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:     September 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 November 12,
1998: 68,966,246

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 September 30, 1998
               (unaudited) and December 31, 1997............................3

          Condensed Consolidated Statements of Operations for the three
               and nine month periods ended September 30, 1998 and 1997
               (unaudited)..................................................4

          Condensed Consolidated Statements of Cash Flows for the nine
               month periods ended September 30, 1998 and 1997 (unaudited)..5

          Notes to Unaudited 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.......................................19

          Item 6.  Exhibits and Reports on Form 8-K

                   (a) Exhibits............................................19

                   (b) Reports on Form 8-K.................................19

         Signatures........................................................20

<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
                      Condensed Consolidated Balance Sheets
                                 (In thousands)
<TABLE>
<CAPTION>
                                                           Sept. 30,   Dec. 31,
                                                             1998        1997
                                                           ---------   ---------
                                                           Unaudited
Assets
Current assets:
<S>                                                         <C>         <C>     
     Cash and cash equivalents ..........................   $  1,314   $  5,485
     Accounts receivable, net ...........................        798        362
     Inventories ........................................        232        193
     Other current assets ...............................         76        175
                                                            --------   --------
         Total current assets ...........................      2,420      6,215

Note receivable from officer  (Note 4) ..................        210        210
Property and equipment, net .............................        607        798
Other assets ............................................        265        268
                                                            --------   --------

         Total assets ...................................   $  3,502   $  7,491
                                                            ========   ========

Liabilities and stockholders' equity Current liabilities:
     Short-term debt ....................................   $    145   $    490
     Accounts payable ...................................        177      1,059
     Accrued compensation ...............................        257        446
     Other accrued liabilities ..........................        621      1,059
     Deferred revenue ...................................         17        440
                                                            --------   --------
         Total current liabilities ......................      1,217      3,494

Other liabilities .......................................       --            8
Commitments  (Note 7)

Stockholders' equity:
     Convertible preferred stock (Note 7) ...............          3          6
     Common stock .......................................        594        474
     Additional paid-in capital .........................     70,366     69,955
     Accumulated deficit ................................    (68,631)   (66,347)
     Cumulative translation adjustment ..................        (47)       (99)
                                                            --------   --------
         Total stockholders' equity .....................      2,285      3,989
                                                            ========   ========

         Total liabilities and stockholders' equity .....   $  3,502   $  7,491
                                                            ========   ========
</TABLE>
                            See accompanying notes.

                                     - 3 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
                 Condensed Consolidated Statements of Operations
                                    Unaudited
                    (In thousands, except per share amounts)
<TABLE>
<CAPTION>
                                     Three Months Ended     Nine Months Ended
                                        September 30,         September 30,
                                   ---------------------   ---------------------
                                   ---------   ---------   ---------   ---------
                                      1998        1997        1998        1997
                                   ---------   ---------   ---------   ---------
Revenues:                                                                                     
<S>                                <C>         <C>         <C>         <C>     
  Product ........................ $    598    $    576    $  2,076    $  2,336
  License and royalty ............      388         623       1,276       1,213
  Development contracts ..........      130         176         330         421
                                    --------    --------    --------    --------
    Total revenues ...............    1,116       1,375       3,682       3,970

Operating costs and expenses:
  Cost of sales:
    Product ......................      357         575       1,133       2,374
    License and royalty ..........       33          43          55          84
    Development contracts ........       98         159         208         340
  Research and development .......      344         585       1,409       1,656
  Sales and marketing ............      591       1,723       1,872       4,703
  General and administrative .....      437         544       1,403       1,663
                                    --------    --------    --------    --------
    Total operating costs
      and expenses ...............    1,860       3,629       6,080      10,820
                                    --------    --------    --------    --------

Loss from operations .............     (744)     (2,254)     (2,398)     (6,850)

Interest income and other income
  (expense), net (Note 7) ........       30          56         132        (312)

Interest expense .................       (2)         (7)        (18)        (28)
                                    --------    --------    --------    --------
   Net loss ......................     (716)     (2,205)     (2,284)     (7,190)

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

   Preferred stock
     dividend (Note 1) ...........     (125)       (141)       (435)       (423)
                                    --------    --------    --------    --------
Net loss applicable to common
  stockholders ................... $   (841)   $ (2,346)   $ (2,719)   $(11,989)
                                    ========    ========    ========    ========
Basic loss per common share
  (Note 8) ....................... $  (0.02)   $  (0.05)   $  (0.05)   $  (0.27)
                                    ========    ========    ========    ========
Diluted loss per common share
  (Note 8)........................ $  (0.02)   $  (0.05)   $  (0.05)   $  (0.27)
                                    ========    ========    ========    ========
Weighted average common shares
  outstanding ....................   54,544      45,200      51,298      44,876
                                    ========    ========    ========    ========
</TABLE>
                            See accompanying notes.

                                     - 4 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
                 Condensed Consolidated Statements of Cash Flows
                                    Unaudited
                                 (In thousands)
<TABLE>
<CAPTION>
                                                             Nine Months Ended
                                                               September 30,
                                                           ---------------------
                                                           ---------   ---------
                                                              1998        1997
                                                           ---------   ---------
Cash flows from operating activities:
<S>                                                        <C>         <C>      
  Net loss ............................................    $ (2,284)   $ (7,190)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
      Depreciation and amortization ...................         246         183
      Warrant issuance costs ..........................        --           484
      Stock options issued for services ...............          32          74
      Changes in operating assets and liabilities:
        Accounts receivable ...........................        (437)       (139)
        Inventories ...................................         (54)       (892)
        Other current assets ..........................          99        (210)
        Other assets ..................................        (203)       (234)
        Accounts payable and accrued compensation .....      (1,070)        672
        Other accrued liabilities .....................        (171)       (272)
        Deferred revenue ..............................        (452)     (1,033)
        Pre-petition liabilities ......................        --          (878)
                                                            --------    --------
      Net cash used in operating activities ...........      (4,294)     (9,435)
                                                            --------    --------
Cash flows from investing activities:
  Proceeds from sales and maturities of short-term
    investments .......................................        --         7,071
  Purchase of short-term investments ..................        --        (7,022)
  Acquisition of property and equipment ...............         (49)       (584)
                                                            --------    --------
      Net cash used in investing activities ...........         (49)       (535)
                                                            --------    --------
Cash flows from financing activities:
  Principal payments on short-term debt ...............        (490)        (26)
  Principal payments on capital lease obligations .....          (4)        (17)
  Proceeds from issuance of short-term debt ...........         145         109
  Proceeds from issuance of common stock ..............         527         772
                                                            --------    --------
      Net cash provided by financing activities .......         178         838
                                                            --------    --------
Effect of exchange rate changes on cash ...............          (6)        (49)
                                                            --------    --------
Net decrease in cash and cash equivalents .............      (4,171)     (9,181)
Cash and cash equivalents at beginning of period ......       5,485      10,573
                                                            ========    ========
Cash and cash equivalents at end of period ............    $  1,314    $  1,392
                                                            ========    ========
</TABLE>
                            See accompanying notes.

                                     - 5 -
<PAGE>


                     Communication Intelligence Corporation
                                 and Subsidiary
                 Condensed Consolidated Statements of Cash Flows
                                    Unaudited
                                 (In thousands)
<TABLE>
<CAPTION>
                                                             Nine Months Ended
                                                               September 30,
                                                           ---------------------
                                                              1998        1997
                                                           ---------   ---------
Schedule of non-cash transactions:
<S>                                                        <C>         <C>     
  Conversion of redeemable convertible preferred
  stock into 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 quarterly 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 Company's 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 nine months ended  September 30, 1998,  the Company's cash and cash
     equivalents  decreased by $4,171 from $5,485 at the beginning of the period
     to  $1,314.  The  decrease  is due  primarily  to cash  used  in  operating
     activities of $4,294 and $453 used to repay an accounts  receivable line of
     credit in January 1998. As of September 30, 1998,  the Company's  principal
     source  of funds  were its cash and  cash  equivalents  of  $1,314  and its
     eligible  advances  from its  $1,500  accounts  receivable  financing.  The
     Company is seeking to become cash flow positive from operating  activities.
     However,  the Company is unable to predict when it can meet this objective.
     There can be no  assurance  that the  Company  will have  adequate  capital
     resources to fund  planned  operations  in the near future.  If the Company
     does not have adequate capital resources to fund operations, it may be

                                     - 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)

     required to delay,  scale back or eliminate some or all of its  operations,
     which may have a material adverse effect on the Company's business, results
     of operations and prospects.  There can be no assurance that any additional
     funds will be available to the Company when needed,  or if available,  will
     be available on favorable terms or in amounts required by the Company. 

     The  Company's  results of  operations  for the three and nine months ended
     September  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 the outstanding  shares of its
     Series A Preferred  Stock.  The Company  believes  the  restatement  of the
     September 30, 1997 three and nine 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 Company's  results
     of operations  originally reported in the Company's Form 10-Q for the three
     months ended  September 30, 1997 was to increase the net loss applicable to
     common  stockholders by $141 from $2,205 to $2,346.  There was no change to
     the amounts reported on basic and diluted loss per common share. The effect
     of this restatement on the results of operations originally reported in the
     Company's  Form 10-Q for the nine months  ended  September  30, 1997 was to
     increase  the net loss  applicable  to common  stockholders  by $4,799 from
     $7,190 to $11,989  and to increase  the basic and  diluted  loss per common
     share by $0.11 from $0.16 to $0.27.  The  restatement  had no effect on the
     Company's cash position at September 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>
                                        Sept. 30,   Dec. 31,
                                          1998       1997
                                        ---------   --------
<S>                                      <C>        <C>   
          Cash in bank ...............   $  639     $1,160
          Commercial paper ...........      663      2,330
          Money market accounts ......       12      1,004
          Corporate debt securities...      --         991
                                          ======     ======
                                         $1,314     $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 September 30,
     1998, inventory was comprised primarily of finished goods.

4.   Note receivable from officer

     On August 14, 1998, the Company entered into an agreement (the "Agreement")
     with an officer of the  Company.  Under the  Agreement,  the  officer  will
     provide  consulting  services to the Company through  December 15, 2001. In
     exchange for his services, $110,000 of the note receivable from the officer
     shall be forgiven on a monthly basis over the period  commencing August 15,
     1998 and ending  December 15,  2001.  The  remaining,  $100,000 of the note
     receivable  from the officer  will be forgiven on December  15, 2001 if the
     officer has performed all the required  services under the  Agreement.  The
     Agreement will terminate on December 15, 2001.

5.   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 September
     30, 1998.

6.   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

                                     - 9 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiary
         Notes to Unaudited Condensed Consolidated Financial Statements
                    (In thousands, except per share amounts)
                                    FORM 10-Q

6.   Revenue recognition (continued)

     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,  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, 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 nine months ended September 30, 1998.

7.   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 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

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

7.   Convertible preferred stock (continued)

     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.  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 shares of  Series A  Preferred  Stock  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 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 then  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.

     As of  November  9, 1998,  there were  approximately  93 shares of Series A
     Preferred  Stock  and 11  shares of Series B  Preferred  Stock  issued  and
     outstanding.

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

8.   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.

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>
                                               Nine Months Ended
                                                 September 30,
                                              --------   --------
                                                1998       1997
                                              --------   --------
<S>                                           <C>        <C>     
     Net loss .............................   $(2,284)   $(7,190)
     Other comprehensive income:
       Cumulative translation adjustment...        52         66
                                               =======    =======
     Total comprehensive loss .............   $(2,232)   $(7,124)
                                               =======    =======
</TABLE>

10.  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.

                                     - 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" and the accompanying financial
statements 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 September 30,
1998,  revenues  decreased by 19% to $1,116 from $1,375, and for the nine months
ended  September  30,  1998,  revenues  decreased  7% to $3,682  from  $3,970 as
compared  to the three and nine month  periods  ended  September  30,  1997,  as
discussed below:
<TABLE>
<CAPTION>
                             Three Months Ended   Nine Months Ended
                                September 30,       September 30,
                              -----------------   -----------------
                                1998      1997      1998      1997
                              -------   -------   -------   -------
Revenues:
<S>                           <C>       <C>       <C>       <C>   
   Product ................   $  598    $  576    $2,076    $2,336
   License and royalty ....      388       623     1,276     1,213
   Development contracts...      130       176       330       421
                               ======    ======    ======    ======
      Total revenues          $1,116    $1,375    $3,682    $3,970
                               ======    ======    ======    ======
</TABLE>
Product sales  increased to $598 from $576, or by 4%, for the three month period
ended  September 30, 1998 compared to the three month period ended September 30,
1997. The increase is due to increases in sales by the Company's 90% owned joint
venture in The People's  Republic of China (the "Joint  Venture").  For the nine
month period ended  September 30, 1998,  product sales  decreased to $2,076 from
$2,336,  or 11%, in the  comparable  prior year  period.  This  decrease was due
primarily to the  withdrawal  of  Handwriter  products  from the retail  channel
during the nine months  ended  September  30,  1998.  Handwriter  product  sales
decreased  $216 and $897 to $129 and $508,  respectively,  during  the three and
nine month periods ended September 30, 1998 from $345 and $1,405,  respectively,
in the comparable  prior year periods.  Product sales by the Company's 90% owned
joint venture increased $174 and $469, or by 72% and 50%, respectively,  for the
three and nine  month  periods  ended  September  30,  1998 to $415 and  $1,399,
respectively,  compared to $241 and $930, respectively,  in the comparable prior
year periods. The increase is primarily due to increases in sales efforts by the
Joint Venture's sales force during the first and second quarters of 1998.

Revenues  from  license  and  royalty  fees for the  three  month  period  ended
September 30, 1998  decreased  $235, or 38%, to $388 from $623 in the comparable
prior year period.  This decrease was primarily the result of approximately $519
of revenues recognized during the three month period ended September 30, 1997 on
licensing  agreements for which the Company had no further obligation to deliver
additional  software or  services.  This decline in license and royalty fees was
primarily offset by increased  shipments by OEM's of products  incorporating the
Company's software. For the nine month period ended September 30, 1998, revenues
from license and royalty fees increased $63, or

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

5%, to $1,276 from $1,213 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 nine months ended
September  30,  1998 was $404  compared  to $902 in the  comparable  prior  year
period.

Development  contract  revenues for the three month period ended  September  30,
1998 decreased 26% to $130 from $176 in the comparable  prior year period.  This
decrease resulted from lower non-recurring  engineering fees recorded as revenue
compared to the prior year period. For the nine months ended September 30, 1998,
development  contract revenue  decreased 22% to $330 from $421 in the comparable
prior  year  period.  The  decline  is due to reduced  grant  revenues  from the
National Science Foundation compared to the prior year period.

Cost of sales.  Cost of product sales for the three and nine month periods ended
September  30, 1998  decreased  38% and 52%,  respectively,  to $357 and $1,133,
respectively,  from $575 and $2,374, respectively,  in the comparable prior year
periods.  Cost of  product  sales  for the three and nine  month  periods  ended
September  30, 1998 includes  approximately  $309 and $1,018,  respectively,  of
hardware and software components related to the system integration activities of
the Joint Venture, compared to approximately $134 and $692, respectively, in the
prior year periods.  The increase in systems  integration costs of product sales
for the three and nine month  periods  ended  September  30,  1998 is due to the
increase in sales of such  products  and was offset by a decrease  for the three
and  nine  month  periods   ended   September  30,  1998  of  $335  and  $1,210,
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 nine months ended  September  30, 1998 compared to the prior year,
and  lower  product  costs.   License  and  royalty  cost  of  sales   decreased
approximately $10 and $29, respectively,  to $33 and $55, respectively,  for the
three  and  nine  months  ended  September  30,  1998  compared  to $43 and $84,
respectively, for the comparable 1997 periods. Costs incurred in connection with
development contract revenues decreased 38% and 39%, respectively, for the three
and nine months ended  September  30, 1998 as compared to the prior year periods
commensurate with the decrease in development contract revenues.

Research and development  expenses.  Research and  development  expenses for the
three and nine month periods ended  September 30, 1998 decreased by 41% and 15%,
respectively,  to $344 and $1,409, respectively, as compared to $585 and $1,656,
respectively,  in the  comparable  period of the prior year.  The decreases were
primarily due to reductions of  approximately  $196 and $301,  respectively,  in
payroll and related costs attributable to a decrease in the number of U.S. based
personnel for the three and nine month periods ended September 30, 1998 compared
to the same three and nine month  prior year  periods.  Other  costs,  including
facilities  and related  costs,  for the three months ended  September  30, 1998
decreased  approximately $45 commensurate with the reductions in head count. For
the nine month period ended  September 30, 1998, the increase in other costs was
commensurate  with the decrease in development  contract  revenues and increased
engineering  activities by the Company's  Joint Venture during the first half of
1998,  compared to the prior year. For the three and nine months ended September
30, 1998 and 1997,  the  Company did not  capitalize  any  significant  software
development costs.

Sales and marketing  expenses.  Sales and  marketing  expenses for the three and
nine month periods ended September 30, 1998 decreased 66% and 60%, respectively,
to  $591  and   $1,872,   respectively,   as  compared  to  $1,723  and  $4,703,
respectively,  in the comparable  period of the prior year. The decrease for the
three and nine month  periods  ended  September  30, 1998 was  primarily  due to
decreases of $393 and $1,320, respectively,  in advertising and related expenses
associated with the Handwriter  products,  and $362 and $812,  respectively,  in
payroll and related expenses as a result of the Company's previously announced

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

strategy to focus primarily on systems  integration  and software  sales.  Other
costs  including  facilities  and  related  expenses  decreased  $377 and  $699,
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.

General and administrative expenses. General and administrative expenses for the
three and nine month  periods ended  September  30, 1998  decreased 20% and 16%,
respectively,  to $437 and $1,403, respectively, as compared to $544 and $1,663,
respectively,  from the comparable periods of the prior year. The decreases were
primarily   attributable   to   decreases  of   approximately   $107  and  $260,
respectively,  in other costs,  including  consulting and  professional  service
expenses.

Interest  income and other  income  (expense),  net.  Interest  income and other
income (expense), net decreased for the nine months ended September 30, 1998 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
Unaudited Condensed Consolidated Financial Statements).

Embedded yield on preferred stock. The embedded yield on preferred stock for the
nine month period  ended  September  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 on the Series A Preferred  Stock and Series B Preferred Stock of $1.25
per share,  per annum,  compounded  quarterly and  semi-annually,  respectively,
whether or not declared.

Liquidity and Capital Resources

At September 30, 1998, cash and cash equivalents totaled $1,314 compared to cash
and cash equivalents of $5,485 at December 31, 1997. This decrease was primarily
the result of $4,294 used in operating activities and approximately $453 used to
repay the accounts  receivable line of credit.  Total current assets were $2,420
at September 30, 1998 compared to $6,215 at December 31, 1997.

As of September 30, 1998, the Company's  principal source of funds were its cash
and cash  equivalents  of  $1,314  and its  eligible  advances  from its  $1,500
accounts  receivable  financing.  The  Company is  seeking  to become  cash flow
positive from operating  activities.  However,  the Company is unable to predict
when it can meet this objective. There can be no assurance that the Company will
have adequate capital  resources to fund planned  operations in the near future.
If the Company does not have adequate capital  resources to fund operations,  it
may be required to delay, scale back or eliminate some or all of its operations,
which may have a material adverse effect on the Company's  business,  results of
operations  and prospects.  There can be no assurance that any additional  funds
will be available to the Company when needed, or if available, will be available
on favorable terms or in amounts required by the Company.

Current  liabilities,  which include deferred revenue,  were $1,217 at September
30,  1998.  Deferred  revenue,  totaling $17 at  September  30, 1998,  primarily
reflects nonrefundable advance

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

service fees received from the Company's  customers  which will be recognized as
revenue by the Company in the period in which 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
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  was  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  September  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
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

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

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.

As of November 9, 1998, there were approximately 93 shares of Series A Preferred
Stock and 11 shares of Series B Preferred Stock issued and outstanding.

If the average market price of the Common Stock on November 9, 1998 of $0.50 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
9,355 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 then 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.

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 September
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.

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

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
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 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 Year 2000
compliant.  The  Company  has  evaluated  its  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 replacement of such older computer  equipment will
be completed by December 31, 1998. 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 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 be Year 2000 compliant 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  results  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  

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

Future  Results  and  Stock  Price (continued)

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 or prevent
others from infringing on the proprietary rights of the Company; and (4) general
economic and business conditions and the availability of sufficient financing.

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

         None

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

                                     - 19 -
<PAGE>
                     Communication Intelligence Corporation
                                 and Subsidiarys
                    (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



November 13, 1998                              /s/Guido DiGregorio
-----------------                -----------------------------------------------
      Date                                       Guido DiGregorio
                                  (Principal Financial Officer and Officer Duly
                                 Authorized to Sign on Behalf of the Registrant)



                                     - 20 -
<PAGE>