquidation preferences and seniority.

The holders of the Series A-1 preferred stock shall have the rights and preferences set forth in the Certificate of Designations filed with the Secretary of State of the State of Delaware upon the approval of the Recapitalization. The rights and interests of the Series A-1 preferred stock of the Company will be substantially similar to the rights and interests of each of the series of the former Level 8 preferred stock other than for (i) anti-dilution protections that have been permanently waived and (ii) certain voting, redemption and other rights that holders of Series A-1 preferred stock will not be entitled to. All shares of Series A-1 preferred stock will have a liquidation preference pari passu with all other Series A-1 preferred stock.

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

F-21

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

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

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

Stock Warrants:

The Company values warrants based on the Black-Scholes pricing model. Warrants granted in 2010 were valued using the following assumptions:

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

Series B Preferred Stock Warrants		5		118	%		3.96	%		8	%	$	0.25		2,600,000
SOAdesk Loan Extension Warrants		5		100	%		2.20	%		--		$	0.08		100,000

NOTE 11. EMPLOYEE BENEFIT PLANS

The Company sponsors one defined contribution plan for its employees - the Cicero Inc. 401(K) Plan. Under the terms of the Plan, the Company, at its discretion, provides a 50% matching contribution up to 6% of an employee’s salary. Participants must be eligible and employed at December 31 of each calendar year to be eligible for employer matching contributions. The Company opted not to make any matching contributions for 2011 and 2010.

F-22

NOTE 12. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

In 2011, four customers accounted for 38%, 17% 11% and 12% of operating revenues and two customers accounted for 70% and 14% of accounts receivable at December 31, 2011. In 2010, three customers accounted for 41%, 20% and 13% of operating revenues and two customers accounted for 44% and 40% of accounts receivable at December 31, 2010.

NOTE 13. RELATED PARTY INFORMATION

From time to time since 2010 the Company has entered into multiple short term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The notes bear interest at 12% per year and are unsecured. At December 31, 2011, the Company was indebted to Mr. Steffens in the amount of $3,065,000. The loans mature at various dates through December 31, 2012. In March 2012, Mr. Steffens converted $3,000,000 of principal amount due under these notes into 20,000,000 shares of common stock of the Company. In March 2012, Mr. Steffens agreed to refinance $465,000 of debt and $417,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013. As such this amount has been reclassified to long term debt. (See Note 8).

Antony Castagno, the Company’s Chief Technology Officer, is part-owner of SOAdesk LLC. For a description of the transactions between the Company and SOAdesk. (See Note 3).

NOTE 14. LEASE COMMITMENTS AND EMPLOYMENT AGREEMENTS

The Company leases certain facilities and equipment under various operating leases. Future minimum lease commitments on operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2011 consisted of only one lease as follows (in thousands):

	Lease Commitments

2012	$	95
2013		98
2014		59
	$	252

Rent expense for the years ended December 31, 2011 and 2010, was $96,000 and $97,000, respectively. As of December 31, 2011 and 2010, the Company had no sublease arrangements.

Under the employment agreement between the Company and Mr. Broderick effective January 1, 2012, we agreed to pay Mr. Broderick an annual base salary of $175,000 and performance bonuses in cash of up to $275,000 per annum based upon exceeding certain revenue goals and operating metrics, as determined by the Compensation Committee, in its discretion. Upon termination of Mr. Broderick’s employment by the Company without cause, we agreed to pay Mr. Broderick a lump sum payment of $175,000 which is one year of Mr. Broderick’s then current base salary within 30 days of termination and any unpaid deferred salaries and bonuses. In the event there occurs a substantial change in Mr. Broderick’s job duties, there is a decrease in or failure to provide the compensation or vested benefits under the employment agreement or there is a change in control of the Company, we agreed to pay Mr. Broderick a lump sum payment of $175,000 which is one year of Mr. Broderick’s then current base salary within thirty (30) days of termination. Mr. Broderick will have thirty (30) days from the date written notice is given about either a change in his duties or the announcement and closing of a transaction resulting in a change in control of the Company to resign and execute his rights under this agreement. If Mr. Broderick’s employment is terminated for any reason, Mr. Broderick has agreed that, for two (2) year after such termination, he will not directly or indirectly solicit or divert business from us or assist any business in attempting to do so or solicit or hire any person who was our employee during the term of his employment agreement or assist any business in attempting to do so.

F-23

Under the employment agreement between the Company and Mr. Castagno effective January 1, 2012, we agreed to pay Mr. Castagno an annual base salary of $150,000 and performance bonuses in cash of up to $250,000 per annum based upon exceeding certain revenue goals and operating metrics, as determined by the Compensation Committee, in its discretion. Upon termination of Mr. Castagno’s employment by the Company without cause, we agreed to pay Mr. Castagno an amount of $75,000 which is equivalent to six (6) months of Mr. Castagno’s then current base salary in equal semi-monthly installments over the six (6) month period following the termination. If Mr. Castagno’s employment is terminated for any reason, Mr. Castagno has agreed that, for two (2) year after such termination, he will not directly or indirectly solicit or divert business from us or assist any business in attempting to do so or solicit or hire any person who was our employee during the term of his employment agreement or assist any business in attempting to do so.

NOTE 15. CONTINGENCIES

Various lawsuits and claims have been brought against us in the normal course of our business.

In October 2003, we were served with a summons and complaint in Superior Court of North Carolina regarding unpaid invoices for services rendered by one of our subcontractors. The amount in dispute was approximately $200,000 and is included in accounts payable. Subsequent to March 31, 2004, we settled this litigation. Under the terms of the settlement agreement, we agreed to pay a total of $189,000 plus interest over a 19-month period ending November 15, 2005. The Company has not made any additional payments and has a remaining liability of approximately $88,000.

During fiscal 2011, the Company was served with a writ of summons by a creditor who holds a revolving note agreement. The Company has offered a repayment arrangement to the creditor but has received no response to date. No formal complaint was filed and the Company intends to seek a dismissal of the writ of summons.

Under the indemnification clause of the Company’s standard reseller agreements and software license agreements, the Company agrees to defend the reseller/licensee against third party claims asserting infringement by the Company’s products of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/licensee. The Company has never paid any such third party claims.

NOTE 16. SUBSEQUENT EVENTS

In January and March 2012, the Company paid assorted notes with a combined principal and interest of $892,000. In April 2012, the Company liquidated an additional $1,021,000 of short term debt and interest payable. Also in March 2012, the Company converted $3,841,000 of assorted short and long term notes, interest payable and accrued Series B preferred stock dividends into 25,608,762 shares of common stock of the Company. In addition, the Company’s CEO, and former CEO, agreed to forgive approximately $404,000 of accrued salaries and wages from prior years.

In March 2012, certain lenders, including Mr. Launny Steffens, the Company’s Chairman of the Board, agreed to refinance $548,000 of debt and $718,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013. As such this amount has been recorded in long term debt. (See Note 8)

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements.

F-24

Delaware		11-2920559
(State of incorporation)		(I.R.S. Employer Identification No.)

Securities registered pursuant to Section 12(b) of the Act:	NONE
Securities registered pursuant to Section 12(g) of the Act:	Common Stock, $.001 par value

	2011				2010
Quarter	High		Low		High		Low
First	$	0.08	$	0.05	$	0.20	$	0.08
Second	$	0.12	$	0.06	$	0.20	$	0.12
Third	$	0.10	$	0.05	$	0.13	$	0.08
Fourth	$	0.06	$	0.03	$	0.08	$	0.05

	Debt		Interest		Series B Dividends		Common Stock
Launny Steffens	$	3,000,000	$	--	$	165,333		21,102,222
SOAdesk, LLC		300,000		--		--		2,000,000
Private Investors		243,502		26,372		--		1,799,155
Scott Lustgarten		--		3,107		25,833		192,934
Ahab Partner L.P.		--		--		32,292		215,278
Don Peppers		--		--		30,578		203,852
Ahab International Ltd.		--		--		10,764		71,759
Mark Landis		--		3,534		--		23,562
	$	3,543,502	$	33,013	$	264,800		25,608,762

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		4,296,193	$	0.39		224,857
Equity compensation plans not approved by stockholders		-0-		--		-0-

Item Number		Page Number
PART I
1.	Business		3
1A.	Risk factors		9
1B	Unresolved Staff Comments		13
2.	Properties		13
3.	Legal Proceedings		13
4.	Mine Safety Disclosures		13
PART II
5.	Market for Cicero Common Stock and Related Shareholder Matters		14
6.	Selected Financial Data		15
7.	Management's Discussion and Analysis of Financial Condition and Results of Operations		15
7A.	Quantitative and Qualitative Disclosures About Market Risk		24
8.	Financial Statements and Supplementary Data		24
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		24
9A.	Controls and Procedures		24
9B.	Other Information		25

PART III

10.	Directors, Executive Officers and Corporate Governance		26
11.	Executive Compensation		29
12.	Security Ownership of Certain Beneficial Owners and Management		35
13.	Certain Relationships and Related Transactions, and Director Independence		38
14.	Principal Accountant Fees and Services		39

PART IV

15.	Index Exhibits and Financial Statement Schedules		40

SIGNATURES			44
INDEX TO FINANCIAL STATEMENTS			F-1

Name	Age		Position(s)
John L Steffens		70	Director and Chairman
John Broderick		62	Director and Chief Executive Officer/Chief Financial Officer
Antony Castagno		44	Director and Chief Technology Officer
Mark Landis		70	Director
Bruce W. Hasenyager		70	Director
Jay R. Kingley		51	Director
Charles B. Porciello		76	Director
Bruce D. Miller		61	Director
John W. Atherton		69	Director
Don Peppers		61	Director

Name and Principal Position	Fiscal Year	Salary		Stock Awards		Option Awards (1)		Non- Equity Incentive Plan Compensation (2)		All Other Compensation (3)		Total
John P. Broderick Chief Executive Officer Chief /Financial Officer, Corporate Secretary	2011	$	175,000		--		--	$	25,000	$	6,030	$	206,030
	2010	$	175,000		--	$	6,668	$	25,000	$	10,943	$	217,611

Antony Castagno Chief Technology Officer *	2011	$	150,000		--		--		--	$	5,402	$	155,402
	2010	$	150,000		--	$	6,668		--	$	5,465	$	162,133

	Option Awards									Stock Awards
Name	Number of Securities Underlying Unexercised Options # Exercisable (Vested)			Number of Securities Underlying Unexercised Unearned Options# Unexercisable (Unvested)			Option Exercise price ($)		Option Expiration date	Number of Shares of Stock That Have Not Vested			Market Value of Shares of Stock That Have Not Vested
John P. Broderick		1,000	(1)		--		$	39.00	07/08/2012
		4,950	(2)		--		$	26.00	04/24/2013
		5,000	(3)		--		$	31.00	02/18/2014
		549,360	(4)		--		$	0.51	08/17/2017
		50,000	(5)		25,000	(5)	$	0.09	08/20/2020
											549,630	(6)	$	54,963
Antony Castagno		50,000	(5)		25,000	(5)	$	0.09	08/20/2020

	Base Salary		Restricted Shares Award		Deferred Compensation		Total Compensation and Benefits
John P. Broderick
Death	$	--	$	60,459	$	175,000	$	235,459
Disability		--		60,459		175,000		235,459
Involuntary termination without cause		175,000		60,459		175,000		410,459
Change in Control		175,000		60,459		175,000		410,459
Antony Castagno
Involuntary termination without cause		75,000		--		--		75,000

Name of Beneficial Owner	No. of Common Shares		% of Class			No. of Series A1 Shares		% of Class			No. of Series B Shares		% of Class			% of Combined Classes
John L. Steffens (1)		28,315,481		37.7	%		14.832		1.0	%		6,400.00		61.5	%		42.6	% (2)
Jonathan Gallen (3)		9,699,840		13.2	%		--		*			1,667.00		16.0	%		15.1	% (4)
Mark and Carolyn P. Landis (5)		3,781,384		5.2	%		1,326.136		86.0	%		--		*			6.9	% (6)
SOAdesk LLC		5,168,860		7.1	%		--		*			8,240.59		44.2	%		16.5	% (7)
Bruce Miller		2,289,322		3.1	%		--		*			--		*			3.1	% (8)
Don Peppers		899,179		1.2	%		--		*			1,333.33		12.8	%		3.0	% (9)
John P. Broderick		1,162,918		1.6	%		--		*			--		*			1.6	% (10)
John W. Atherton		163,451		*			--		*			--		*			*	(11)
Bruce W. Hasenyager		48,319		*			--		*			--		*			*	(12)
Charles Porciello		94,953		*			--		*			--		*			*	(13)
Antony Castagno		50,000		*			--		*			--		*			*	(14)
Jay R. Kingley		16,667		*			--		*			--		*			*	(15)
Scott Lustgarten		443,934		*			--		*			1,000.00		9.6	%		1.9	(16)
All current directors and executive officers as a group (10 persons)		36,821,64		48.0	%		1,340.968		87.0	%		7,733.33		74.4	%		53.4	%(17)

	CICERO INC.

Date: April 16, 2012	By:	/s/ John P. Broderick
		John P. Broderick
		Chief Executive Officer and Chief Financial Officer

Signature	Title	Date

/ s/John L. Steffens	Chairman of the Board	April 16, 2012
John L. Steffens

/s/ John P. Broderick	Chief Executive Officer/Chief Financial Officer (Principal Executive Officer)	April 16, 2012
John P. Broderick

/s/ Antony Castagno	Chief Technology Officer	April 16, 2012
Antony Castagno

/s/ Mark Landis	Director	April 16, 2012
Mark Landis

/s/ Bruce Hasenyager	Director	April 16, 2012
Bruce Hasenyager

/s/ Jay Kingley	Director	April 16, 2012
Jay Kingley

/s/ Bruce D. Miller	Director	April 16, 2012
Bruce D. Miller

/s/ Charles Porciello	Director	April 16, 2012
Charles Porciello

/s/ John W. Atherton	Director	April 16, 2012
John W. Atherton

/s/ Don Peppers	Director	April 16, 2012
Don Peppers

COMPANY:			EMPLOYEE:

CICERO, INC.

/s/			/s/
Name			John P. Broderick
Title

	Operating Net Income Range (before tax)

	From	To	Variable Compensation
	Less than Target Operating Net Income		None
Tier 1	Achieve Target Operating Net Income up to 120% of Target		43% of base compensation
Tier 2	Achieve >120% of Target Net Operating Income ; < 150%		86% of base compensation
Tier 3	Achieve > 150% of Target Net Operating Income		143% of base compensation

	Performance significantly in excess of Tier 3 may result in an additional reward at the discretion of the Compensation Committee

CONVERGYS CUSTOMER MANAGEMENT GROUP INC.	VENDOR
By:____________________________________	By:____________________________________

Name:__________________________________	Name:__________________________________

Title:___________________________________	Title:___________________________________

Date:___________________________________	Date:___________________________________

Service	Description	Daily Rate	Convergys Rate
XM Implementation and Consulting	Implementation Specialist	$1,600	$1,200
XM Planning and Management	Implementation / Project Manager	$1,600	$1,200

	If to Maker:	Cicero, Inc. 8000 Regency Parkway Suite 542 Cary, North Carolina 27518 Attn: John Broderick Fax: (919) 380-5121

	If to Lender:	John L. Steffens

	CICERO, INC.

	By:
		John Broderick
		Chief Executive and Chief Financial Officer

Name		Jurisdiction

Level 8 Technologies, Inc.		Delaware

Cicero Technologies, Inc,		Delaware

Cicero Technologies Acquisition, LLC		Delaware

Template Software de Mexico, S.A. de C.V.		Mexico

Level 8 Systems Australia Pty Ltd		Australia

Template Software Holding GmbH		Germany
Template Software Geschaftsfuhrungs GmbH		Germany
Template Software GmbH		Germany

Level 8 Worldwide Holdings Ltd		Delaware
Seer Technologies de Argentina S.A		Argentina
Level 8 FSC, Inc		Barbados
Level 8 Benelux B.V		Netherlands
Seer Technologies do Brasil Ltd.		Brazil
Level 8 Canada, Inc		Canada
Level 8 Europe (Deutschland) GmbH		Germany
Level 8 Ireland Limited		Ireland
Level 8 Systems Nordic AB		Sweden
Seer Korea Co., Limited		South Korea
Seer Technologies Singapore PTY, Limited		Singapore
Seer Technologies Hong Kong Limited		Hong Kong

3020126 Canada, Inc. (fka Bizware)		Canada

April 16, 2012	By: /s/ John P. Broderick
	John P. Broderick
	Chief Executive and Financial Officer
	(Principal Financial and Accounting Officer)