UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549



                                    FORM 10-Q


  X      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
------   EXCHANGE ACT OF 1934

For the quarterly period ended:     June 30, 1998

                                       OR

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------   EXCHANGE ACT OF 1934

For the transition period from               to

                         Commission File Number: 0-19301


                     COMMUNICATION INTELLIGENCE CORPORATION
             (Exact name of registrant as specified in its charter)

              Delaware                                94-2790442
   -------------------------------            ----------------------------
   (State or other jurisdiction of                  (I.R.S. Employer
    incorporation or organization)                  Identification No.)


      275 Shoreline Drive, Suite 500, Redwood Shores, CA    94065-1413
      ----------------------------------------------------------------
         (Address of principal executive offices)           (Zip Code)

Registrant's telephone number, including area code:    (650) 802-7888

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                         Yes       X               No
                             --------                  --------


     Number of shares outstanding of the issuer's Common Stock, as of 
     August 12, 1997: 54,221,965.

 This Quarterly Report on Form 10-Q contains 21 pages of which this is page 1.



<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
                                   FORM 10-Q

                                      INDEX



PART I.  FINANCIAL INFORMATION


 Item 1. Financial Statements                                           Page No.

   Condensed Consolidated Balance Sheets at June 30, 1998 (unaudited) and
       December 31, 1997......................................................3

   CondensedConsolidated  Statements of  Operations  for the three and six
       month periods ended June 30, 1998 and 1997(unaudited)..................4

   CondensedConsolidated  Statements  of Cash  Flows  for  the  six  month
       periods ended June 30, 1998 and 1997(unaudited)........................5

   Notes to Condensed Consolidated Financial Statements.......................7


 Item 2.  Management's Discussion and Analysis of Financial Condition and
          Results of Operations..............................................13


PART II.  OTHER INFORMATION

   Item 1.  Legal Proceedings................................................19

   Item 2.  Change in Securities.............................................19

   Item 3.  Defaults Upon Senior Securities..................................19

   Item 4.  Submission of Matters to a Vote of Security Holders..............19
 
   Item 5.  Other Information................................................20

   Item 6.  Exhibits and Reports on Form 8-K

            (a)      Exhibits................................................20

            (b)      Reports on Form 8-K.....................................20

   Signatures................................................................21



                                     - 2 -
<PAGE>
                         
<TABLE>
                                                      
                     Communication Intelligence Corporation
                                 and Subsidiary
                      Condensed Consolidated Balance Sheets
                                 (In thousands)
<CAPTION>

                                                June 30,          December 31,
                                                  1998                1997
                                               ----------          ----------
                                                         Unaudited

Assets
Current assets:
<S>                                            <C>                 <C>       
     Cash and cash equivalents                 $    1,939          $    5,485
     Accounts receivable, net                         860                 362
     Inventories                                      245                 193
     Other current assets                             274                 175
                                               ----------          ----------
         Total current assets                       3,318               6,215

Note receivable from officer                          210                 210
Property and equipment, net                           691                 798
Other assets                                          262                 268
                                               ----------          ----------

         Total assets                         $     4,481          $    7,491
                                              ===========          ==========

Liabilities and stockholders' equity
 Current liabilities:
     Short-term debt                          $       145          $      490
     Accounts payable                                 227               1,059
     Accrued compensation                             309                 446
     Other accrued liabilities                        977               1,059
     Deferred revenue                                  55                 440
                                              -----------          ----------
         Total current liabilities                  1,713               3,494

Other liabilities                                       -                   8
Commitments  (Note 6)

Stockholders' equity:
     Convertible preferred stock (Note 6)               4                   6
     Common stock                                     519                 474
     Additional paid-in capital                    70,179              69,955
     Accumulated deficit                          (67,915)            (66,347)
     Cumulative translation adjustment                (19)                (99)
                                              ------------        ------------
         Total stockholders' equity                 2,768               3,989
                                              ------------        ------------

Total liabilities and stockholders' equity    $     4,481         $     7,491
                                              ============        ============
</TABLE>

                            See accompanying notes.

                                     - 3 -
<PAGE>

<TABLE>

                     Communication Intelligence Corporation
                                 and Subsidiary
                 Condensed Consolidated Statements of Operations
                                    Unaudited
                    (In thousands, except per share amounts)
<CAPTION>

                                   Three Months Ended        Six Months Ended
                                        June 30,                June 30,
                                   ------------------        ------------------
                                     1998       1997           1998      1997
                                   --------   -------        --------  --------
Revenues:                                                                                     
<S>                                <C>        <C>            <C>       <C>     
  Product                          $    803   $   995        $ 1,478   $  1,760
  License and royalty                   295       318            888        590
  Development contracts                 102        84            200        245
                                   --------   -------        --------  --------

            Total revenues            1,200     1,397          2,566      2,595

Operating costs and expenses:
  Cost of sales:
     Product                            447     1,014            776      1,799
     License and royalty                  7        22             22         41
     Development contracts               53        84            110        181
  Research and development              486       595          1,065      1,071
  Sales and marketing                   734     1,580          1,281      2,980
  General and administrative            466       690            966      1,119
                                   --------   -------        -------   --------

         Total operating costs
             and expenses             2,193     3,985          4,220      7,191
                                   --------   -------        -------   --------

Loss from operations                   (993)   (2,588)        (1,654)    (4,596)

Interest income and other income
  (expense), net (Note 6)                38        53            102       (368)

Interest expense                         (2)       (4)           (16)       (21)
                                   --------   -------        -------   --------

      Net loss                         (957)   (2,539)        (1,568)    (4,985)

      Embedded yield on preferred
      stock (Note 1)                      -    (2,188)             -     (4,376)

      Preferred stock dividend         (143)     (141)          (310)      (282)
                                   --------   -------        -------   --------

Net loss applicable to common
 stockholders                      $ (1,100)  $(4,868)       $(1,878)  $ (9,643)
                                   ========   =======        =======   ========

Basic loss percommon share(Note 7) $  (0.02) $  (0.11)       $ (0.04)  $  (0.22)
                                   ========   =======        ========  ========
 
Diluted loss per common 
share(Note 7)                      $  (0.02) $  (0.11)       $ (0.04)  $  (0.22)
                                   ========  ========        =======   ========
 Weighted average common
     shares outstanding              50,884    44,871         49,649     44,713
                                   ========  ========        =======   ========
</TABLE>

                            See accompanying notes.

                                     - 4 -

<PAGE>
<TABLE>


                     Communication Intelligence Corporation
                                 and Subsidiary
                 Condensed Consolidated Statements of Cash Flows
                                    Unaudited
                                 (In thousands)

<CAPTION>
                                                   Six Months Ended
                                                       June 30,
                                              ---------------------------------
                                                  1998                 1997
                                              ------------        -------------

Cash flows from operating activities:
<S>                                           <C>                 <C>          
 Net loss                                     $     (1,568)       $     (4,985)
 Adjustments to reconcile net loss to
 net cash used in operating activities:
     Depreciation and amortization                     164                 113
     Warrant issuance costs                              -                 484
     Stock options issued for services                  32                  46
     Changes in operating assets 
     and liabilities:
        Accounts receivable                           (499)               (346)
        Inventories                                    (52)               (717)
        Other current assets                           (99)               (201)
        Other assets                                   (17)                (62)
        Accounts payable and accrued
        compensation                                  (673)                259
        Other accrued liabilities                     (273)                164
        Deferred revenue                              (414)               (509)
        Pre-petition liabilities                         -                (878)
                                              ------------         ------------

     Net cash used in operating activities          (3,399)             (6,632)
                                              ------------         ------------

Cash flows from investing activities:
  Proceeds from sales and maturities 
  of short-term investments                             -                4,954
  Purchase of short-term investments                    -               (6,304)
  Acquisition of property and equipment               (35)                (383)
                                              -----------          ------------

      Net cash used in investing activities           (35)              (1,733)
                                              -----------          ------------

Cash flows from financing activities:
  Principal payments on short-term debt              (490)                   -
  Principal payments on capital
  lease obligations                                    (3)                  (5)
  Proceeds from issuance of short-term debt           145                  109
  Proceeds from issuance of common stock              236                  194
   Net cash provided by (used in)             -----------          ------------
   financing activities                              (112)                 298
                                              -----------          ------------

Effect of exchange rate changes on cash                -                   (34)
                                              -----------          ------------

Net decrease in cash and cash equivalents          (3,546)              (8,101)
Cash and cash equivalents at beginning
of period                                           5,485               10,573
                                              -----------          ------------  
Cash and cash equivalents at end of period    $     1,939          $     2,472
                                              ===========          ============
</TABLE>

                            See accompanying notes.

                                     - 5 -
<PAGE>

<TABLE>

                     Communication Intelligence Corporation
                                 and Subsidiary
                 Condensed Consolidated Statements of Cash Flows
                                    Unaudited
                                 (In thousands)
<CAPTION>

                                                Six Months Ended
                                                    June 30,
                                         ------------------------------------
                                              1998                  1997
                                         ---------------       --------------

Schedule of non-cash transactions:

Conversion of redeemable 
convertible preferred stock into 
<S>                                      <C>                   <C>         
Series A Preferred Stock                 $          -          $      9,417
                                          ==============       ==============
</TABLE>



                           See accompanying notes.

                                     - 6 -

<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
         Notes to Unaudited Condensed Consolidated Financial Statements
                    (In thousands, except per share amounts)
                                    FORM 10-Q

1.       Interim financial statements

         The accompanying  unaudited condensed consolidated financial statements
         of  Communication  Intelligence  Corporation  and its  subsidiary  (the
         "Company"  or  "CIC")  have  been  prepared  pursuant  to the rules and
         regulations  of the Securities  and Exchange  Commission.  Accordingly,
         they do not include all of the  information  and footnotes  required by
         GAAP for complete financial  statements.  In the opinion of management,
         the  financial   statements   included  in  this  report   reflect  all
         adjustments (consisting only of normal recurring adjustments) which the
         Company  considers  necessary for a fair  presentation of its financial
         position at the dates presented and the Company's results of operations
         and cash flows for the periods  presented.  The interim results are not
         necessarily  indicative  of the results to be  expected  for the entire
         year.

         The Company  develops,  markets and licenses  pen-input  and  biometric
         security   software  and  technologies   for  the  computer,   consumer
         electronics and communication  markets.  The Company's products include
         multi-lingual  character  recognition  software (JOT(TM) and Handwriter
         Recognition  System),  signature  verification  software and  biometric
         security   development  tools  (SigCheck(TM)  and  InkTools(TM)),   and
         electronic  ink   compression  and  electronic   note-taking   software
         (INKshrINK and QuickNotes(TM)). CIC's products are designed to increase
         the ease of use,  functionality and security of a variety of electronic
         devices from desktop PCs to "smart" cellular phones.

         The Company  offers a wide range of  software  products  for  pen-based
         computing,  based on the Company's  core  handwriting  recognition  and
         related  technologies.  The Company's core  technologies are classified
         into  two  broad   categories:   "Natural   Input   Technologies"   and
         "Transaction and Communication  Enabling  Technologies."  Natural input
         technologies are designed to allow users to interact with a computer or
         handheld  device by using an electronic pen as the sole input device or
         in conjunction with a keyboard. The pen eliminates the need for a mouse
         as a navigational  device. The Company believes that pen-input enhances
         productivity  and  creativity  because  it is a more  natural  means of
         input, facilitates editing and screen navigation,  and reduces the risk
         of  repetitive   stress   illness.   The  Company's   transaction   and
         communication   enabling   technologies   are  designed  to  provide  a
         cost-effective means for protecting electronic transactions, electronic
         files and private communications.  CIC believes that these technologies
         offer more efficient  methods to conduct  transactions and provide more
         functional  user  authentication  and  heightened  data  security.  The
         Company's transaction and communication enabling technologies have been
         fundamental in its development of software for signature  verification,
         data security, data compression and pen-based operating environments.

         For the six months ended June 30,  1998,  the  Company's  cash and cash
         equivalents  decreased  by $3,546 from $5,485 at the  beginning  of the
         period  to  $1,939.  The  decrease  is due  primarily  to cash  used in
         operating  activities  of  $3,399  and $453  used to repay an  accounts
         receivable  line of credit in January,  1998.  Although there can be no
         assurance, the Company believes that its cash and cash equivalents will
         be sufficient to fund planned  operations  for at least the next twelve
         months.  However,  if the Company is unable to generate  adequate  cash
         flow from sales, or if  expenditures  required to achieve the Company's
         plans  are  greater  than  expected,  the  Company  may need to  obtain
         additional funds or reduce

                                     - 7 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
         Notes to Unaudited Condensed Consolidated Financial Statements
                    (In thousands, except per share amounts)
                                    FORM 10-Q

1.       Interim financial statements (continued)

         discretionary  spending.  Management  believes  that it will be able to
         reduce  discretionary  spending if required.

         The  Company's  Form 10-Q for the three and six  months  ended June 30,
         1997 was restated to reflect the non-cash charge for the embedded yield
         on the  convertible  preferred  stock  resulting  from  the  discounted
         conversion feature provided on such stock and the cumulative  dividends
         of $1.25  per  share,  per  annum,  on  outstanding  shares of Series A
         Preferred  Stock.  The Company believes the restatement of the June 30,
         1997 three and six month results was in accordance  with the accounting
         treatment of the embedded  discount on convertible  preferred  stock as
         announced by the  Securities  and Exchange  Commission at the March 13,
         1997 meeting of the Financial  Accounting  Standards  Board's  Emerging
         Issues Task  Force.  The effect of this  restatement  on the results of
         operations originally reported in the Company's Form 10-Q for the three
         months ended June 30, 1997 was to increase the net loss  applicable  to
         common stockholders by $2,329 from $2,539 to $4,868 and to increase the
         basic and diluted  loss per common  share by $0.05 from $0.06 to $0.11.
         The effect of this restatement on the results of operations  originally
         reported in the  Company's  Form 10-Q for the six months ended June 30,
         1997 was to increase the net loss applicable to common  stockholders by
         $4,658 from $4,985 to $9,643 and to increase the basic and diluted loss
         per common  share by $0.11 from $0.11 to $0.22 The  restatement  had no
         effect on the Company's cash position at June 30, 1997.

         Certain prior period  amounts in this Form 10-Q have been  reclassified
         to conform with the current period presentation.

         The  financial   information   contained   herein  should  be  read  in
         conjunction with the Company's audited financial statements included in
         its Annual Report on Form 10-K for the year ended December 31, 1997.

2.        Cash and cash equivalents

         The Company  considers  all highly  liquid  investments  with  original
         maturities of up to 90 days to be cash equivalents.

         Cash and cash equivalents consist of the following:

<TABLE>
<CAPTION>
                                          June 30,       Dec. 31,
                                            1998           1997
                                           ------         ------
<S>                                        <C>           <C>        
          Cash in bank .................   $  715         $1,160
          Commercial paper .............      410          2,330
          Money market accounts ........       14          1,004
          Corporate debt securities ....       --            991
          Other debt securities ........      800             --
                                           ------         ------
                                           $1,939         $5,485
                                           ======         ======
</TABLE>
                                     - 8 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
         Notes to Unaudited Condensed Consolidated Financial Statements
                    (In thousands, except per share amounts)
                                    FORM 10-Q

3.       Inventories

         Inventories  are  stated at the  lower of cost or  market,  cost  being
         determined  using the first-in,  first-out  (FIFO) method.  At June 30,
         1998, inventory was comprised primarily of finished goods.

4.       Short-term debt

         On June 30, 1998,  the  Company's  90% owned Chinese joint venture (the
         "Joint  Venture")  borrowed  the  equivalent  of $145,  denominated  in
         Chinese currency from a Chinese bank. The loan bears interest at 9% and
         is due on June 30,  1999.  The  borrowings  are  secured by a US dollar
         denominated deposit held by the bank.

         In May 1997,  the Company  purchased  office  furniture  and a security
         system  with an  approximate  value  of $209  from a third  party.  The
         Company paid $100 in cash and signed an unsecured  note for $109 due in
         monthly  installments  through May 1998.  The note bore interest on the
         unpaid balance at a rate of 10% per annum. The note was paid in full in
         May, 1998.

         In October  1997,  the  Company  entered  into an  accounts  receivable
         financing  agreement  whereby  the  Company  may  factor  its  accounts
         receivable in accordance  with the terms of the agreement.  The maximum
         credit  available to the Company  under the agreement is $1,500 with an
         advance rate of 80% of eligible  accounts  receivable less than 90 days
         old. The term of the agreement is twelve months with annual renewals. A
         financing  fee of 2.1% per month  applies  to the  outstanding  balance
         based on the face value of each invoice.  The line of credit is secured
         by a  blanket  first  priority  lien on all  Company  assets  with  the
         exception of  intellectual  property.  The amounts  financed  under the
         accounts  receivable  financing  agreement at December  31, 1997,  were
         repaid in January 1998. The Company had approximately  $1,500 of credit
         available under this agreement at June 30, 1998.

5.       Revenue recognition

          Revenue from  software and other  product  sales are  recognized  upon
          shipment  provided  that no  significant  obligations  remain  and the
          collection  of the  resulting  receivable  is  probable.  The  Company
          provides for estimated sales returns at the time of shipment.  License
          revenues are recognized  when the software has been delivered and when
          all  significant  obligations  have been  met.  Royalty  revenues  are
          recognized as products are licensed and sold by licensees. Development
          contract  revenue  is  generated  primarily  from  system  integration
          services,  research  grants  and  joint  development  agreements  with
          private and government  agencies.  Revenue is recognized in accordance
          with  the  terms  of  the  grants  and   agreements,   generally  when
          collectability is probable and related costs have been incurred.

          In  October  1997,   the  American   Institute  of  Certified   Public
          Accountants  (the  "AICPA")  issued  Statement  of Position  No. 97-2,
          "Software  Revenue  Recognition"  ("SOP 97-2"),  which the Company has
          adopted for transactions entered into during the fiscal year beginning
          January 1, 1998. SOP 97-2 provides guidance for recognizing revenue on
          software   transactions  and  supersedes  Statement  of  Position  No.
          91-1,"Software Revenue Recognition". In March 1998,
 
                                     - 9 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
         Notes to Unaudited Condensed Consolidated Financial Statements
                    (In thousands, except per share amounts)
                                    FORM 10-Q

 5.       Revenue recognition (continued)

         the AICPA  issued  Statement  of Position  No.  98-4,  "Deferral of the
         Effective   Date  of  a  Provision  of  SOP  97-2,   Software   Revenue
         Recognition"   ("SOP  98-4").  SOP  98-4  defers,  for  one  year,  the
         application  of  certain  passages  in SOP  97-2  which  limit  what is
         considered  vendor-specific  objective  evidence ("VSOE")  necessary to
         recognize   revenue   for   software   licenses   in   multiple-element
         arrangements when undelivered  elements exist.  Additional  guidance is
         expected to be provided prior to adoption of the deferred  provision of
         SOP 97-2. The Company will determine the impact, if any, the additional
         guidance  will  have on  current  revenue  recognition  practices  when
         issued. Adoption of the remaining provisions of SOP 97-2 did not have a
         material impact on revenue  recognition during the three and six months
         ended June 30, 1998.

  6.     Convertible preferred stock

         In December  1996,  the  Company  completed  a private  placement  (the
         "December Private  Placement") of 450 shares of redeemable  convertible
         preferred stock (the "Series A Preferred Stock") at $25.00 per share to
         certain institutional and other investors.  Of the aggregate 450 shares
         sold, 70 shares of Series A Preferred Stock were issued in exchange for
         390  shares of Common  Stock  originally  issued  by the  Company  in a
         private placement of Common Stock in June 1996.

         On March 28, 1997,  and  effective as of December 31, 1996,  holders of
         100% of the  then  issued  and  outstanding  Series A  Preferred  Stock
         executed  a waiver of certain  provisions  of the  Registration  Rights
         Agreement  (the  "Agreement")  entered  into  in  connection  with  the
         December Private Placement. Under the waiver, these holders irrevocably
         waived any  redemption  obligations  of the Company with respect to the
         Series A Preferred  Stock in exchange  for the issuance to such holders
         of 300  warrants to purchase  the  Company's  Common  Stock,  allocated
         amongst the holders on a pro-rata basis. The warrants expire five years
         from the effective date of issuance and have an exercise price of $2.00
         per share,  subject to adjustments for  anti-dilution.  The Company has
         ascribed a value of $484 to these  warrants,  which was  recorded as an
         expense  in the  Company's  statement  of  operations  during the first
         quarter of 1997.  The fair value ascribed to the warrants was estimated
         on the date of issuance using the Black-Scholes  pricing model with the
         following assumptions:  risk-free interest rate of 6.60%; expected life
         of 5 years; expected volatility of 104%; and expected dividend yield of
         0%. As a result of the  aforementioned  waiver,  the shares of Series A
         Preferred  Stock which were  classified  as  redeemable  securities  at
         December 31, 1996 were  reclassified as convertible  preferred stock at
         March 31, 1997 and, as such, are included in stockholders' equity.

         On November 26, 1997, the Company  completed a private placement of 240
         shares of Series B Preferred Stock (the "November  Private  Placement")
         at  $25.00  per  share to  certain  investors.  Each  share of Series A
         Preferred  Stock and Series B  Preferred  Stock is  convertible  by the
         holders  into  shares of the  Company's  Common  Stock at any time.  In
         addition,  all  outstanding  shares of Series A Preferred Stock will be
         automatically  converted  into shares of Common  Stock on December  31,
         1999,  subject to the satisfaction of certain  conditions and events by
         the Company,  or later under  certain  circumstances.  All  outstanding
         shares of Series B Preferred Stock will be automatically converted into
         shares  of Common  Stock on  November  25,  2000,  or at the  Company's
         option, up to one year later.

                                     - 10 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
         Notes to Unaudited Condensed Consolidated Financial Statements
                    (In thousands, except per share amounts)
                                    FORM 10-Q

  6.     Convertible preferred stock (continued)

         The number of shares of Common  Stock to be issued upon  conversion  of
         the Series A Preferred  Stock is  determined by dividing (i) the sum of
         $25.00  multiplied  by the number of Series A  Preferred  shares  being
         converted,  plus accrued and unpaid  dividends  and any unpaid  default
         payments thereon, by (ii) a conversion price which is approximately 72%
         of the then applicable market price of the Company's Common Stock.

         The number of shares of Common  Stock to be issued upon  conversion  of
         the Series B Preferred  Stock is  determined by dividing (i) the sum of
         $25.00  multiplied by the number of shares of Series B Preferred  Stock
         being  converted,   plus  accrued  and  unpaid  dividends,  by  (ii)  a
         conversion  price equal to the lower of (a) the average market price of
         the Common Stock or (b) $1.59 per share

         Each holder of the  outstanding  shares of Series A Preferred Stock and
         Series B Preferred  Stock is entitled to receive,  out of funds legally
         available therefor,  cumulative  dividends on each share at the rate of
         $1.25 per share per  annum,  compounded  semi-annually  and  quarterly,
         respectively, when payable (whether or not declared). The dividends may
         be paid in cash or  additional  shares of  preferred  stock  (with each
         additional share valued at $25.00 per share),  at the Company's option.
         Dividends  must be paid on the  Series A  Preferred  Stock and Series B
         Preferred Stock prior to any dividends being paid on any other class of
         stock ranking junior thereto.

         Pursuant to the Series A Registration  Rights Agreement entered into in
         connection with the sale of the Series A Preferred  Stock,  the Company
         is required to pay to each holder a default  payment in an amount equal
         to 3% of the  liquidation  preference  of the Series A Preferred  Stock
         held for any part of each 30-day period in which (i) the Company fails,
         refuses  or  is  unable  to  cause  the   securities   covered  by  the
         registration  statement  related to the shares of Common Stock issuable
         upon conversion of the Series A Preferred Stock (the "1997 Registration
         Statement")  to be listed on the  exchange on which the Common Stock is
         traded, (ii) any holder's ability to sell the securities covered by the
         1997  Registration  Statement is suspended  for more than sixty days in
         the aggregate,  or (iii) the Company does not have a sufficient  number
         of shares of Common Stock available to effect  conversion of the Series
         A Preferred Stock.

7.       Net loss per share

         Effective  December 31, 1997,  the Company  adopted the  provisions  of
         Statement of Financial  Accounting  Standards  No. 128,  "Earnings  Per
         Share"  ("SFAS  128").  SFAS 128 requires the  disclosure of both basic
         earnings per share,  which is based on the weighted  average  number of
         common shares  outstanding,  and diluted  earnings per share,  which is
         based on the  weighted  average  number of common  shares and  dilutive
         potential common shares outstanding.  All prior year earnings per share
         data  have  been  restated  to  reflect  the  provisions  of SFAS  128.
         Potential common shares,  including  outstanding  convertible preferred
         stock,  stock  options  and  warrants,  have  been  excluded  from  the
         calculation of diluted earnings per share for all periods  presented as
         their effect is  anti-dilutive.  Per share  results of  operations  are
         reduced by the  amortization  of the beneficial  conversion rate on the
         Series A  Preferred  Stock  and the  cumulative  dividend  requirements
         earned by the preferred stockholders.

                                     - 11 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
         Notes to Unaudited Condensed Consolidated Financial Statements
                    (In thousands, except per share amounts)
                                    FORM 10-Q

8.        Recent accounting pronouncement

         In June 1997, the Financial Accounting Standards Board issued Statement
         of Financial Accounting Standards No. 131,  "Disclosures About Segments
         of An  Enterprise  and  Related  Information"  ("SFAS  131").  SFAS 131
         revises  information  regarding the reporting of operating segments and
         is required to be adopted in periods beginning after December 15, 1997.
         It also establishes  standards for related  disclosures  about products
         and services,  geographic areas and major  customers.  The Company will
         adopt SFAS 131 for the year ended  December 31, 1998 and such  adoption
         is not expected to have a material effect on its consolidated financial
         statements.

9.       Comprehensive income

         In June 1997, the Financial Accounting Standards Board issued Statement
         of Financial  Accounting  Standards No. 130,  "Reporting  Comprehensive
         Income" ("SFAS 130"). The Company adopted SFAS 130 effective January 1,
         1998.  SFAS 130 requires  that all items  recognized  under  accounting
         standards as  components  of  comprehensive  earnings be reported in an
         annual  statement that is displayed  with the same  prominence as other
         annual  financial  statements.  SFAS 130 also  requires  that an entity
         classify  items as other  comprehensive  earnings by their nature in an
         annual financial  statement.  For example other comprehensive  earnings
         may include foreign currency translation  adjustments,  minimum pension
         liability  adjustments,  and unrealized  gains and losses on marketable
         securities   classified   as   available-for-sale.   Annual   financial
         statements for prior periods will be reclassified, as required.

         Total comprehensive loss was as follows:
<TABLE>
<CAPTION>
                                                       Six Months Ended June 30,
                                                       -------------------------
                                                             1998         1997
                                                           -------      -------
<S>                                                        <C>          <C>     
         Net loss ....................................     $(1,568)     $(4,985)
         Other comprehensive loss:
            Cumulative translation adjustment ........          80           81
                                                           -------      -------
         Total comprehensive loss ....................     $(1,488)     $(4,904)
                                                           =======      =======
</TABLE>

                                     - 12 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
                    (In thousands, except per share amounts)
                                    FORM 10-Q

Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

The following  discussion and analysis  should be read in  conjunction  with the
unaudited condensed consolidated financial statements and notes thereto included
in Part I - Item 1 of this Form 10-Q and  "Management `s Discussion and Analysis
of Financial  Condition  and Results of  Operations"  set forth in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997.

Results of Operations

Revenues.  The Company's  revenues are derived from product  sales,  license and
royalty  fees and  development  contracts.  For the three  months ended June 30,
1998,  revenues  decreased by 14% to $1,200 from $1,397,  and for the six months
revenues  decreased  1% to $2,566 from $2,595 for the  comparable  three and six
month periods ended June 30, 1997 as discussed below:
<TABLE>
<CAPTION>

                                   Three Months Ended  Six Months Ended
                                         June 30,          June 30,
                                     ---------------   ---------------

                                      1998     1997     1998     1997
                                     ------   ------   ------   ------

          Revenues:
<S>                                  <C>      <C>      <C>      <C>   
          Product sales ..........   $  803   $  995   $1,478   $1,760
          License and royalty fees      295      318      888      590
          Development contracts ..      102       84      200      245
                                     ======   ======   ======   ======

                Total revenues ...   $1,200   $1,397   $2,566   $2,595
                                     ======   ======   ======   ======
</TABLE>

Product sales decreased to $803 and $1,478, or by 19% and 16%, respectively, for
the  three and six  month  periods  ended  June 30,  1998 from $995 and  $1,760,
respectively,  in the  comparable  prior year  periods.  This  decrease  was due
primarily to the  withdrawal  of  Handwriter  products  from the retail  channel
during the six months ended June 30, 1998.  Handwriter  product sales  decreased
$541 and $861 to $184 and  $379,  respectively,  during  the three and six month
periods  ended June 30, 1998 compared to $725 and $1,240,  respectively,  in the
prior year  periods.  Product  sales by the Company's 90% owned joint venture in
The People's Republic of China (the "Joint Venture") increased $112 and $292, or
by 27% and 42%, respectively, for the three and six month periods ended June 30,
1998 to $526 and $983,respectively,  compared to $414 and $691, respectively, in
the comparable prior year periods. The increase is primarily due to increases in
sales  efforts made possible by an expansion of the sales force during the first
and second quarters of 1998 which offsets a portion of the decline in Handwriter
sales.

Revenues from license and royalty fees for the three month period ended June 30,
1998 decreased $23 or 7% to $295 from $318 in the comparable  prior year period.
This  decrease  was  primarily  the  result of  approximately  $219 of  revenues
recognized  during  the three  month  period  ended June 30,  1997 on  licensing
agreements for which the Company had no further obligation to deliver additional
software  or  services  offset  by  increased  shipments  by OEM's  of  products
incorporating the Company's  software..  For the six month period ended June 30,
1998,  revenues from license and royalty fees increased $298 or 51% to $888 from
$590  in  the  comparable   prior  year  period.   This  increase  is  primarily
attributable  to  increases  in OEM product  shipments  bundling  the  Company's
handwriting  recognition software reported by licensees.  Revenues recognized on
licensing  agreements for which the Company has no further obligation to deliver
additional  software or services for the six months ended June 30, 1998 was $404
compared to $383 in the comparable prior year period

                                     - 13 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
                    (In thousands, except per share amounts)
                                    FORM 10-Q

Development  contract  revenues  for the three month  period ended June 30, 1998
increased  21% to $102  from  $84 in the  comparable  prior  year  period.  This
increase resulted from non-grant  development revenue from the LA Unified School
District.  For the six months ended June 30, 1998,  development contract revenue
decreased 18% to $200 from $245 in the comparable prior year period. The decline
is due to reduced grant revenues from the National  Science  Foundation from the
comparable prior year period.

Cost of sales.  Cost of product  sales for the three and six month periods ended
June  30,  1998  decreased  56%  and  57%,  respectively,   to  $447  and  $776,
respectively, from $1,014 and $1,799, respectively, in the comparable prior year
periods.  Cost of product  sales for the three and six month  periods ended June
30, 1998 includes  approximately  $405 and $709,  respectively,  of hardware and
software  components related to the system  integration  activities of the Joint
Venture,  compared to approximately  $323 and $558,  respectively,  in the prior
year periods. The increase in systems integration costs of product sales for the
three and six month  periods ended June 30, 1998 is due to the increase in sales
of such  products  and was  offset  by a  decrease  for the  three and six month
periods ending June 30, 1998 of $500 and $875,  respectively,  in  Handwriter(R)
product cost of sales.  The decrease in  Handwriter(R)  product cost of sales is
due to reduced  sales of such  products  for the three and six months ended June
30, 1998  compared  to the prior  year,  and lower  product  costs.  License and
royalty cost of sales decreased  approximately $15 and $19, respectively,  to $7
and $22,  respectively,  for the  three  and six  months  ended  June 30,  1998,
compared to $22 and $41,  respectively,  for the comparable 1997 periods.  Costs
incurred in connection with development  contract revenues decreased 37% and 39%
for the three and six months  ended June 30,  1998 as compared to the prior year
periods,  commensurate with the decrease in contract development revenues in the
first and second quarters of 1998.

Research and development  expenses.  Research and  development  expenses for the
three  and six  month  periods  ended  June 30,  1998  decreased  by 18% and 1%,
respectively,  to $486 and $1,065, respectively,  as compared to $595 and $1,071
in the comparable  period of the prior year. The decreases were primarily due to
reductions of approximately $181 and $148, respectively,  in payroll and related
costs  attributable  to a decrease in the number of U.S. based personnel for the
three and six month  periods  ended June 30, 1998 compared to the same three and
six month prior year  periods.  Other costs,  including  facilities  and related
costs, increased approximately $72 and $142, respectively, for the three and six
month periods ended June 30, 1998 from the  comparable  prior year periods.  The
increase in other costs was commensurate with the decreased development contract
revenues and increased  engineering  activities by the Company's  Joint Venture.
The Company did not capitalize any software  development  costs during the three
month periods ended June 30, 1998,  and 1997.  For the six months ended June 30,
1998  and  1997,  the  Company  did not  capitalized  any  significant  software
development costs.

Sales and marketing expenses. Sales and marketing expenses for the three and six
month periods ended June 30, 1998 decreased 54% and 57%,  respectively,  to $734
and $1,281,  respectively,  as  compared to $1,580 and $2,980 in the  comparable
period of the prior year. The decrease for the three and six month periods ended
June 30, 1998 was primarily due to decreases of $483 and $928, respectively,  in
advertising and related expenses,  and $228 and $450,  respectively,  in payroll
and related expenses  consistent with the Company's new objectives.  Other costs
including facilities and related expenses decreased $135 and $321, respectively,
commensurate with overall reductions in staffing. The reductions in staffing and
advertising  expenses  were  primarily  due to the  withdrawal  of the Company's
Handwriter  products from the retail channel during the first quarter of 1998, a
reduction in the U. S. based sales force in October 1997, and the closure of the
Japanese sales office in December 1997, respectively.

                                     - 14 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
                    (In thousands, except per share amounts)
                                    FORM 10-Q

General and administrative expenses. General and administrative expenses for the
three  and six  month  periods  ended  June  30,  1998  decreased  32% and  14%,
respectively,  to $466 and $966 as compared  to $690 and  $1,119,  respectively,
from the  comparable  periods of the prior year.  The decreases  were  primarily
attributable to decreases of approximately $224 and $233, respectively, in other
costs,  including consulting and professional  service expenses.  The reductions
were offset by increases  in  allocated  facilities  and related  costs,  and an
increase in the administrative activities of the Joint Venture.

Interest  income and other  income  (expense),  net.  Interest  income and other
income (expense),  net decreased due to a one time non-cash charge to expense in
March 1997 of $484 for 300 warrants  issued on March 28, 1997 to holders of 100%
of the then issued and  outstanding  redeemable  convertible  preferred stock in
exchange for the execution of a waiver to certain provisions of the Registration
Rights Agreement  entered into in connection with the December Private Placement
(See Note 6 in the Notes to the Condensed Consolidated Financial Statements).

Embedded yield on preferred stock. The embedded yield on preferred stock for the
three and six month  periods  ended  June 30,  1997  results  from the  discount
feature  provided on the conversion of the Series A Preferred  Stock into Common
Stock.  The embedded  yield totaling  $4,376 was  recognized  from the effective
issuance  date of December 31, 1996 through July 1, 1997,  the date on which the
Series A Preferred Stock first became convertible.

Preferred  stock dividend.  The preferred  stock dividend  relates to cumulative
dividends of $1.25 per share, per annum, compounded quarterly and semi-annually,
respectively,  whether  or not  declared,  on all of the  Company's  convertible
preferred stock.

Liquidity and Capital Resources

At June 30, 1998, cash and cash equivalents  totaled $1,939 compared to cash and
cash equivalents of $5,485 at December 31, 1997. This decrease was primarily the
result of $3,399 used in operating  activities  and  approximately  $453 used to
repay the accounts  receivable line of credit.  Total current assets were $3,318
at June 30, 1998 compared to $6,215 at December 31, 1997.

As of June 30, 1998,  the Company's  principal  source of liquidity was its cash
and cash equivalents of $1,939. Although there can be no assurance,  the Company
believes that its cash and cash  equivalents  will be sufficient to fund planned
operations for at least the next twelve months. However, if, among other things,
the  Company  is unable to  generate  adequate  cash  flows  from  sales,  or if
expenditures  required to achieve the Company's plans are greater than expected,
the  Company  may  need to  obtain  additional  funds  or  reduce  discretionary
spending. There can be no assurance that additional funds will be available when
needed, or if available,  will be available on favorable terms or in the amounts
required by the Company.  If adequate funds are not available  when needed,  the
Company  may be required to delay,  scale back or  eliminate  some or all of its
operations, which will have a material adverse effect on the Company's business,
results of operations and prospects.

Current  liabilities,  which include deferred  revenue,  were $1,713 at June 30,
1998.  Deferred  revenue,  totaling  $55 at June 30,  1998,  primarily  reflects
nonrefundable  advance  royalty and service  fees  received  from the  Company's
customers and licensees which are generally recognized as revenue by the Company
in the  period  in  which  licensees  report  that  products  incorporating  the
Company's software have been shipped or the service is performed.

The  Company  currently  owns  90% of a  joint  venture  with  The  Ministry  of
Electronic  Industries  of the  Jiangsu  Province,  a  provincial  agency of The

                                     - 15 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
                    (In thousands, except per share amounts)
                                    FORM 10-Q

People's Republic of China (the "Agency").  In June 1998 the registered  capital
of the  Joint  Venture  was  reduced  from  $10,000  to  $2,550.  Under  the old
provisions of the joint venture agreement,  the Company could have been required
to  contribute  up to an  aggregate  of $5,400 in cash to the Joint  Venture and
provide it with non-exclusive  licenses to technologies and certain distribution
rights.  The Agency  was  required  to  contribute  certain  land use rights and
provide other  services to the Joint  Venture.  As of June 30, 1998, the Company
had contributed an aggregate of $1,800 in cash to the Joint Venture and provided
it with non-exclusive  licenses to technologies and certain  distribution rights
and the Agency had contributed certain land use rights.  Following the reduction
in registered  capital of the Joint  Venture  neither the Company nor the Agency
are required to make further  contributions  to the Joint Venture.  Prior to the
reduction in the amount of registered capital,  the Joint Venture was subject to
the annual licensing requirements of the Chinese government. Concurrent with the
reduction in registered  capital,  the Joint Venture's business license has been
renewed through October 18, 2043.. The Company's investment in the Joint Venture
is subject to the risks of doing business abroad,  including fluctuations in the
value  of  currencies,   export  duties,  import  controls  and  trade  barriers
(including  quotas),  restrictions  on the  transfer  of funds,  longer  payment
cycles,  greater  difficulty  in  accounts  receivable  collections,  burdens of
complying with foreign laws and political and economic instability.

In December  1996,  the Company  completed a private  placement of 450 shares of
redeemable  convertible  preferred stock (the "December  Private  Placement") at
$25.00 per share to certain institutional and other investors.  Of the aggregate
450 shares sold, 70 shares of redeemable convertible preferred stock were issued
in exchange for 390 shares of Common Stock,  originally issued by the Company in
an earlier private placement in June 1996.

On November 26, 1997, the Company completed a private placement of 240 shares of
Series B Preferred Stock (the "November Private  Placement") at $25.00 per share
to certain investors.

Each  share of  Series A and  Series B  Preferred  Stock is  convertible  by the
holders into shares of Common Stock at any time.  In addition,  all  outstanding
shares of Series A Preferred Stock will be  automatically  converted into shares
of Common  Stock on December 31, 1999,  subject to the  satisfaction  of certain
conditions and events by the Company, or later under certain circumstances.  All
outstanding  shares of Series B Preferred Stock will be automatically  converted
into shares of Common Stock on November 25, 2000, or at the Company's option, up
to one year later.

Generally,  the number of shares of Common Stock to be issued upon conversion of
the  Series A  Preferred  Stock is  determined  by  dividing  (i) the sum of $25

                                     - 16 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
                    (In thousands, except per share amounts)
                                    FORM 10-Q

multiplied  by the number of shares  being  converted,  plus  accrued and unpaid
dividends  thereon and any unpaid default  payments,  by (ii) a conversion price
(as  determined in the  certificate  of  designations  for such shares) which is
approximately  72% of the then applicable  market price of the Common Stock. The
then applicable market price generally will be determined as follows: (i) if the
holder giving the conversion notice has sold the shares of Common Stock issuable
upon  conversion,  the market price will be the  weighted  average of the actual
selling price at which the holder converting has sold the shares of Common Stock
(which may not be less than the lowest  trading  price on the date of such trade
as  reported  by the  Nasdaq  Small-Cap  Market),  net of normal  and  customary
commissions and underwriting or dealer spreads, or (ii) if the holder giving the
conversion  notice  has not  sold the  shares  of  Common  Stock  issuable  upon
conversion,  the market  price will be the average of the daily mean between the
low  trading  price and the  closing  price of the Common  Stock for each of the
three  consecutive  trading days prior to the  conversion  date.  The conversion
price is also subject to adjustment for customary  dilutive events such as stock
splits, stock dividends, reorganizations and certain mergers.

Generally,  the number of shares of Common Stock to be issued upon conversion of
the  Series B  Preferred  Stock is  determined  by  dividing  (i) the sum of $25
multiplied  by the number of shares  being  converted,  plus  accrued and unpaid
dividends thereon,  by (ii) a conversion price (as determined in the certificate
of  designations  for such shares) equal to the lower of (a) the average  market
price of the Common  Stock,  or (b) $1.59 per share.  The average  market  price
generally  will be the average of the daily  closing  prices of the Common Stock
for the  three  consecutive  trading  days  prior to the  conversion  date.  The
conversion  price is also subject to adjustment  for customary  dilutive  events
such as stock splits, stock dividends, reorganizations and certain mergers.

If the average  market price of the Common Stock on August 12, 1998 of $1.00 per
share was used to determine the number of shares issuable upon conversion of all
of the shares of Series A and Series B  Preferred  Stock  outstanding  as of the
same date, the Company would be obligated to issue an aggregate of approximately
11,738 shares of Common Stock. There is no limitation on the number of shares of
Common  Stock that the Company may be required to issue in  connection  with the
conversion of the Series A and Series B Preferred Stock. The number of shares of
Common Stock  issuable  upon  conversion  of, or otherwise  with respect to, the
shares of Series A and Series B Preferred  Stock is subject to  adjustment,  and
will likely be different than the amount estimated  herein.  The exact number is
dependent  upon  factors  which the  Company  is unable to predict at this time,
including the future market price of the Common Stock.

Pursuant  to  the  Series  A  Registration  Rights  Agreement  entered  into  in
connection  with the sale of the  Series  A  Preferred  Stock,  the  Company  is
required to pay to each holder a default payment in an amount equal to 3% of the
liquidation preference of the Series A Preferred Stock held for any part of each
30-day period in which (i) the Company fails,  refuses or is unable to cause the
securities covered by the Registration Statement related to the shares of Common
Stock  issuable  upon  conversion  of the  Series A  Preferred  Stock (the "1997
Registration  Statement") to be listed on the exchange on which the Common Stock
is traded,  (ii) any holder's ability to sell the securities covered by the 1997
Registration  Statement is suspended for more than sixty days in the  aggregate,
or (iii) the Company does not have a sufficient number of shares of Common Stock
available  to effect  conversion  of the Series A Preferred  Stock.  Any default
payment which the Company is required to make may have a material adverse effect
on the  Company  and,  if such  payment is made by the  issuance  of  additional
shares, may further dilute the ownership  interests of the holders of the Common
Stock.

As of August 12, 1998, there were approximately 162 shares of Series A Preferred
Stock and 219 shares of Series B Preferred Stock issued and outstanding.

In October  1997,  the Company  entered  into an accounts  receivable  financing
agreement whereby the Company has the ability to factor its accounts  receivable
in accordance with the terms of the agreement.  The maximum credit  available to
the Company  under the  agreement is $1,500,  with an advance rate of 80% of the
eligible  accounts  receivable  which are less than 90 days old. The term of the
agreement is twelve  months with annual  renewals.  A financing  fee of 2.1% per
month  applies  to the  outstanding  balance  based  on the  face  value of each
invoice.  The line of credit is secured by a blanket first  priority lien on all
Company assets with the exception of its intellectual  property.  As of June 30,
1998, the Company had no outstanding  financed  accounts  receivable  under this
agreement.  The amounts  financed under this agreement at December 31, 1997 were
repaid in January 1998.

The Company  leases  facilities in the United States and China.  Future  minimum
lease  payments  under  non-cancelable  operating  leases  are  expected  to  be
approximately $617, $603, $620, and $558 for the years ending December 31, 1998,
1999, 2000 and 2001, respectively.  The Company's rent expense is expected to be
reduced by  approximately  $167 in 1998 in connection  with  subleases on excess
office space in the United  States.

The Company has an  investment  portfolio  of fixed income  securities  that are
classified  as  cash  equivalents.  These  securities,  like  all  fixed  income

                                     - 17 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
                    (In thousands, except per share amounts)
                                    FORM 10-Q

instruments,  are  subject to  interest  rate risk and will fall in value if the
market interest rates increase.  The Company  attempts to limit this exposure by
investing primarily in short-term securities.From time to time the Company makes
certain capital equipment or other purchases  denominated in foreign currencies.
As a result the Company's cash flows and earnings are exposed to fluctuations in
interest rates and foreign  currency  exchange  rates.  The Company  attempts to
limit these  exposures  through  operational  strategies  and  generally has not
hedged currency exposures. 

Year 2000 Compliance

The Company  develops,  markets and licenses  pen-input and  biometric  security
software  and   technologies   for  the  computer,   consumer   electronics  and
communication  markets. The Company's products include  multi-lingual  character
recognition  software,   signature  verification  software,  biometric  security
development  tools,  and electronic ink compression  and electronic  note-taking
software.  The Company  believes  that all versions of its products are and have
been Year 2000  compliant.  The Company  has been  assessing  internal  software
programs  and  equipment  to ascertain  the  readiness of computer  software and
operating  systems for the Year 2000.  Management  of the Company  believes  the
internal financial and applications software is Year 2000 compliant. The Company
is currently in the process of replacing  older  desktop PC's which are not, nor
cannot be upgraded  to be,  Year 2000  compliant.  The cost of  replacing  these
desktop  systems  is not  expected  to have a  material  adverse  impact  on the
Company's business,  financial condition and results of operations.  The Company
is still in the process of analyzing its  supplier's  and  customer's  readiness
with respect to Year 2000 compliance.  There can be no assurance that failure of
the Company's  suppliers  and  customers to rectify  their Year 2000  compliance
issues  will not have a  material  adverse  effect  on the  Company's  business,
financial condition and results of operations.

Future Results and Stock Price

The  Company's  future  earnings  and stock price may be subject to  significant
volatility.  The public stock markets have exhibited extreme volatility in stock
prices in recent  years.  The stock  prices of high  technology  companies  have
experienced  particularly  high  volatility,  including  at times  severe  price
changes that are unrelated or  disproportional  to the operating  performance of
these specific companies.  The trading price of the Company's Common Stock could
be  subject  to  wide   fluctuation   in  response  to,  among  other   factors,
quarter-to-quarter   variations   in   operating   results,   announcements   of
technological  innovations  or new  products by the Company or its  competitors,
announcements of new strategic  relationships by the Company or its competitors,
general conditions in the computer industry or the global economy generally,  or
market volatility unrelated to the Company's business and operating results.

Certain  statements  contained in this Quarterly Report on Form 10-Q,  including
without limitation,  statements containing the words "believes",  "anticipates",
"hopes",  "intends",  "expects",  and other words of similar import,  constitute
"forward looking" statements within the meaning of the Private Litigation Reform
Act of 1995. Such statements involve known and unknown risks,  uncertainties and
other  factors  which  may  cause  actual  events  to  differ   materially  from
expectations. Such factors include the following (1) technological, engineering,
quality control or other circumstances which could delay the sale or shipment of
the  Company's  products;  (2)  economic,   business,   market  and  competitive
conditions in the software  industry and  technological  innovations which could
affect the Company's business;  (3) the Company's inability to protect its trade
secrets  or  other  proprietary  rights,  operate  without  infringing  upon the
proprietary  rights  of  others  and  prevent  others  from  infringing  on  the
proprietary  rights  of the  Company;  and (4)  general  economic  and  business
conditions and the availability of sufficient financing.

                                     - 18 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
                    (In thousands, except per share amounts)
                                    FORM 10-Q

Part II-Other Information

Item 1.  Legal Proceedings

         None

Item 2.  Change in Securities

         None

Item 3.  Defaults Upon Senior Securities

         None

Item 4.  Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of  Stockholders on June 1, 1998. The number
of shares of common stock with voting  rights as of the record date  represented
at the  meeting  either in person  or by proxy was  46,136  shares or 93% of the
eligible outstanding Common Stock of the Company. Four proposals were voted upon
by the stockholders. The proposals and the voting results follow:

Proposal 1

Each of the six persons  listed  below were  elected as directors to serve until
the next Annual  Meeting or until his  successor  is elected or  appointed.  The
number of votes for and withheld for each individual is listed next to his name.
<TABLE>
<CAPTION>
                                                                   Broker
                                                             -----------------
                            Name            For    Withheld  Non-votes Abstain
                      ----------------     ------  --------  --------- -------
<S>                                        <C>        <C>      <C>       <C>       
     All Classes      Michael A. Braun     45,949     187      None      None
     All Classes      James Dao ......     45,850     286      None      None
     All Classes      Guido DiGregorio     45,915     221      None      None
     All Classes      Jess M. Ravich .     45,950     186      None      None
     All Classes      Philip Sassower      45,950     186      None      None
     All Classes      Jeffrey Steiner      45,949     187      None      None
     All Classes      C. B. Sung .....     45,854     282      None      None
</TABLE>

Proposal 2

It was resolved to amend the Company's  Certificate of  Designation  relating to
its  first  series of 5%  Cumulative  Convertible  Preferred  Stock to cause the
dividend and  liquidation  rights with respect thereto to be pari passu with the
Company's  Series B 5% Cumulative  Convertible  Preferred  Stock.  The number of
votes for, against and abstaining on this proposal follows:

                                     - 19 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
                    (In thousands, except per share amounts)
                                    FORM 10-Q

Item 4.  Submission of Matters to a Vote of Security Holders (continued)

Proposal 2 (continued)
<TABLE>
<CAPTION>
                                                                   Broker
                                                            --------------------
                                For      Against   Abstain  Non-votes   Abstain
                               ------    -------   -------  ---------  ---------
<S>                            <C>         <C>      <C>        <C>       <C>       
     All Classes ........      26,832      427      290        None      None
</TABLE>

Proposal 3

It was  resolved to amend the  Company's  Amended and  Restated  Certificate  of
Incorporation  to  increase  the number of  authorized  shares of the  Company's
Common  Stock from  80,000 to  100,000:  The number of votes  for,  against  and
abstaining on this proposal follows:
<TABLE>
<CAPTION>

                                                                   Broker
                                                             -------------------
                                  For      Against  Abstain  Non-votes   Abstain
                                 ------     -----   ------   ---------   -------
<S>                              <C>        <C>       <C>       <C>         <C>       
     All Classes ...........     43,884     1,974     278       None        None
     Common only ...........     43,152     1,974     278       None        None
</TABLE>

Proposal 4

It was  resolved  to ratify the  appointment  of  PricewaterhouseCoopers  LLP as
independent  accountants of the Company for the fiscal year ending  December 31,
1998. The number of votes for, against and abstaining on this proposal follows:
<TABLE>
<CAPTION>
                                                                   Broker
                                                             -------------------
                                  For      Against  Abstain  Non-votes   Abstain
                                 ------     -----   ------   ---------   -------
<S>                              <C>         <C>      <C>       <C>         <C>  
     All Classes .........       45,901      197      38        None        None
</TABLE>

Item 5.  Other Information

         None

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits

         Exhibit 27, Financial Data Schedule.

(b)      Reports on Form 8-K

         None

                                     - 20 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
                    (In thousands, except per share amounts)
                                    FORM 10-Q

                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.





                                          COMMUNICATION INTELLIGENCE CORPORATION
                                          --------------------------------------
                                                        Registrant



     August 7, 1998                        /s/ Guido DiGregorio
--------------------------       -----------------------------------------------
          Date                                 Guido DiGregorio
                                  (Principal Financial Officer and Officer Duly
                                 Authorized to Sign on Behalf of the Registrant)


<PAGE>