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



                                    FORM 10-Q


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


For the quarterly period ended:     March 31, 1998

                                       OR

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

For the transition period from ________  to  _________

                         Commission File Number: 0-19301
                                                 -------

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

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


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

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

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

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


          Number of shares outstanding of the issuer's Common Stock, 
          as of May 6, 1997: 51,498,486.
                  
 This Quarterly Report on Form 10-Q contains 19 pages of which this is page 1.



<PAGE>


                                      INDEX



PART I.  FINANCIAL INFORMATION


  Item 1.  Financial Statements                                         Page No.

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

  Condensed Consolidated Statements of Operations for the three-month
    periods ended March 31, 1998 and 1997 (unaudited).......................4

  CondensedConsolidated  Statements  of Cash  Flows  for the  three-month
    periods ended March 31, 1998 and 1997(unaudited)........................5

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


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


PART II.  OTHER INFORMATION

  Item 1.  Legal Proceedings...............................................18

  Item 2.  Change in Securities............................................18

  Item 3.  Defaults Upon Senior Securities.................................18

  Item 4.  Submission of Matters to a Vote of Security Holders.............18
                 
  Item 5.  Other Information...............................................18

  Item 6.  Exhibits and Reports on Form 8-K

           (a)      Exhibits...............................................18

           (b)      Reports on Form 8-K....................................18

  Signatures...............................................................19




<PAGE>



                             See accompanying notes.

                                                       
                     Communication Intelligence Corporation
                                 and Subsidiary
                      Condensed Consolidated Balance Sheets
                                 (In Thousands)
<TABLE>
<CAPTION>


                                           March 31,             December 31,
                                             1998                    1997
                                      ------------------      ------------------
                                           Unaudited
Assets
Current assets:                      
<S>                                  <C>                     <C>         
     Cash and cash equivalents       $      2,943            $      5,485
     Accounts receivable, net                 598                     362
     Inventories                              158                     193
     Other current assets                     322                     175
                                      ------------------      ------------------
         Total current assets               4,021                   6,215

Note receivable from officer                  210                     210
Property and equipment, net                   736                     798
Other assets                                  272                     268
                                      ------------------      ------------------

         Total assets                $      5,239            $      7,491
                                      ==================      ==================

Liabilities and stockholders' equity Current liabilities:
     Short-term debt                 $         37            $        490
     Accounts payable                         350                   1,059
     Accrued compensation                     378                     446
     Other accrued liabilities                847                   1,059
     Deferred revenue                          98                     440
                                      ------------------      ------------------
         Total current liabilities          1,710                   3,494

Other liabilities                               6                       8
Commitments  (Note 5)

Stockholders' equity:
     Convertible preferred stock (Note 5)       5                       6
     Common stock                             486                     474
     Additional paid-in capital            70,102                  69,955
     Accumulated deficit                  (66,958)                (66,347)
     Cumulative translation adjustment       (112)                    (99)
                                      ------------------      ------------------
         Total stockholders' equity         3,523                   3,989
                                      ==================      ==================
Total liabilities and
 stockholders' equity (Note 5)       $      5,239            $      7,491
                                      ==================      ==================
</TABLE>



<PAGE>


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

                                               Three Months Ended
                                                    March 31,
                                   --------------------------------------------
                                          1998                     1997
                                   -------------------      -------------------

Revenues:
<S>                                <C>                      <C>         
     Product                       $        675             $        765
     License and royalty                    593                      272
     Development contracts                   98                      161
                                   -------------------      -------------------

                                          1,366                    1,198

Operating costs and expenses:
     Cost of sales:
         Product                            329                      785
         License and royalty                 15                       19
         Development contracts               57                       97
     Research and development               579                      476
     Sales and marketing                    547                    1,400
     General and administrative             500                      429
                                   -------------------      -------------------

Total operating costs and expenses        2,027                    3,206
                                   -------------------      -------------------

Loss from operations                       (661)                  (2,008)

Interest and other income
 (expense), net (Note 5)                     64                     (421)

Interest expense                            (14)                     (17)
                                   -------------------      -------------------
       Net loss                            (611)                  (2,446)

 Embedded yield on preferred stock            -                   (2,188)

         Preferred stock dividend          (167)                    (141)
                                   -------------------      -------------------

Net loss applicable 
  to common stockholders          $       (778)            $     (4,775)
                                   ===================      ===================
                                  
Basic loss per common share       $      (0.02)            $      (0.11)
                                   ===================      ===================
                                  
Diluted loss per common share     $      (0.02)            $      (0.11)
                                   ===================      ===================
                                   
Weighted average common 
 shares outstanding                      48,400                   44,521
                                   ===================      ===================
</TABLE>



<PAGE>


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

                                                      Three Months Ended
                                                           March 31,
                                                  --------------------------
                                                      1998           1997
                                                  -----------      ---------

Cash flows from operating activities:             
<S>                                               <C>              <C>      
  Net loss                                        $    (611)       $ (2,446)
   Adjustments to reconcile net loss to net 
     cash used in operating activities:
       Depreciation and amortization                     71              43
       Warrant issuance costs                             -             484
       Stock options issued for services                  7              46
       Changes in operating assets and liabilities:
         Accounts receivable                           (236)           (280)
         Inventories                                     35            (337)
         Other current assets                          (147)           (127)
         Other assets                                   (12)            (57)
         Accounts payable and accrued compensation     (776)             61
         Other accrued liabilities                     (284)             (6)
         Deferred revenue                              (287)           (172)
         Pre-petition liabilities                         -            (878)
                                                   ----------      ----------

         Net cash used in operating activities       (2,240)         (3,669)
                                                   ----------      ----------

Cash flows from investing activities:
     Proceeds from sales and maturities of 
      short-term investments                              -           3,000
     Purchase of short-term investments                   -          (4,729)
     Acquisition of property and equipment                -             (79)
                                                   ----------      ----------

         Net cash used in investing activities            -          (1,808)
                                                   ----------      ----------

Cash flows from financing activities:
     Principal payments on short-term debt             (453)              -
     Proceeds from exercise of stock options            151             102
                                                   ----------      ----------

         Net cash provided by (used in)
          financing activities                         (302)            102
                                                   ----------      ----------

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

Net decrease in cash and cash equivalents            (2,542)         (5,409)
Cash and cash equivalents at beginning of quarter     5,485          10,573
                                                   ----------      ----------

Cash and cash equivalents at end of quarter       $   2,943        $  5,164
                                                   ==========      ==========
</TABLE>


<PAGE>


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

                                                       Three Months Ended
                                                            March 31,
                                                    -------------------------
                                                      1998             1997
                                                    --------         ---------

Schedule of non-cash transactions:

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





<PAGE>


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

- 9 -

1.       Interim financial statements

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

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

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

         For the three months ended March 31, 1998,  the Company's cash and cash
         equivalents decreased by approximately $2,542 from approximately $5,485
         at the beginning of the period to approximately $2,943. The decrease is
         due  primarily to cash used in operating  activities  of  approximately
         $2,240 and approximately $453 used to repay an accounts receivable line
         of credit during the three months ended March 31, 1998.  Although there
         can be no  assurance,  the  Company  believes  that  its  cash and cash
         equivalents will be sufficient to fund planned  operations for at least
         the next twelve months.  However,  if the Company is unable to generate
         adequate cash flow from sales, or if  expenditures  required to achieve
         the Company's plans are greater than expected,  the Company may need to
         obtain additional funds or reduce


<PAGE>


  1.     Interim financial statements (continued)

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

         The  Company's  Form 10-Q for the  quarter  ended  March  31,  1997 was
         restated to reflect the non-cash  charge for the embedded  yield on the
         convertible  preferred stock  resulting from the discounted  conversion
         feature  provided on such stock and the  cumulative  dividends of $1.25
         per share,  per annum,  on  outstanding  shares of Series A Convertible
         Preferred  Stock. The Company believes the restatement of the March 31,
         1997 quarterly results was in accordance with the accounting  treatment
         of the embedded discount on convertible preferred stock as announced by
         the Securities and Exchange Commission at the March 13, 1997 meeting of
         the Financial  Accounting Standards Board's Emerging Issues Task Force.
         The effect of this restatement on the results of operations  originally
         reported in the  Company's  Form 10-Q for the  quarter  ended March 31,
         1997 was to increase the net loss applicable to common  stockholders by
         $2,329 from  $2,446 to $4,775 and to  increase  the net loss per common
         share by $0.06 from $0.05 to $0.11.  The  restatement  had no effect on
         the Company's cash position at March 31, 1997.

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

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

2.        Cash and cash equivalents

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

         Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>

                                              March 31,          December 31,
                                               1998                 1997
                                           -----------          -------------

<S>                                           <C>                 <C>      
             Cash in bank                     $   665             $   1,160
             Commercial paper                     529                 2,330
             Money market accounts              1,600                 1,004
             Corporate debt securities              -                   991
             Other debt securities                149                     -
                                           -----------          -------------
                                              $ 2,943             $   5,485
                                           ===========          =============
</TABLE>

3.       Inventories

         Inventories  are  stated at the  lower of cost or  market,  cost  being
         determined using the first-in,  first-out  (FIFO) method.  At March 31,
         1998, inventory was comprised primarily of finished goods.



<PAGE>


4.       Short-term debt

         In May 1997,  the Company  purchased  office  furniture  and a security
         system  with an  approximate  value  of $209  from a third  party.  The
         Company paid $100 in cash and signed an unsecured  note for $109 due in
         monthly  installments  through May 1998. The note bears interest on the
         unpaid  balance at a rate of 10% per annum.  At March 31, 1997, $37 was
         outstanding under this note.

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

5.       Convertible preferred stock

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

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

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


<PAGE>


5.        Convertible preferred stock (continued)

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

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

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

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

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



<PAGE>


6.       Net loss per share

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

7.       Recent accounting pronouncements

         In October 1997, the American Institute of Certified Public Accountants
         (the "AICPA") issued Statement of Position No. 97-2,  "Software Revenue
         Recognition"   ("SOP   97-2"),   which  the  Company  has  adopted  for
         transactions  entered into during the fiscal year beginning  January 1,
         1998. SOP 97-2 provides  guidance for  recognizing  revenue on software
         transactions and supersedes  Statement Of Position No. 91-1,  "Software
         Revenue  Recognition".  In March 1998,  the AICPA  issued  Statement of
         Position No. 98-4,  "Deferral of the  Effective  Date of a Provision of
         SOP 97-2, Software Revenue  Recognition" ("SOP 98-4"). SOP 98-4 defers,
         for one year,  the  application  of certain  passages in SOP 97-2 which
         limit what is considered  vendor-specific  objective  evidence ("VSOE")
         necessary   to   recognize    revenue   for   software    licenses   in
         multiple-element   arrangements   when   undelivered   elements  exist.
         Additional guidance is expected to be provided prior to adoption of the
         deferred  provision of SOP 97-2. The Company will determine the impact,
         if  any,  the  additional   guidance  will  have  on  current   revenue
         recognition practices when issued. Adoption of the remaining provisions
         of SOP 97-2 did not  have a  material  impact  on  revenue  recognition
         during the three months ended March 31, 1998.

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

8        Change in accounting principle

         In  June  1997,  the  Financial   Accounting  Standards  Board  issued
         Statement  of  Financial  Accounting  Standards  No.  130,  "Reporting
         Comprehensive  Income"("SFAS  130").  The  Company  adopted  SFAS  130
         effective January 1, 1998. SFAS 130 requires that all items

<PAGE>


8        Change in accounting principle (continued)

         recognized  under  accounting  standards as components of comprehensive
         earnings be reported in an annual  statement that is displayed with the
         same  prominence as other annual  financial  statements.  SFAS 130 also
         requires that an entity classify items as other comprehensive  earnings
         by their nature in an annual  financial  statement.  For example  other
         comprehensive   earnings  may  include  foreign  currency   translation
         adjustments,  minimum  pension  liability  adjustments,  and unrealized
         gains   and   losses   on   marketable    securities    classified   as
         available-for-sale.  Annual financial statements for prior periods will
         be reclassified, as required.

         Total comprehensive loss was as follows:
<TABLE>
<CAPTION>

                                               Three Months Ended March 31,
                                              ----------- ----- ------------
                                                  1998              1997
                                              -----------       ------------

<S>                                           <C>               <C>        
         Net loss                             $   (611)         $   (2,446)
         Other comprehensive loss:
          Cumulative translation adjustment        (13)                (35)
                                              -----------       ------------
         Total comprehensive loss             $   (624)         $   (2,481)
                                              ===========       ============
</TABLE>




<PAGE>


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

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

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

Results of Operations

Revenues.  The Company's  revenues are derived from product  sales,  license and
royalty revenues and development contracts. For the three months ended March 31,
1998,  revenues  increased by 14% to $1,366 from $1,198 for the comparable three
month period ended March 31, 1997 as discussed below:
<TABLE>
<CAPTION>

                                             Three Months Ended
                                                  March 31,
                                       ------------      -------------
                                           1998               1997
                                       ------------      -------------
                                                 Unaudited
              Revenues:
<S>                                    <C>                <C>      
                Product                $     675          $     765
                License and royalty          593                272
                Development contract          98                161
                                       ------------      -------------
              Total revenues           $   1,366          $   1,198
                                       ============      =============
</TABLE>


Product sales decreased to $675 or by 12% for the three month period ended March
31, 1998 from $765 in the  comparable  prior year period.  This decrease was due
primarily to the  withdrawal  of  Handwriter  products  from the retail  channel
during the three months ended March 31, 1998. Handwriter product sales decreased
$294 to $194  during the period  ended  March 31,  1998  compared to $488 in the
prior year period. Product sales by the Company's 90% owned joint venture in The
People's  Republic of China (the "Joint Venture") were $499 for the period ended
March 31, 1998  compared to $275 during the same period last year.  The increase
is primarily  due to increases in sales efforts made possible by an expansion of
the sales force during the first quarter of 1998.

Revenues  from  license and royalty  fees for the three month period ended March
31, 1998 increased to $593 from $272 in the comparable  prior year period.  This
increase was primarily the result of approximately  $404 of revenues  recognized
on  licensing  agreements  for which the  Company has no further  obligation  to
deliver  additional  software or services compared to approximately $164 of such
revenues in the comparable prior year period.

Development  contract  revenues  for the three month period ended March 31, 1998
decreased  39% to $98  from  $161 in the  comparable  prior  year  period.  This
decrease resulted from a decrease in grant revenue  recognized from the National
Science Foundation from the comparable prior year period.

Cost of sales.  Cost of product  sales for the three months ended March 31, 1998
decreased  55% to $401 from $901 in the  comparable  prior year period.  Cost of
product  sales at March 31, 1998  comprises  approximately  $304 of hardware and
software  components related to the system  integration  activities of the Joint
Venture,  compared to approximately  $235 in the prior year period. The increase
in systems integration cost of product sales is due to the increase in sales and
was offset by a decrease of $525 in  Handwriter(R)  product  cost of sales.  The
decrease in Handwriter(R)  product cost of sales is due to reduced sales of such
products for the three  months ended March 31, 1998  compared to the prior year,
and lower product costs  resulting from inventory  write-downs of  approximately
$1,600 and other cost  reductions  in the three month period ended  December 31,
1997  relating  to  Handwriter  products.  License  and  royalty  cost of  sales
decreased  approximately  $4 to $15 for the three  months  ended  March 31, 1998
compared to $19 for the  comparable  1997 period.  Costs  incurred in connection
with  development  contract  revenues  decreased  41% for the three months ended
March 31, 1998 as compared to the March 31, 1997 period,  commensurate  with the
decrease in contract development revenues in the first quarter of 1998.

Research and development  expenses.  Research and  development  expenses for the
three month period ended March 31, 1998  increased by 22% to $579 as compared to
$476 in the comparable period of the prior year. This increase was primarily due
to approximately $58 in payroll and related costs  attributable to the number of
personnel  for the three months ended March 31, 1998  compared to the same three
month period last year.  Other costs,  including  facilities  and related costs,
increased  approximately  $52 for the three month period ended March 31, 1998 as
compared to the  comparable  prior year period.  This increase was  commensurate
with the increased personnel. The Company capitalized $7 in software development
costs  during  the three  month  period  ended  March 31,  1998  compared  to no
capitalization in the comparable period of 1997.

Sales and marketing  expenses.  Sales and marketing expenses for the three month
period ended March 31, 1998  decreased  61% to $547 as compared to $1,400 in the
comparable  period  of the  prior  year.  This  decrease  was  primarily  due to
decreases of $444 in advertising and related  expenses,  and $205 in payroll and
related  expenses  consistent  with the  Company's new  objectives.  Other costs
including  facilities  and related  expenses  decreased $204  commensurate  with
reductions in staffing. The reductions in staffing and advertising expenses were
primarily due to the  withdrawal of the Company's  Handwriter  products from the
retail  channel during the first quarter of 1998 and the closure of the Japanese
sales office in December 1997., respectively.

General and administrative expenses. General and administrative expenses for the
three month  period  ended March 31, 1998  increased  17% to $500 as compared to
$429 in the  comparable  period of the prior year.  This  increase was primarily
attributable  to an  increase of  approximately  $54 in other  costs,  including
consulting  expenses  and  facilities  and related  costs and an increase in the
administrative activities of the Joint Venture.

Interest and other income  (expense),  net. Interest and other income (expense),
net decreased due to a one time non-cash charge to expense in March 1997 of $484
for 300 warrants  issued on March 28, 1997 to holders  constituting  100% of the
issued and outstanding  redeemable  convertible  preferred stock in exchange for
the execution of a waiver to certain provisions of the Agreement entered into in
connection with the December  Private  Placement (See Note 5 in the Notes to the
Condensed Consolidated Financial Statements).

Embedded yield on preferred stock. The embedded yield on preferred stock results
from the  discount  feature  provided  on the  conversion  price of the Series A
Preferred  Stock into Common  Stock.  The  embedded  yield  totaling  $4,376 was
recognized from the issuance date of December 31, 1996 through July 1, 1997, the
date upon which the Series A Preferred Stock first became convertible.

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



<PAGE>


Liquidity and Capital Resources

At March 31, 1998, cash and cash equivalents totaled $2,943 compared to cash and
cash equivalents of $5,485 at December 31, 1997. This decrease was primarily the
result of $2,240 used in operating  activities  and  approximately  $453 used to
repay the accounts  receivable line of credit.  Total current assets were $4,021
at March 31, 1998 compared to $6,215 at December 31, 1997.

As of March 31, 1998, the Company's  principal  source of liquidity was its cash
and cash equivalents of $2,943. Although there can be no assurance,  the Company
believes that its cash and cash  equivalents  will be sufficient to fund planned
operations for at least the next twelve months. However, if, among other things,
the  Company  is unable to  generate  adequate  cash  flows  from  sales,  or if
expenditures  required to achieve the Company's plans are greater than expected,
the  Company  may  need to  obtain  additional  funds  or  reduce  discretionary
spending. There can be no assurance that additional funds will be available when
needed, or if available,  will be available on favorable terms or in the amounts
required by the Company.  If adequate funds are not available  when needed,  the
Company  may be required to delay,  scale back or  eliminate  some or all of its
operations, which will have a material adverse effect on the Company's business,
results of operations and prospects.

Current  liabilities,  which include deferred revenue,  were $1,710 at March 31,
1998.  Deferred  revenue,  totaling  $98 at March 31, 1998,  primarily  reflects
nonrefundable  advance royalty fees received from the Company's  licensees which
are  generally  recognized  as  revenue  by the  Company  in the period in which
licensees report that products  incorporating  the Company's  software have been
shipped. As such, the period over which such deferred revenue will be recognized
as revenue is uncertain  because the Company cannot  presently  determine either
the timing or volume of future shipments by its licensees.

The Company currently owns 90% of a joint venture (the "Joint Venture") with The
Ministry of Electronic  Industries of the Jiangsu Province,  a provincial agency
of the People's  Republic of China (the  "Agency").  Under the  provisions  of a
joint  venture  agreement,  the Company may be required to  contribute  up to an
aggregate  of $5,400 in cash to the Joint  Venture and is required to provide it
with non-exclusive licenses to technologies and certain distribution rights. The
Agency is  required to  contribute  certain  land use rights and  provide  other
services to the Joint Venture. As of March 31, 1997, the Company had contributed
an  aggregate  of $1,800  in cash to the  Joint  Venture  and  provided  it with
non-exclusive  licenses to technologies and certain  distribution rights and the
Agency had contributed  certain land use rights.  The Company  believes that any
future cash contributions  required to be made to the Joint Venture will be paid
from its working  capital or proceeds from  additional  financings,  if any. The
Joint  Venture is subject to the annual  licensing  requirements  of the Chinese
government.  The Joint Venture's business license has been renewed through March
1,1999.  The  failure of the Joint  Venture to receive a renewal of its  license
beyond this date may adversely affect the Company's  ownership  interests in the
Joint Venture. The Company's investment in the Joint Venture is subject to risks
of doing business  abroad,  including  fluctuations  in the value of currencies,
export  duties,   import  controls  and  trade  barriers   (including   quotas),
restrictions on the transfer of funds, longer payment cycles, greater difficulty
in accounts receivable  collections,  burdens of complying with foreign laws and
political and economic instability.

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


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

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

Generally,  the number of shares of Common Stock to be issued upon conversion of
the  Series A  Preferred  Stock is  determined  by  dividing  (i) the sum of $25
multiplied  by the number of shares  being  converted,  plus  accrued and unpaid
dividends  thereon and any unpaid default  payments,  by (ii) a conversion price
(as  determined in the  certificate  of  designations  for such shares) which is
approximately  72% of the then applicable  market price of the Common Stock. The
then applicable market price generally will be determined as follows: (i) if the
holder giving the conversion notice has sold the shares of Common Stock issuable
upon  conversion,  the market price will be the  weighted  average of the actual
selling price at which the holder converting has sold the shares of Common Stock
(which may not be less than the lowest  trading  price on the date of such trade
as  reported  by the  Nasdaq  Small-Cap  Market),  net of normal  and  customary
commissions and underwriting or dealer spreads, or (ii) if the holder giving the
conversion  notice  has not  sold the  shares  of  Common  Stock  issuable  upon
conversion,  the market  price will be the average of the daily mean between the
low  trading  price and the  closing  price of the Common  Stock for each of the
three  consecutive  trading days prior to the  conversion  date.  The conversion
price is also subject to adjustment for customary  dilutive events such as stock
splits, stock dividends, reorganizations and certain mergers.

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

If the  average  market  price of the  Common  Stock on May 6, 1998 of $1.00 per
share was used to determine the number of shares issuable upon conversion of all
of the shares of Series A and Series B  Preferred  Stock  outstanding  as of the
same date, the Company would be obligated to issue an aggregate of approximately
13,795,000  shares of Common  Stock.  There is no  limitation  on the  number of
shares of Common  Stock that the Company may be required to issue in  connection
with the conversion of the Series A and Series B Preferred  Stock. The number of
shares of Common Stock  issuable upon  conversion  of, or otherwise with respect
to,  the  shares  of  Series  A and  Series B  Preferred  Stock  is  subject  to
adjustment,  and will likely be different than the amount estimated herein.  The
exact number is dependent upon factors which the Company is unable to predict at
this time, including the future market price of the Common Stock.

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

As of May 6, 1998,  there were  approximately  219 shares of Series A  Preferred
Stock and 240 shares of Series B Preferred Stock issued and outstanding.

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

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

The Company has an  investment  portfolio  of fixed income  securities  that are
classified  as  cash  equivalents.  These  securities,  like  all  fixed  income
instruments,  are  subject to  interest  rate risk and will fall in value if the
market interest rates increase.  The Company  attempts to limit this exposure by
investing primarily in short term securities.

From Time to time the Company makes certain capital equipment or other purchases
denominated  in foreign  currencies.  As a result the  Company's  cash flows and
earnings  are exposed to  fluctuations  in interest  rates and foreign  currency
exchange  rates.  The  Company   attempts  to  limit  these  exposures   through
operational strategies and generally has not hedged currency exposures.

Future Results and Stock Price

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

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

Part II-Other Information

Item 1.  Legal Proceedings

         None

Item 2.  Change in Securities

         None

Item 3.  Defaults Upon Senior Securities

         None

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

         None

Item 5.  Other Information

         None

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits

         Exhibit 27, Financial Data Schedule.

(b)      Reports on Form 8-K

         None


<PAGE>


                                   SIGNATURES

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




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



    May 15, 1998                        /s/ Guido DiGregorio
----------------------    ---------------------------------------------------
       Date                                Guido DiGregorio
                            (Principal Financial Officer and Officer Duly
                            Authorized to Sign on Behalf of the Registrant)