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

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

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

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

|   | Yes |   |   | No |   |   |
|--------|-----|--------|--------|----|--------|--------|

|   | large      accelerated filer |   | accelerated      filer |   | non-accelerated      filer |  X | Smaller      reporting Company |
|--------|------------------------------|--------|------------------------|--------|----------------------------|---------|--------------------------------|

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

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Page No.       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|
| PART      I.  FINANCIAL INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |           |
| Item      1.  Financial      Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |           |
| Condensed      Consolidated Balance Sheets at September 30, 2009 (unaudited)      andDecember 31, 2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   3  |
| Condensed      Consolidated Statements of Operations for the Three-MonthAnd Nine-Month Periods Ended      September 30, 2009 and 2008 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   4  |
| Condensed      Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for      theNine-Month Period Ended      September 30, 2009 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   5  |
| Condensed      Consolidated Statements of Cash Flows for the Nine-Month      PeriodsEnded September 30, 2009 and      2008 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   6  |
| Notes      to Unaudited Condensed Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  8        |
| Item      2.  Management's      Discussion and Analysis of Financial Condition andResults of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   18 |
| Item      3.  Quantitative and      Qualitative Disclosures About Market Risk                                                                                                                             |  25       |
| Item      4.  Controls and      Procedures                                                                                                                                                                     |  25       |
| PART      II.  OTHER INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |           |
| Item      1.    Legal      Proceedings                                                                                                                                                               |  25       |
| Item      1A. Risk      Factors                                                                                                                                                                                     |  25       |
| Item      2.    Unregistered Sale of      Securities and Use of proceeds                                                                                                                        |  25       |
| Item      3.    Defaults Upon Senior      Securities                                                                                                                                            |  25       |
| Item      4.    Submission of Matters      to a Vote of Security Holders                                                                                                                        |  25       |
| Item      5.    Other      Information                                                                                                                                                               |  25       |
| Item      6.    Exhibits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |           |
| (a)      Exhibits                                                                                                                                                                                                                       |  25       |
| Signatures                                                                                                                                                                                                          |  27       |

----

|                                                                                                                                                                                                                                                                      |   | September,      30 |                |   | December,      31 |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------------------|--------|-------------------|--------|
|                                                                                                                                                                                                                                                                      |   | 2009               |                |   | 2008              |   |
| Assets                                                                                                                                                                                                                                                                    |   | Unaudited          |                |   |              |   |
| Current      assets:                                                                                                                                                                                                                                                      |   |               |                |   |              |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                 |   | $                  | 631                 |   |              | $      | 929 |   |
| Accounts receivable, net of      allowances of $117 and $104 at September 30, 2009 and December 31, 2008,      respectively                                                                                                                                               |   |               | 654                 |   |              |   | 700 |   |
| Prepaid expenses and other      current assets                                                                                                                                                                                                                            |   |               | 82                  |   |              |   | 80 |   |
|                                                                                                                                                                                                                                                                      |   |               |                |   |              |   |   |   |
| Total current assets                                                                                                                                                                                                                                                      |   |               | 1,367               |   |              |   | 1,709 |   |
|  Property      and equipment, net                                                                                                                                                                                                                                    |   |               | 31                  |   |              |   | 48 |   |
| Patents                                                                                                                                                                                                                                                                   |   |               | 2,865               |   |              |   | 3,149 |   |
| Capitalized      software development costs                                                                                                                                                                                                                               |   |               | 1,543               |   |              |   | 1,406 |   |
| Deferred      financing costs                                                                                                                                                                                                                                             |   |               | 274                 |   |              |   | 301 |   |
| Other      assets                                                                                                                                                                                                                                                         |   |               | 29                  |   |              |   | 30 |   |
|                                                                                                                                                                                                                                                                      |   |               |                |   |              |   |   |   |
| Total assets                                                                                                                                                                                                                                                              |   | $                  | 6,109               |   |              | $      | 6,643 |   |
|                                                                                                                                                                                                                                                                      |   |               |                |   |              |   |   |   |
|  Liabilities      and Stockholders' Equity (Deficit)                                                                                                                                                                                                                 |   |               |                |   |              |   |   |   |
| Current      liabilities:                                                                                                                                                                                                                                                 |   |               |                |   |              |   |   |   |
| Short-term debt – net of      discount of $0 at September 30, 2009 and $5 at December 31,      2008                                                                                                                                                                 |   | $                  | 20                  |   |              | $      | 60 |   |
| Accounts payable                                                                                                                                                                                                                                                          |   |               | 202                 |   |              |   | 92 |   |
| Accrued compensation                                                                                                                                                                                                                                                      |   |               | 361                 |   |              |   | 369 |   |
| Other accrued liabilities                                                                                                                                                                                                                                                 |   |               | 165                 |   |              |   | 236 |   |
| Deferred revenue                                                                                                                                                                                                                                                          |   |               | 706                 |   |              |   | 343 |   |
|                                                                                                                                                                                                                                                                      |   |               |                |   |              |   |   |   |
| Total current liabilities                                                                                                                                                                                                                                                 |   |               | 1,454               |   |              |   | 1,100 |   |
|                                                                                                                                                                                                                                                                      |   |               |                |   |              |   |   |   |
| Long-term      debt – net of discount of $2,666 and $873 at September 30, 2009 and      December 31, 2008, including related party debt of $4,823 and $2,644 net      of discount of $2,576 and $834 at September 30, 2009 and December 31,      2008, respectively |   |               |     2,325 |   |              |   |     2,765 |   |
| Derivative      liability                                                                                                                                                                                                                                                 |   |               | 6,501               |   |              |   | − |   |
| Total      liabilities                                                                                                                                                                                                                                                    |   |               | 10,280              |   |              |   | 3,865 |   |
| Commitments      and contingencies                                                                                                                                                                                                                                        |   |               |                |   |              |   |   |   |
| Stockholders'      equity (deficit):                                                                                                                                                                                                                                      |   |               |                |   |              |   |   |   |
| Preferred stock, $.01 par value;      10,000 shares authorized; 756 shares outstanding at September 30, 2009 and      856 at December 31, 2008                                                                                                                            |   |               | 756                 |   |              |   | 856 |   |
| Common stock, $.01 par value;      275,000 shares authorized; 131,379 and 130,374 shares issued and      outstanding at September 30, 2009 and December 31, 2008,      respectively                                                                                       |   |               |   1,314        |   |              |   |   1,304 |   |
| Additional paid-in capital                                                                                                                                                                                                                                                |   |               | 92,840              |   |              |   | 95,174 |   |
| Accumulated deficit                                                                                                                                                                                                                                                       |   |               | (99,090             | )      |              |   | (94,569 | ) |
| Accumulated other comprehensive      income                                                                                                                                                                                                                               |   |               | 9                   |   |              |   | 13 |   |
|                                                                                                                                                                                                                                                                      |   |               |                |   |              |   |   |   |
| Total      stockholders' equity (deficit)                                                                                                                                                                                                                                 |   |               | (4,171              | )      |              |   | 2,778 |   |
|                                                                                                                                                                                                                                                                      |   |               |                |   |              |   |   |   |
| Total      liabilities and stockholders' equity (deficit)                                                                                                                                                                                                                 |   | $                  | 6,109               |   |              | $      | 6,643 |   |
|                                                                                                                                                                                                                                                                      |   |               |                |   |              |   |   |   |

----

|                                                                                                                                                                                                                                                                                                                                                                       |   | Three      Months Ended |    |   | Nine      Months Ended |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|--------|------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                       |   | September      30,      |    |   | September      30,     |   |
|                                                                                                                                                                                                                                                                                                                                                                       |   | 2009                    |    |   | 2008                   |   |   | 2009 |   |   | 2008 |   |
|                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |                   |   |   |   |   |   |   |   |
| Revenues:                                                                                                                                                                                                                                                                                                                                                                  |   |                    |    |   |                   |   |   |   |   |   |   |   |
| Product                                                                                                                    |   | $                       | 688     |   |                   | $      | 546 |   |   | $ | 968 |   |   | $ | 1,006 |   |
| Maintenance                                                                                                                |   |                    | 189     |   |                   |   | 175 |   |   |   | 559 |   |   |   | 552 |   |
| Total Revenues                                                                                                                                                                                                                                                                                                                                                             |   |                    | 877     |   |                   |   | 721 |   |   |   | 1,527 |   |   |   | 1,558 |   |
|                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Operating      costs and expenses:                                                                                                                                                                                                                                                                                                                                         |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales:                                                                                                                                                                                                                                                                                                                                                             |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Product                                                                                                                                             |   |                    | 186     |   |                   |   | 216 |   |   |   | 539 |   |   |   | 543 |   |
| Maintenance                                                                                                                                         |   |                    | 44      |   |                   |   | 47 |   |   |   | 141 |   |   |   | 120 |   |
| Research and      development                                                                                              |   |                    | 60      |   |                   |   | 73 |   |   |   | 186 |   |   |   | 169 |   |
| Sales and      marketing                                                                                                   |   |                    | 407     |   |                   |   | 337 |   |   |   | 1,104 |   |   |   | 1,052 |   |
| General and      administrative                                                                                            |   |                    | 545     |   |                   |   | 535 |   |   |   | 1,504 |   |   |   | 1,554 |   |
| Total operating costs and      expenses                                                                                                                                                                                                                                                                                                                                    |   |                    | 1,242   |   |                   |   | 1,208 |   |   |   | 3,474 |   |   |   | 3,438 |   |
|                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Loss      from      operations                                                               |   |                    | (365    | )      |                   |   | (487 | ) |   |   | (1,947 | ) |   |   | (1,880 | ) |
|                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Interest      and other income (expense), net                                                                                                                                                                                                                                                                                                                              |   |                    | 1       |   |                   |   | 40 |   |   |   | 2 |   |   |   | 45 |   |
| Interest      expense:                                                                                                                                                                                                                                                                                                                                                     |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Related      party                                                                                                         |   |                    | (96     | )      |                   |   | (55 | ) |   |   | (243 | ) |   |   | (147 | ) |
| Other                                                                                                                                                                                                                                                                                                                                                                      |   |                    | (4      | )      |                   |   | (26 | ) |   |   | (12 | ) |   |   | (67 | ) |
| Amortization      of loan discount and deferred financing:                                                                                                                                                                                                                                                                                                                 |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Related      party                                                                                                         |   |                    | (549    | )      |                   |   | (204 | ) |   |   | (1,062 | ) |   |   | (512 | ) |
| Other                                                                                                                                                                                                                                                                                                                                                                      |   |                    | (19     | )      |                   |   | (23 | ) |   |   | (36 | ) |   |   | (131 | ) |
| Loss      on extinguishment of long term debt                                                                                                                                                                                                                                                                                                                              |   |                    | − |   |                   |   | − |   |   |   | (829 | ) |   |   | − |   |
| Loss      on derivative      liability                                                       |   |                    | (1,529  | )      |                   |   | − |   |   |   | (2,505 | ) |   |   | − |   |
| Net      loss                                                                                                              |   |                    | (2,561  | )      |                   |   | (755 | ) |   |   | (6,632 | ) |   |   | (2,692 | ) |
| Accretion      of beneficial conversion feature, Preferred shares:                                                                                                                                                                                                                                                                                                         |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
|       Related      party                                                                     |   |                    | − |   |                   |   | − |   |   |   | − |   |   |   | (273 | ) |
| Other                                                                                                                      |   |                    | − |   |                   |   | − |   |   |   | − |   |   |   | (98 | ) |
| Preferred      stock dividends:                                                                                                                                                                                                                                                                                                                                            |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Related      party                                                                                                         |   |                    | (10     | )      |                   |   | (16 | ) |   |   | (34 | ) |   |   | (20 | ) |
| Other                                                                                                                      |   |                    | (4      | )      |                   |   | (5 | ) |   |   | (12 | ) |   |   | (7 | ) |
|                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss attributable to      commonstockholders                                                                                                                                                                                                                                                                                                                           |   | $                       | (2,575  | )      |                   | $      | (776 | ) |   | $ | (6,678 | ) |   | $ | (3,090 | ) |
| Basic      and diluted loss per common share                                                                                                                                                                                                                                                                                                                               |   | $                       | (0.02   | )      |                   | $      | (0.01 | ) |   | $ | (0.05 | ) |   | $ | (0.02 | ) |
| Weighted      average common shares outstanding, basic and diluted                                                                                                                                                                                                                                                                                                         |   |                    | 131,379 |   |                   |   | 129,057 |   |   |   | 131,134 |   |   |   | 129,057 |   |

----

|                                                                                                                                                                         |   |   PreferredSharesOutstanding |   |   |   PreferredSharesAmount |   |   |   CommonSharesOutstanding |   |   |   CommonStock Amount |   |   |   AdditionalPaid-InCapital |   |   |    AccumulatedDeficit |   |   |  AccumulatedOtherComprehensiveIncome |   |   |     Total   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|--------|-----------------------------------|--------|--------|-------------------------------------|--------|--------|--------------------------------|--------|--------|--------------------------------------|--------|--------|--------------------------------------|--------|--------|-------------------------------------------|--------|--------|---------------------------------|--------|
|                                                                                                                                                                         |   |                                   |   |   |                              |   |   |                                |   |   |                           |   |   |                                 |   |   |                                 |   |   |                                      |   |   |                            |   |
| Balances      as of December 31, 2008                                                                                                                                        |   |                                   | 856    |   |                              | $      | 856    |                                |   |   | 130,374                        |   |   | $                                    | 1,304  |   |                                 | $      | 95,174 |                                      |   | $      | (94,569                         | )      |   | $ | 13 |   |   | $ | 2,778 |   |
|                                                                                                                                                                         |   |                                   |   |   |                              |   |   |                                |   |   |                           |   |   |                                 |   |   |                                 |   |   |                                      |   |   |                            |   |   |   |   |   |   |   |   |   |
| Cumulative      effect of change in accounting principle on January 1, 2009 –      Reclassification of equity linked financial instrument to derivative      liability |   |                                   |   |   |                              |   |   |                                |   |   |                           |   |   |                                 |   |   |                                 |   | (3,510 | )                                         |   |   |            2,157 |   |   |   |   |   |   |   | (1,353 | ) |
| Stock      based employee compensation                                                                                                                                       |   |                                   |   |   |                              |   |   |                                |   |   |                           |   |   |                                 |   |   |                                 |   | 211    |                                      |   |   |                            |   |   |   |   |   |   |   | 211 |   |
| Conversion      of preferred shares                                                                                                                                          |   |                                   | (146   | )      |                              |   | (146   | )                                   |   |   | 1,005                          |   |   |                                 | 10     |   |                                 |   | 136    |                                      |   |   |                            |   |   |   |   |   |   |   | − |   |
| Cancellation      of warrants recorded as  derivative liability                                                                                                    |   |                                   |   |   |                              |   |   |                                |   |   |                           |   |   |                                 |   |   |                                 |   | 875    |                                      |   |   |                            |   |   |   |   |   |   |   | 875 |   |
| Comprehensive      loss:                                                                                                                                                     |   |                                   |   |   |                              |   |   |                                |   |   |                           |   |   |                                 |   |   |                                 |   |   |                                      |   |   |                            |   |   |   |   |   |   |   |   |   |
|  Net loss                                                                                                                                                               |   |                                   |   |   |                              |   |   |                                |   |   |                           |   |   |                                 |   |   |                                 |   |   |                                      |   |   | (6,678                          | )      |   |   |   |   |   |   | (6,678 | ) |
|  Foreign currency translation      adjustment                                                                                                                           |   |                                   |   |   |                              |   |   |                                |   |   |                           |   |   |                                 |   |   |                                 |   |   |                                      |   |   |                            |   |   |   | (4 | ) |   |   | (4 | ) |
| Total      comprehensive loss                                                                                                                                                |   |                                   |   |   |                              |   |   |                                |   |   |                           |   |   |                                 |   |   |                                 |   |   |                                      |   |   |                            |   |   |   |   |   |   |   | (6,682 | ) |
| Preferred      share dividends                                                                                                                                               |   |                                   | 46     |   |                              |   | 46     |                                |   |   |                           |   |   |                                 |   |   |                                 |   | (46    | )                                         |   |   |                            |   |   |   |   |   |   |   | − |   |
|  Balances      as of September 30, 2009                                                                                                                                 |   |                                   | 756    |   |                              |   | 756    |                                |   |   | 131,379                        |   |   | $                                    | 1,314  |   |                                 | $      | 92,840 |                                      |   | $      | (99,090                         | )      |   | $ | 9 |   |   | $ | (4,171 | ) |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Nine      Months EndedSeptember      30, |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 2009                                     |    |   | 2008 |   |
| Cash      flows from operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                     |    |   |   |   |
| Net      loss                                                                                                                                                    |   | $                                        | (6,678  | ) |   | $ | (2,692 | ) |
| Adjustments to reconcile net      loss to net cashused      for operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                     |    |   |   |   |   |   |
| Depreciation and      amortization                                                                                                                                                        |   |                                     | 822     |   |   |   | 673 |   |
| Amortization of debt discount and      deferred financing costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                     | 1,098   |   |   |   | 643 |   |
| Loss on extinguishment of      long-term      debt                                                                                                                                        |   |                                     | 829     |   |   |   |   |   |
| Stock-based  employee      compensation                                                                                                                                         |   |                                     | 211     |   |   |   | 128 |   |
| Loss on derivative      liability                                                                                                                                                         |   |                                     | 2,505   |   |   |   | − |   |
| Changes in operating assets and      liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                     |    |   |   |   |   |   |
|    Accounts      receivable,      net                                                                                                                                      |   |                                     | 46      |   |   |   | (129 | ) |
|    Prepaid      expenses and other      assets                                                                                                                             |   |                                     | (2      | ) |   |   | (6 | ) |
|    Accounts      payable                                                                                                                                                   |   |                                     | 110     |   |   |   | 29 |   |
|    Accrued      compensation                                                                                                                                               |   |                                     | (8      | ) |   |   | (26 | ) |
|    Other accrued      liabilities                                                                                                                                          |   |                                     | 150     |   |   |   | (1 | ) |
|    Deferred      revenue                                                                                                                                                   |   |                                     | 363     |   |   |   | (165 | ) |
| Net cash used for      operating  activities                                                                                                                                    |   |                                     | (554    | ) |   |   | (1,546 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                     |    |   |   |   |   |   |
| Cash      flows from investing activities:Acquisition of property and      equipment                                                                             |   |                                     | (3      | ) |   |   | (14 | ) |
| Capitalized software development      costs                                                                                                                      |   |                                     | (654    | ) |   |   | (659 | ) |
| Net cash used for investing      activities                                                                                                                                               |   |                                     | (657    | ) |   |   | (673 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                     |    |   |   |   |   |   |
| Cash      flows from financing activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                     |    |   |   |   |   |   |
| Deferred financing      costs                                                                                                                                    |   |                                     | (174    | ) |   |   | (452 | ) |
| Proceeds from issuance of      short-term      debt                                                                                                              |   |                                     | − |   |   |   | 125 |   |
| Proceeds from issuance of      long-term      debt                                                                                                               |   |                                     | 1,100   |   |   |   | 3,000 |   |
| Principal payments on short term      debt                                                                                                                       |   |                                     | (45     | ) |   |   | (250 | ) |
| Principal payments on long term      debt                                                                                                                        |   |                                     | − |   |   |   | (37 | ) |
| Net cash provided by financing      activities                                                                                                                                            |   |                                     | 881     |   |   |   | 2,386 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                     |    |   |   |   |   |   |
| Effect      of exchange rate changes on cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                     | 32      |   |   |   | (35 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                     |    |   |   |   |   |   |
| Net      (decrease) increase in cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                     | (298    | ) |   |   | 132 |   |
| Cash      and cash equivalents at beginning of period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                     | 929     |   |   |   | 1,144 |   |
| Cash      and cash equivalents at end of      period                                                                               |   | $                                        | 631     |   |   | $ | 1,276 |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |  Nine      Months EndedSeptember 30, |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|
| Supplementary      disclosure of cash flow information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |  2009                                |   |   |  2008 |   |
| Interest      paid                                                                                                                                                    |   | $                                         | − |   |   | $ | 130 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                      |   |   |   |   |   |   |
| Non-cash      financing and investing transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                      |   |   |   |   |   |   |
| Short-term notes and accrued      interest exchanged for convertible preferred stock                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | $                                         | − |   |   | $ | 1,040 |   |
| Dividends on preferred      shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | $                                         | 46 |   |   | $ | 21 |   |
| Short-term notes and accrued      interest exchanged for long-term notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $                                         | − |   |   | $ | 638 |   |
| Accretion of beneficial      conversion feature and warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | $                                         | − |   |   | $ | 371 |   |
| Conversion of preferred stock      to common stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | $                                         | 146 |   |   | $ | − |   |
| Issuance of long-term debt for      payment of interest in kind                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | $                                         | 254 |   |   | $ | − |   |
| Reclassification of equity linked      instrument to derivative liability                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | $                                         | 1,353 |   |   | $ | − |   |
| Debt discount and related      liability recorded in connection with long-term      debt                                                                         |   | $                                         | 3 , 347 |   |   | $ | − |   |
| Warrants issued for interest      recorded as derivative liability                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | $                                         | 205 |   |   | $ | − |   |

----

| 1.   | Nature of      business |
|----------------|-------------------------|

----

| 1            | Nature of      business |
|---------------------------------------------------------------------|-------------------------|

----

| 3.   |   Patents |
|----------------|---------------------|

| 4. | Short-term      debt |
|----|----------------------|

----

----

|                         | September 30, 2009     | January 1, 2009       |
|------------------------------|------------------------|-----------------------|
| Expected      term           | .08      to 3.00 years | .75      to 2.5 years |
| Volatility                   | 142.4%      - 209.0%   | 141.9%      - 171.7%  |
| Risk-free      interest rate | 1.45%                  | 1.14%                 |
| Dividend      yield          | 0%                     | 0%                    |

|                      |   | Value      at           |   |   | Quoted      prices in active markets |   |    | Significant      other observable inputs |   |   | Significant      unobservable inputs |   |
|---------------------------|--------|-------------------------|--------|--------|--------------------------------------|--------|---------|------------------------------------------|--------|--------|--------------------------------------|--------|
|                      |   | September      30, 2009 |   |   | (Level      1)                       |   |    | (Level      2)                           |   |   | (Level      3)                       |   |
| Derivative      liability |   | $                       | 6,501  |   |                                 | $      | − |                                     |   | $      | −                              |   |   | $ | 6,501 |   |

----

|                                                                                                 |   | Derivative      Liability |         |
|------------------------------------------------------------------------------------------------------|--------|---------------------------|--------------|
| Balance      at January 1, 2009                                                                      |   | $                         | 1,353        |   |
| Extinguishment      of derivative related to long term debt                                          |   |                      | (875         | ) |
| Additional      liabilities recorded related to long-term debt, including paid in kind      interest |   |                      |   3,518 |   |
| Loss      on derivative liability                                                                    |   |                      | 2,505        |   |
|                                                                                                 |   |                      |         |   |
| Balance      at September 30, 2009                                                                   |   | $                         | 6,501        |   |

| 7. | Net (loss) per      share |
|----|---------------------------|

| 8. | Equity |
|----|--------|

----

| 8. | Equity      (continued) |
|----|-------------------------|

|                         |   |                                          |
|------------------------------|--------|-----------------------------------------------|
|                         |   | Nine      Months EndedSeptember      30, 2009 | Nine      Months EndedSeptember      30, 2008 |
| Risk      free interest rate |   | 1.45%      – 5.11%                      | 3.32%      - 5.11% |
| Expected      life (years)   |   | 3.21      – 6.88                        | 3.21      – 6.86 |
| Expected      volatility     |   | 80.96%      – 131.35%                   | 80.96%      – 104.57% |
| Expected      dividends      |   | None                                          | None |

|                                  |   | Three      Months Ended September 30, |   |   | Nine      months Ended September 30, |   |
|---------------------------------------|--------|---------------------------------------|--------|--------|--------------------------------------|--------|
|                                  |   | 2009                                  |   |   | 2008                                 |   |   | 2009 |   |   | 2008 |   |
|  Research      and development   |   | $                                     | 28     |   |                                 | $      | 25 |   |   | $ | 43 |   |   | $ | 27 |   |
| Sales      and marketing              |   |                                  | 44     |   |                                 |   | 7 |   |   |   | 57 |   |   |   | 27 |   |
| General      and administrative       |   |                                  | 65     |   |                                 |   | 57 |   |   |   | 91 |   |   |   | 59 |   |
| Director      options                 |   |                                  | 20     |   |                                 |   | − |   |   |   | 20 |   |   |   | 16 |   |
| Stock-based      compensation expense |   | $                                     | 157    |   |                                 | $      | 89 |   |   | $ | 211 |   |   | $ | 129 |   |

----

| 8. | Equity      (continued) |
|----|-------------------------|

|                                                   |   | As      of September 30, |    |
|--------------------------------------------------------|--------|--------------------------|---------|
|                                                   |   | 2009                     |    |   | 2008 |   |
|     Options                        |   |   Shares(000)  |    |   | Weighted      Average Exercise Price |   |   | Weighted      average Remaining Contractual Term |   |   |  Aggregate      Intrinsic Value |   |   |   Shares(000) |   |   | Weighted      Average Exercise Price |   |   | Weighted      average Remaining Contractual Term |   |   |  Aggregate      Intrinsic Value |   |
| Outstanding      at January 1,                         |   |                     | 7,608   |   |   | $ | 0.48 |   |   |   |   |   |   |   |   |   | 6,036 |   |   | $ | 0.59 |   |   |   |   |   |   |   |
| Granted                                                |   |                     | 3,098   |   |   | $ | 0.09 |   |   |   |   |   | $ | 127 |   |   |   | 1,875 |   |   | $ | 0.15 |   |   |   |   |   |   |   |
| Exercised                                              |   |                     | − |   |   |   |   |   |   |   |   |   |   |   |   |   |   | − |   |   |   |   |   |   |   |   |   |   |   |
| Forfeited      or expired                              |   |                     | (1,012  | ) |   | $ | 0.43 |   |   |   |   |   |   |   |   |   |   | (295 | ) |   | $ | 0.55 |   |   |   |   |   |   |   |
| Outstanding      at September 30                       |   |                     | 9,694   |   |   | $ | 0.36 |   |   |   | 4.06 |   |   | $ | − |   |   |   | 7,616 |   |   | $ | 0.48 |   |   |   | 4.2 |   |   | $ | − |   |
|  Vested      and expected to vest at September 30 |   |                     | 9,694   |   |   | $ |   0.36 |   |   |   | 4.06 |   |   | $ | − |   |   |   | 7,616 |   |   | $ |   0.48 |   |   |   | 4.2 |   |   | $ | − |   |
| Exercisable      at September 30                       |   |                     | 7,745   |   |   | $ | 0.42 |   |   |   | 3.50 |   |   | $ | − |   |   |   | 5,929 |   |   | $ | 0.57 |   |   |   | 4.63 |   |   | $ | − |   |

|                                            |                        |   | As      of September 30, 2009       |   |
|-------------------------------------------------|-----------------------------|--------|-------------------------------------|--------|
|                                            |                        |   | Options      Outstanding            |   |   | Options      Exercisable |   |
|    Range      of Exercise Prices |                        |   |   Number      Outstanding |   |   | Weighted      Average Remaining Contractual Life (in years) |   |   | Weighted      Average Exercise Price |   |   |   Number      Outstanding |   |   | Weighted      Average Exercise Price |   |
| $                                               | 0.07      – $0.50     |   |                                |   | 6,665 |   |   |   | 4.6 |   |   | $ | 0.17 |   |   |   | 4,717 |   |   | $ | 0.19 |   |
|                                            | 0.51      – 1.00 |   |                                |   | 2,941 |   |   |   | 3.0 |   |   | $ | 0.72 |   |   |   | 2,940 |   |   | $ | 0.72 |   |
|                                            | 1.01      – 2.00 |   |                                |   | 73 |   |   |   | 2.5 |   |   | $ | 1.66 |   |   |   | 73 |   |   | $ | 1.66 |   |
|                                            | 2.01      – 3.00 |   |                                |   | − |   |   |   | − |   |   | $ | − |   |   |   | − |   |   | $ | − |   |
|                                            | 3.01      – 7.50 |   |                                |   | 15 |   |   |   | 0.7 |   |   | $ | 3.56 |   |   |   | 15 |   |   | $ | 3.56 |   |
|                                            |                        |   |                                |   | 9,694 |   |   |   | 4.1 |   |   | $ | 0.42 |   |   |   | 7,745 |   |   | $ | 0.42 |   |

----

| 8. | Equity      (continued) |
|----|-------------------------|

|                                            |                        |   | As      of September 30, 2008       |   |
|-------------------------------------------------|-----------------------------|--------|-------------------------------------|--------|
|                                            |                        |   | Options      Outstanding            |   |   | Options      Exercisable |   |
|    Range      of Exercise Prices |                        |   |   Number      Outstanding |   |   | Weighted      Average Remaining Contractual Life(in years) |   |   | Weighted      Average Exercise Price |   |   |   Number      Outstanding |   |   | Weighted      Average Exercise Price |   |
| $                                               | 0.14      – $0.50     |   |                                |   | 4,187 |   |   |   | 5.4 |   |   | $ | 0.25 |   |   |   | 2,500 |   |   | $ | 0.30 |   |
|                                            | 0.51      – 1.00 |   |                                |   | 3,341 |   |   |   | 3.6 |   |   | $ | 0.73 |   |   |   | 3,341 |   |   | $ | 0.73 |   |
|                                            | 1.01      – 2.00 |   |                                |   | 73 |   |   |   | 3.5 |   |   | $ | 1.66 |   |   |   | 73 |   |   | $ | 1.66 |   |
|                                            | 2.01      – 3.00 |   |                                |   | − |   |   |   | − |   |   | $ | − |   |   |   | − |   |   | $ | − |   |
|                                            | 3.01      – 7.50 |   |                                |   | 15 |   |   |   | 1.7 |   |   | $ | 3.56 |   |   |   | 15 |   |   | $ | 3.56 |   |
|                                            |                        |   |                                |   | 7,616 |   |   |   | 4.60 |   |   | $ | .48 |   |   |   | 5,929 |   |   | $ | 0.57 |   |

|   Nonvested      Shares       |   |  Shares |   |   | Weighted      AverageGrant-DateFair      Value |   |
|-----------------------------------------|--------|--------------|--------|--------|------------------------------------------------|--------|
|  Nonvested      at January 1, 2009 |   |         | 1,565  |   |                                           | $      | 0.16 |   |
| Granted                                 |   |         | 3,098  |   |                                           | $      | 0.07 |   |
| Forfeited                               |   |         | (1,012 | )      |                                           | $      | 0.09 |   |
| Vested                                  |   |         | (1,702 | )      |                                           | $      | 0.08 |   |
| Nonvested                               |   |         | 1,949  |   |                                           | $      | 0.22 |   |

----

| 8.   | Equity      (continued) |
|----------------|-------------------------|

| 9.   | Subsequent      events |
|----------------|------------------------|

----

| ·   | Technological,      engineering, manufacturing, quality control or other circumstances that      could delay the sale or shipment ofproducts; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Economic,      business, market and competitive conditions in the software industry and      technological innovations that could affect the Company’s      business; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | 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 |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | General      economic and business conditions and the availability of sufficient      financing. |
|--------------------|--------------------------------------------------------------------------------------------------|

----

----

----

----

----

|                                    |   | Payments      due by period |   |
|-----------------------------------------|--------|-----------------------------|--------|
| Contractual      obligations            |   | Total                       |   |   | 2009 |   |   | 2010 |   |   | 2011 |   |   | 2012 |   |   | 2013 |   |   | Thereafter |   |
| Short-term      debt (1)                |   | $                           | 20     |   |   | $ | 20 |   |   | $ | – |   |   | $ | – |   |   | $ | – |   |   | $ | – |   |   | $ | – |   |
| Long-term      debt (2)                 |   |                        | 4,990  |   |   |   | – |   |   |   | 4,990 |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Operating      lease commitments (3)    |   |                        | 591    |   |   |   | 71 |   |   |   | 280 |   |   |   | 240 |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Total      contractual cash obligations |   | $                           | 5,601  |   |   | $ | 91 |   |   | $ | 5,270 |   |   | $ | 240 |   |   | $ | – |   |   | $ | – |   |   | $ | – |   |

| 1.   | Short-term      debt reported on the balance sheet is net of the remaining discount      representing the fair value of warrants issued in connection with the      Company’s debt financings. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 2.   | Long-term      debt reported on the balance sheet is net of approximately $2,666 in      discounts representing the fair value of warrants issued to the debt      holders. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.   | The      operating lease commenced on November 1, 2002. The lease was renegotiated      in December 2005 and extended for an additional 60 months. The base rent      will increase approximately 3% per annum over the term of the lease, which      expires on October 31, 2011. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  Exhibit      Number |  Document                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|---------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  3.1                 |  Certificate      of Incorporation of the Company, as amended, incorporated herein by      reference to Exhibits 3.1, 3.2, 3.3 and 3.4 to the Company's Registration      Statement on Form 10 (File No. 0-19301).                                                                                                                                                                                                                               |
| 3.2                       | Certificate      of Amendment to the Company's Certificate of Incorporation (authorizing      the reclassification of the Class A Common Stock and Class B      Common Stock into one class of Common Stock) as filed with the Delaware      Secretary of State's office on November 1, 1991, incorporated herein      by reference to Exhibit 3 to Amendment 1 on Form 8 to the      Company's Form 8-A (File No. 0-19301). |
| 3.3                       | By-laws      of the Company adopted on October 6, 1986, incorporated herein by      reference to Exhibit 3.5 to the Company's Registration Statement on      Form 10 (File No. 0-19301).                                                                                                                                                                                                                                               |

----

|  Exhibit      Number |  Document                                                                                                                                                                                                                                                                                                                             |
|---------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  3.4                 |  By-laws      of the Company adopted on October 6, 1986, incorporated herein by      reference to Exhibit 3.5 to the Company's Registration Statement on      Form 10 (File No. 0-19301).                                                                                                                         |
|  3.5                 |  Certificate      of Amendment to the Company’s Amended and Restated Certificate of      Incorporation dated January 24, 2001, incorporated herein by reference to      Exhibit 3.5 to the Company’s Registration Statement on Form S/1, filed      December 28, 2007.                                                    |
| 3.6                       | Certificate      of Elimination of the Company’s Certificate of Designation of the Series A      Preferred Stock dated August 17, 2001, incorporated herein by reference to      Exhibit 3.6 to the Company’s Registration Statement on Form S/1, filed      December 28, 2007.                                                |
| 3.7                       | Certificate      of Amendment to the Company’s Amended and Restated Certificate of      Incorporation filed with the Delaware Secretary of State August 17, 2007,      incorporated herein by reference to Exhibit 3.7 to the Company’s      Registration Statement on Form S/1 filed on December 28,    2007.                 |
| 3.8                       | Amended      and Restated Certificate of Incorporation of the Company filed with the      Delaware Secretary of State on May 18, 1995, incorporated herein by      reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q      filed on August 14, 2008.                                                            |
| 3.9                       | Certificate      of Designations, Powers, Preferences and Rights of the Series A Cumulative      Convertible Preferred Stock filed with the Delaware Secretary of State on      June 4, 2008, incorporated herein by reference to Exhibit 4.23 to the      Company’s Quarterly Report on Form 10-Q filed on August 14,      2008.    |
| 3.10                      | Certificate      of Amendment to the Company’s Amended and Restated Certificate of      Incorporation filed with the Delaware Secretary of State on June 30, 2008,      incorporated herein by reference to Exhibit 3.7 to the Company’s Quarterly      Report on Form 10-Q filed on August 14, 2008.                          |
| 3.11                      | Certificate      of Designations, Powers, Preferences and Rights of the Series A-1      Cumulative Convertible Preferred Stock filed with the Delaware Secretary      of State on October 30, 2008., incorporated herein by reference to Exhibit      3.11 to the Company’s Annual Report on Form 10-K filed on March 12,      2009. |
| 3.12                      | Certificate      of Elimination of the Company’s Series A Cumulative Convertible Preferred      Stock filed with the Delaware Secretary of State on December 30, 2008,      incorporated herein by reference to Exhibit 3.12 to the Company’s Annual      Report on Form 10-K filed on March 12, 2009.                         |
| 3.13                      | Certificate      of Amendment to the Company’s Amended and Restated Certificate of      Incorporation filed with the Delaware Secretary of State on June 30,      2009.                                                                                                                                                              |
| *31.1                     | Certification      of Company’s Chief Executive Officer pursuant to Section 302 of the      Sarbanes-Oxley Act of 2002                                                                                                                                                                                                               |
| *31.2                     | Certificate      of Company’s Chief Financial Officer pursuant to Section 302 of the      Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                 |
| *32.1                     | Certification      of Chief Executive Officer pursuant to 18 USC Section 1750, as adopted      pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                  |
| *32.2                     | Certification      of Chief Financial Officer pursuant to 18 USC Section 1750, as adopted      pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                  |

| * | Filed      herewith. |
|---|----------------------|

----

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

| October      28, 2009 |   | /s/      Francis V. Dane                                                                                                                                                                                |
|-----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Date                  |   | Francis      V. Dane                                                                                                                                                                                    |
|                  |   | (Principal      Financial Officer and Officer Duly Authorized to Sign on Behalf of the      Registrant)                 |