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



                                    FORM 10-Q


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

For the quarterly period ended:     September 30, 1997
                                   -------------------

                                       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 520, Redwood Shores, CA
                   94065-1413 (Address of principal executive
                               offices) (Zip Code)

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

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

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


Number of shares  outstanding of the Issuer's  Common Stock,  as of November,  7
1997: 47,057,433

This Quarterly Report on Form 10-Q contains 19 pages of which
this is page 1.



<PAGE>


                     COMMUNICATION INTELLIGENCE CORPORATION
                                    FORM 10-Q


                                      INDEX



PART I.  FINANCIAL INFORMATION


Item 1.  Financial Statements                                           Page No.

   Condensed Consolidated Balance Sheets at September 30, 1997 (unaudited)
   and December 31, 1996.....................................................3

   Condensed Consolidated  Statements of Operations  for the three and nine
   month  periods ended  September 30, 1997 and 1996  (unaudited)............4

   Condensed Consolidated  Statements  of Cash  Flows  for the  nine  month
   periods ended September 30, 1997 and 1996(unaudited)......................5

   Notes to Condensed Consolidated Financial Statements(unaudited)...........6


   Item 2.  Management's Discussion and Analysis of Financial Condition and
   Results of Operations....................................................11

PART II.  OTHER INFORMATION

   Item 6.  Exhibits and Reports on Form 8-K

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

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

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




<PAGE>




                     Communication Intelligence Corporation
                                 and Subsidiary
                      Condensed Consolidated Balance Sheets
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                September 30,      December 31,
                                                    1997               1996
Assets                                           (Unaudited)
                                                  ------------     -----------
Current assets:
<S>                                                 <C>             <C>      
     Cash and cash equivalents                      $  1,392        $  10,573
     Short-term investments                              703              752
     Accounts receivable, net                            515              376
     Inventories                                       1,413              529
     Other current assets                                400              190
                                                  ------------     -----------
         Total current assets                          4,423           12,420

Notes receivable from officers and employees             360              210
Property and equipment, net                              994              537
Other assets                                             313              336
                                                  ------------     -----------

         Total assets                               $  6,090        $  13,503
                                                  ============     ===========

Liabilities and stockholders' equity Current liabilities:
     Accounts payable                               $    917        $     367
     Accrued compensation                                492              339
     Short-term debt                                      83                -
     Other accrued liabilities                           719              578
     Deferred revenue                                    973            2,006
     Pre-petition liabilities                              -              878
                                                  ------------      ----------
         Total current liabilities                     3,184            4,168

Redeemable convertible preferred stock (Note 5)            -            9,417
Convertible preferred stock (Note 5)                       4                -
Common stock                                             449              419
Additional paid-in capital                            64,093           54,015
Accumulated deficit                                  (61,537)         (54,347)
Cumulative foreign currency translation adjustment      (103)            (169)
Commitments (Note 5)
                                                  ------------      ----------

Total liabilities, redeemable securities,
convertible preferred and common
stockholders' equity (Note 5)                       $  6,090         $ 13,503
                                                  ============     ===========
</TABLE>


<PAGE>


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

<TABLE>
<CAPTION>
                                      Three Months Ended    Nine Months Ended
                                         September 30,        September 30,
                                      --------------------   ------------------
                                         1997       1996       1997       1996
                                      ---------  --------    -------   --------
Revenues:
<S>                                     <C>        <C>      <C>        <C>    
  Product                               $  576     $ 433    $ 2,336    $ 1,317
  License and royalty                      623       252      1,213        545
  Development contracts                    176        69        421        209
                                       --------  --------   --------   --------

           Total revenues                1,375       754      3,970      2,071

Operating costs and expenses:
  Cost of sales:
     Product                               358       351      1,779      1,038
     License, royalty and other costs      260        95        679        309
     Development contracts                 159       107        340        247
  Research and development                 585       389      1,656      1,176
  Sales and marketing                    1,723       833      4,703      2,350
  General and administrative               544       454      1,663      1,483
                                       --------  --------   --------   --------

        Total operating costs
            and expenses                 3,629     2,229     10,820      6,603
                                       --------  --------   --------   --------

Loss from operations                    (2,254)   (1,475)    (6,850)    (4,532)

Interest income and other income
  (expense) net, (Note 5)                   56        78       (312)       233

Interest expense                            (7)      (25)       (28)      (122)
                                       --------  --------   --------   --------

      Net loss                         $(2,205)  $(1,422)   $(7,190)   $(4,421)
                                       ========  ========   ========   ========

      Net loss per common share        $ (0.05)  $ (0.03)   $ (0.16)   $ (0.11)
                                       ========  ========   ========   ========

      Weighted average common
           shares outstanding           45,200    41,951     44,876     41,011
                                       ========  ========   ========   ========
</TABLE>



<PAGE>


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

<TABLE>
<CAPTION>
                                                          Nine Months Ended
                                                             September 30,
                                                      -------------------------
                                                           1997          1996
                                                      ----------     ----------
Cash flows used in operating activities:
<S>                                                    <C>          <C>       
Net loss                                               $ (7,190)    $  (4,421)
Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization                          183           271
     Warrant issuance                                       484             -
     Stock options issued for services                       74             -
     Changes in operating assets and liabilities:
         Accounts receivable                               (139)          (56)
         Inventories                                       (892)         (442)
         Other current assets                              (210)           (5)
         Other assets                                      (234)           36
         Accounts payable and accrued compensation          672          (390)
         Other accrued liabilities                         (272)         (193)
         Deferred revenue                                (1,033)         (182)
         Pre-petition liabilities                          (878)         (719)
                                                       ----------    ----------

         Net cash used in operating activities           (9,435)       (6,101)
                                                       ----------    ----------

Cash flows used in investing activities:
     Proceeds from sale of short-term investments         7,071        11,385
     Purchase of short-term investments                  (7,022)      (12,650)
     Acquisition of property and equipment                 (584)         (225)
                                                       ----------    ----------

     Net cash used in investing activities                 (535)       (1,490)
                                                       ----------    ----------

Cash flows from financing activities:
     Principal payments on short-term debt                  (26)          (30)
     Principal payments on capital lease obligations        (17)          (26)
     Proceeds from issuance of short-term debt              109           140
     Proceeds from issuance of common stock                 772         3,240
                                                       ----------    ----------

         Net cash provided by financing activities          838         3,324
                                                       ----------    ----------

Effect of exchange rate changes on cash                     (49)          (59)
                                                       ----------    ----------

Net decrease in cash and cash equivalents                (9,181)       (4,326)
Cash and cash equivalents at beginning of period         10,573         5,924
                                                       ----------    ----------

Cash and cash equivalents at end of period             $  1,392      $  1,598
                                                       ==========    ==========
</TABLE>


<PAGE>


                     COMMUNICATION INTELLIGENCE CORPORATION
                                 AND SUBSIDIARY
                         NOTES TO CONDENSED CONSOLIDATED
                        FINANCIAL STATEMENTS (UNAUDITED)
                                    FORM 10-Q

<PAGE>


1.   Interim financial statements

     The accompanying  unaudited condensed consolidated financial statements
     of Communication Intelligence Corporation (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,  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  corporate  mission of CIC is to develop  and market  natural,  pen
     input, computer interfaces and handwriting  recognition-based  security
     technologies and products to satisfy the emerging markets for pen-based
     computing and electronic  commerce.  These emerging markets include all
     areas  of  personal  computing  as  well  as  electronic  commerce  and
     communications.

     The Company's  research and  development  activities have given rise to
     numerous  technologies and products including:  two pen-based operating
     environments (PenDOS(R) and PenMAC(R)), its multi-lingual Handwriter(R)
     Recognition System, and three desktop computing products, Handwriter(R)
     for   Windows(R),   MacHandwriter(R),   and   its   recently   released
     Handwriter(R)  Manta(R).  Additionally,  CIC has developed products for
     dynamic  signature  verification,   electronic  ink  data  compression,
     encryption and a suite of development tools and applications  which the
     Company believes could increase the  functionality of its core products
     and  could  facilitate  their   integration  into  original   equipment
     manufacturers'  ("OEM")  hardware  products  and  computer  systems and
     networks.

     In June 1997, the Company contributed  licensed technology and $900,000
     in cash to the  Company's  joint  venture in the  People's  Republic of
     China  (the  "Joint  Venture"),   Communication  Intelligence  Computer
     Corporation,  Ltd. ("CICC"), which increased the Company's ownership of
     CICC from 79% to 90%.

     For the nine months ended  September 30, 1997,  the Company's  cash and
     cash   equivalents   decreased  by   approximately   $9,181,000,   from
     approximately   $10,573,000   at  the   beginning   of  the  period  to
     approximately  $1,392,000  due  primarily  to a cash used in  operating
     activities  of  approximately  $9,435,000  for the  nine  months  ended
     September 30, 1997. As of September 30, 1997, the Company's  cash, cash
     equivalents and short-term  investments was $2,095,000.  Although there
     is no assurance,  the Company  believes that the above mentioned funds,
     are  adequate  to  meet  projected   working  capital  and  other  cash
     requirements for the next two months.  The Company is currently seeking
     to raise additional  funds from financing  sources in order to meet its
     short-term  requirements  and  expects to  consummate  a  financing  in
     November  1997.  There can be no  assurance  that such  financing  will
     close,  or if the financing does close,  that such financing will be on
     favorable terms.

     This  financial  information  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, 1996.

     Certain prior period amounts in the accompanying  financial  statements
     have been reclassified to conform with the current period presentation.
2.   Cash, cash equivalents and short-term investments

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

     Short-term investments are classified as  "available-for-sale"  and are
     stated at their fair value. Any unrealized gains or losses are reported
     as a separate component of stockholders' equity, but, to date, have not
     been  significant.  The cost of securities sold is determined  based on
     the specific identification method.

     Cash and cash equivalents consist of the following:

<TABLE>
<CAPTION>
                                        September 30,         December 31,
                                             1997                 1996
                                     --------------------- -------------------
                                                   (In Thousands)

<S>                                     <C>                   <C>        
          Cash in bank                  $     1,387           $     9,483
          Commercial paper                        -                 1,088
          Money markets                           5                     2
                                        ------------          ------------
                                        $     1,392           $    10,573
                                        ============          ============

      Short-term  investments  consist  of the  following  available-for-sale
      securities:

                                        September 30,         December 31,
                                             1997                 1996
                                     --------------------- -------------------
                                                    (In Thousands)

           U.S. Corporate securities    $      703            $      252
           Other debt securities                 -                   500

                                        -----------           -----------
                                        $      703            $      752
                                        ===========           ===========
</TABLE>

       Corporate debt securities at September 30, 1997 mature in less than one
       year.

3.   Inventories

     Inventories  are stated at the lower of cost  (first-in,  first-out) or
     market.  At  September  30, 1997,  inventory is comprised  primarily of
     finished goods.

4.   Short-term debt

     In May 1997,  the Company  purchased  office  furniture  and a security
     system with an  approximate  value of $209,000 from a third party.  The
     Company paid $100,000 in cash and signed an unsecured note for $109,000
     due in monthly  installments  through May 1998. The note bears interest
     on the unpaid balance at a rate of 10% per annum.


5.   Convertible preferred stock

     On December  31,  1996,  the Company  completed a private  placement of
     450,000 shares of redeemable convertible preferred stock (the "December
     Private  Placement") at $25.00 per share to certain  institutional  and
     other investors. Of the aggregate 450,000 shares sold, 70,200 shares of
     redeemable  convertible  preferred stock (the  "Preferred  Stock") were
     issued to  investors in exchange  for 390,000  shares of common  stock,
     originally issued by the Company in a private placement of common stock
     consummated in June 1996.

     The  Company   agreed  to  register  the  common  stock  issuable  upon
     conversion of the Preferred Stock by filing a Registration Statement on
     Form S-3 by March 31, 1997 and by using its best  efforts to cause such
     Registration  Statement to be declared  effective  within 180 days from
     December  31,  1996 (the  "Declaration  Date").  In the event  that the
     Registration  Statement was not declared effective within 180 days from
     December  31,  1996,  the Company was  required to pay to each holder a
     default payment (the "Default Payment") in an amount equal to 3% of the
     liquidation  preference  for the  Preferred  Stock held for any part of
     each  30-day  period  subsequent  to  the  Declaration  Date  that  the
     Registration  Statement was not declared  effective.  The  Registration
     Statement  was  declared  effective  in April 1997.  A similar  Default
     Payment  must be made by the  Company to the  holders of the  Preferred
     Stock in the event that (i) the Company fails,  refuses or is unable to
     cause the securities covered by the Registration Statement to be listed
     on the exchange on which the Company's common stock is traded, (ii) any
     holder's  ability to sell the  securities  covered by the  Registration
     Statement is suspended for more than 60 days, or at any time during the
     twelfth or  thirteenth  fiscal month  following  December 31, 1996,  or
     (iii) the Company does not have a sufficient number of shares of common
     stock  available  to effect  conversion  of the  Preferred  Stock.  The
     Company  has not been liable for any  payments  through  September  30,
     1997.

     On March 28, 1997,  and  effective  as of December  31,  1996,  holders
     constituting  100%  of  the  issued  and  outstanding  Preferred  Stock
     executed  a waiver to certain  provisions  of the  Registration  Rights
     Agreement  (the  "Agreement")  entered  into  in  connection  with  the
     December  Private  Placement,  which  irrevocably  waived such holders'
     rights  to any  redemption  of the  preferred  stock,  and in  exchange
     therefor  the  holders   received  300,000  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 adjustments  for
     antidilution.  The  Company  ascribed  a value  of  $484,000  to  these
     warrants,  which was recorded as an expense in the Company's  statement
     of  operations  for the quarter  ended March 31,  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  waiver,  the  shares  of  Preferred  Stock  were  reclassified  as
     convertible  preferred  stock after December 31, 1996 and, as such, are
     included  in  stockholders'  equity  for  such  periods  subsequent  to
     December 31, 1996.

     During  the  quarter  ending  September  30,  1997,  27,600  shares  of
     convertible  preferred  stock were  exchanged for 699,465 shares of the
     Company's Common Stock.

  6. Recent accounting pronouncements

     In February  1997,  the  Financial  Accounting  Standards  Board issued
     Statement of Financial  Accounting  Standards  No. 128,  "Earnings  per
     Share".  This  Statement is  effective  for the  Company's  year ending
     December  31, 1997 and  redefines  earnings  per share under  generally
     accepted  accounting  principles.   Under  the  new  standard,  primary
     earnings  per share is replaced by basic  earnings  per share and fully
     diluted earnings per share is replaced with diluted earnings per share.
     If the  Company  had adopted  this  statement  for the quarter and nine
     months ended  September 30, 1997 and for the comparable  periods in the
     prior year, the Company's loss per share would have been as follows:

<TABLE>
<CAPTION>
                                 Three Months Ended    Nine Months Ended
                                    September 30,        September 30,
                                 ------------------    -----------------
                                   1997      1996        1997      1996
                                 ------------------    -----------------
<S>                              <C>       <C>         <C>       <C>    
      Basic loss per share       $(0.05)   $(0.03)     $(0.16)   $(0.11)
      Diluted loss per share     $(0.05)   $(0.03)     $(0.16)   $(0.11)
</TABLE>


     In June 1997, the Financial Accounting Standards Board issued Statement
     of Financial  Accounting  Standards No. 130,  "Reporting  Comprehensive
     Income" ("SFAS 130"). SFAS 130 establishes  standards for the reporting
     of   comprehensive   income  and  its  components  in  a  full  set  of
     general-purpose   financial  statements  for  periods  beginning  after
     December 15, 1997. Reclassification of financial statements for earlier
     periods for  comparative  purposes is required.  The Company will adopt
     SFAS 130 in 1998 and does not expect  such  adoption to have a material
     effect on its consolidated financial statements.

     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 in 1998 and does not  expect  such  adoption  to have a
     material effect on its consolidated financial statements.

     In October 1997, the Accounting  Standards  Executive  Committee of The
     American  Institute of Certified Public Accountants issued Statement of
     Practice 97-2 "Software  Revenue  Recognition"  ("SOP 97-2").  SOP 97-2
     provides  guidance on  generally  accepted  accounting  principles  for
     recognition  of revenue on software  transactions.  This SOP supersedes
     SOP 91-1 and is effective for fiscal years beginning after December 15,
     1997.  The Company will adopt SOP 97-2 in 1998 and does not expect such
     adoption  to  have a  material  effect  on its  consolidated  financial
     statements.


7.   Subsequent event

     On October  16,  1997 the Company  entered  into an Account  Receivable
     Financing  Agreement  whereby  the  Company  may  factor  its  Accounts
     Receivable.  The maximum  credit  available  to the  Company  under the
     agreement is $1,500,000 with an advance rate of 80% of eligibleaccounts
     receivable less than 90 days old. The term of the agreement is
     twelve months with annual  renewals.  A financing fee of 2.5% 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.  As
     of November 7, 1997, the Company had financed approximately $396,000 of
     accounts     receivable     under     this     agreement     and    has
     approximately $1,100,000  of additional financings available for future
     use.



<PAGE>

                     COMMUNICATION INTELLIGENCE CORPORATION
                                 AND SUBSIDIARY
                                    FORM 10-Q

                                                        11
Item 2. Management's Discussion and Analysis of Financial Condition and
        Results of Operations

Results of Operations

Revenues.  Revenues  for the three and nine  months  ended  September  30,  1997
increased by 82% and 92%, respectively, from the comparable three and nine month
periods of the prior year to $1,375,000 and $3,970,000,  respectively.  Revenues
are  comprised  of product  sales,  license and royalty  fees,  and  development
contract revenues. The increases are principally due to higher product sales and
license and royalty fees as discussed in more detail below.
<TABLE>
<CAPTION>
                            Three Months Ended        Nine Months Ended
                               September 30,             September 30,
                            -------------------       ------------------
                                           (In Thousands)
                              1997         1996          1997         1996
                            --------     --------      --------     --------
Revenues:
<S>                         <C>          <C>           <C>          <C>     
 Product sales              $   576      $   433       $  2,336     $  1,317
 License and royalty fees       623          252          1,213          545
 Development contracts          176           69            421          209
                            --------     --------      --------     --------

       Total Revenues       $ 1,375      $   754       $  3,970     $  2,071
                            ========     ========      ========     ========
</TABLE>

Product sales increased to $576,000 and $2,336,000,  respectively, for the three
and nine month  periods ended  September 30, 1997 from $433,000 and  $1,317,000,
respectively,  in the  comparable  prior year  periods.  This  increase  was due
primarily to introduction of Handwriter products into the retail channel through
CompUSA in 1997 and an increase in  Handwriter  sales to the  corporate  market.
Handwriter  product sales increased  $287,000 and $1,168,000,  respectively,  to
$337,000 and $1,406,000,  respectively,  during the three and nine month periods
ended September 30, 1997 compared to $50,000 and $238,000,  respectively, in the
comparable  periods in 1996.  Product  sales by the  Company's  90% owned  Joint
Venture were $241,000 and $930,000,  respectively,  for the three and nine month
periods  ended   September  30,  1997  compared  to  $382,000  and   $1,079,000,
respectively, during the same periods last year.

Revenues  from  license  and royalty  fees for the three and nine month  periods
ended  September 30, 1997  increased to $623,000 and  $1,213,000,  respectively,
from $252,000 and $545,000,  respectively,  in the  comparable  prior periods in
1996.  This  increase  was due to the  release of deferred  royalty  revenues of
approximately $519,000 and $902,000,  respectively, for the three and nine month
periods ended September 30, 1997,  recognized on licensing  agreements for which
the  Company  had no  further  obligation  to  deliver  additional  software  or
services.  In the comparable prior year periods,  licensing and royalty revenues
of  approximately  $164,000  and  $250,000,  respectively,  were  recognized  on
licensing  agreements for which the Company had no further obligation to deliver
additional software or services.  Royalty revenues recognized on current product
shipments  by the  Company's  licensees  increased by 17% and 5% to $104,000 and
$311,000, respectively, for the three and nine month periods ended September 30,
1997 from  $88,000 and  $295,000,  respectively,  in the  comparable  prior year
periods..

Development  contract  revenues  for the  three  and nine  month  periods  ended
September  30,  1997   increased   155%  and  101%  to  $176,000  and  $421,000,
respectively,  compared to $69,000 and $209,000, respectively, in the comparable
prior year  periods.  This increase was primarily due to $98,000 and $174,000 in
development  contracts  revenues other than grant revenues  received  during the
three and nine  months  ended  September  30,  1997,  respectively,  compared to
$10,000 in development contract revenues other than grant revenues earned during
the nine  month  period of the prior  year.  Grant  revenues  from The  National
Science Foundation for basic research for the three and nine month periods ended
September 30, 1997 was $79,000 and $247,000,  respectively,  compared to $59,000
and $155,000,  respectively,  during the  comparable  periods of the prior year.
Grant  revenues  from the US  Government's  National  Institute of Standards and
Technology ("NIST") was $90,000 in 1996. The NIST grant expired in April 1996.

Cost of Sales.  Cost of sales  comprises  costs from product  sales,  licensing,
royalty and other costs and costs from  development  contracts.  Cost of product
sales for the three and nine months ended September 30, 1997, consists primarily
of cost of  materials,  approximately  $134,000 and $692,000,  respectively,  of
which is related to the hardware and software  components involved in the system
integration activities of the Joint Venture,  compared to approximately $291,000
and $858,000,  respectively,  in the  comparable  prior year  periods,  with the
remainder being related to costs of Handwriter product sales. Handwriter product
cost of materials was approximately $279,000 and $1,221,000,  respectively,  for
the three and nine months ended  September  30, 1997  compared to  approximately
$46,000 and $180,000,  respectively,  in the comparable prior year periods. This
increase in Handwriter  product cost of sales is due to the increase in sales of
the  Handwriter  products as mentioned  above.  Handwriter  product gross margin
increased to 17% during the three months ended September 30, 1997 from 8% in the
comparable  period of the prior year. This increase resulted from an increase in
sales of the Company's new higher margin  Handwriter Manta product by the retail
channel in the third  quarter of 1997.  The Manta  product was not  available in
quantity in 1996. For the nine month period ended September 30, 1997, Handwriter
products gross margin decreased to 13% from 24% in the comparable  period of the
prior  year.  The  decrease is due to the lower  selling  price  experienced  on
Handwriter  Classic products in the retail channel.  The Handwriter  Classic was
not sold in the Retail  Channel  during  1996.  Gross  margin on  product  sales
activities of the Joint Venture was 44% and 25%, respectively,  during the three
and nine months ended September 30, 1997 compared to 24% and 20%,  respectively,
in  the  prior  year.   License,   royalties  and  other  costs,  which  include
procurement,  warehousing, and related personnel in connection with sales of the
Company's products,  increased to $260,000 and $679,000,  respectively,  for the
three and nine months ended September 30, 1997 compared to $95,000 and $309,000,
respectively, for the comparable 1996 periods. This increase in License, royalty
and other costs for the three and nine months ended  September  30, 1997 related
primarily to additional  personnel costs of $70,000 and $188,000,  respectively,
and product  fulfillment and other costs of $90,000 and $215,000,  respectively,
in connection with the launch and ongoing support of the Company's Handwriter(R)
for  Windows(R)  product in the retail market in 1997.  There were no comparable
activities  in the prior year.  Costs  incurred in connection  with  development
contract  revenue are expensed as incurred and  increased 49% and 38% during the
three and nine months ended September 30, 1997, respectively, as compared to the
comparable periods of the prior year, commensurate with the increase in contract
development revenues in 1997.

Research and  development.  Research and development  expenses for the three and
nine month periods ended September 30, 1997 increased by 50% and 41% to $585,000
and   $1,656,000,   respectively,   as  compared  to  $389,000  and  $1,176,000,
respectively,  in the  comparable  periods of the prior year. The increases were
primarily  attributable  to increases of  approximately  $155,000 and  $337,000,
respectively,   in  payroll  and  related  costs,   and  $30,000  and  $156,000,
respectively,  in professional services,  facilities and other costs compared to
the prior year. These increases are commensurate  with the increase in personnel
and the continued  development of the Chinese  recognizer and the development of
the Handwriter MX and Handwriter fx products  introduced into the retail channel
late in the third  quarter of the current year.  The Company did not  capitalize
any  software  development  costs in the  three  and nine  month  periods  ended
September 30, 1997 or 1996, respectively.

Sales and marketing.  Sales and marketing  expenses for the three and nine month
periods ended  September  30, 1997  increased  107% and 100% to  $1,723,000  and
$4,703,000,  respectively, as compared to $833,000 and $2,350,000, respectively,
in the comparable periods of the prior year. The increases were primarily due to
increases of $250,000  and $979,000  respectively,  in  advertising  and related
expenses,  and  $314,000  and  $666,000,  respectively,  in payroll  and related
expenses.  Other costs,  including  facilities and related expenses,  consulting
services and other costs increased $326,000 and $708,000,  respectively,  during
the three and nine month periods  ended  September  30, 1997  commensurate  with
additions in staffing.  The increases in staffing and advertising  expenses were
primarily  due  to  the  introduction  and  ongoing  support  of  the  Company's
Handwriter  products in the retail channel during 1997, and continued  marketing
and sales efforts in the corporate channel.

General and  administrative.  General and administrative  expenses for the three
and  nine  month  periods  ended  September  30,  1997  increased  20% and  12%,
respectively, to $544,000 and $1,663,000,  respectively, as compared to $454,000
and $1,483,000,  respectively,  in the comparable periods of the prior year. The
increases were primarily attributable to increases of approximately $100,000 and
$314,000,  respectively,  in  professional  fees  and  services  related  to the
Company's  financing  activities and related  obligations.  These increases were
partially  offset by  reductions  in payroll  and  related  costs of $57,000 and
$161,000, respectively,  during the three and nine month periods ended September
30, 1997 compared to the same periods in the prior year.  These  reductions were
associated with the transfers of general and  administrative  staff to sales and
marketing activities.

Interest  income and other income  (expense).  Interest  income and other income
(expense)  increased  for the nine months ended  September 30, 1997 due to a one
time non-cash charge to expense of $484,000 for 300,000 warrants issued on March
28, 1997, and effective as of December 31, 1996, 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 registration  rights
agreement  entered into in  connection  with the private  placement of Preferred
Stock in December 1996 (Note 5).

Interest  expense.  Interest  expense  decreased  for the three  and nine  month
periods  ended  September 30, 1997 compared to the prior year due to the pay-off
of the pre-petition liabilities in the first quarter of 1997.

Liquidity and Capital Resources

At September 30, 1997, cash, cash equivalents and short-term investments totaled
$2,095,000  compared to cash,  cash  equivalents  and short-term  investments of
$11,325,000  at December 31, 1996.  This  decrease was  primarily  the result of
$9,435,000 used in operating  activities which included a net loss of $7,190,000
for the nine  months  ended  September  30,  1997.  Total  current  assets  were
$4,423,000 at September 30, 1997 compared to $12,420,000 at December 31, 1996.

Current  liabilities,   which  include  deferred  revenue,  were  $3,184,000  at
September 30, 1997.  Deferred revenue,  totaling $973,000 at September 30, 1997,
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 or for which the Company has no further obligation to
deliver  additional  software or services.  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.

For the nine months  ended  September  30,  1997,  the  Company's  cash and cash
equivalents   decreased  by   approximately   $9,181,000,   from   approximately
$10,573,000  at the  beginning  of the period to  approximately  $1,392,000  due
primarily to a cash used in operating activities of approximately $9,435,000 for
the nine months  ended  September  30,  1997.  As of  September  30,  1997,  the
Company's  cash,  cash  equivalents  and short-term  investments was $2,095,000.
Although there is no assurance,  the Company  believes that the above  mentioned
funds,   are  adequate  to  meet  projected   working  capital  and  other  cash
requirements for the next two months.  The Company is currently seeking to raise
additional  funds  from  financing  sources  in  order  to meet  its  short-term
requirements  and expects to consummate a financing in November 1997.  There can
be no assurance that such financing will close,  or if the financing does close,
that such financing will be on favorable terms.

On October 16, 1997 the Company  entered  into an Account  Receivable  Financing
Agreement  whereby the Company may factor its Accounts  Receivable.  The maximum
credit  available  to the Company  under the  agreement  is  $1,500,000  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
2.5% 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.  As of November
7, 1997, the Company had financed  approximately $396,000 of accounts receivable
under this agreement and has  approximately.$1,100,000  of additional financings
available for future use.

In 1993,  the Company  formed the Joint  Venture with The Ministry of Electronic
Industries of Jiangsu  Province  (the  "Ministry")  of The People's  Republic of
China. The Joint Venture,  Communication Intelligence Computer Corporation, Ltd.
("CICC"),  is 90%  owned  by the  Company  at  September  30,  1997.  Under  the
provisions  of the joint  venture  agreement,  the  Company  may be  required to
contribute  up to $5.4  million in cash to the Joint  Venture and is required to
provide it with nonexclusive  licenses to technologies and certain  distribution
rights.  The  Ministry  is required to  contribute  certain  land use rights and
provide other services to the Joint  Venture.  During the second quarter of 1997
the Company  contributed  technology licenses and $900,000 in cash to CICC. This
contribution will help fund CICC's new Software Development Division,  which was
formed to create pencentric applications initially for the Chinese market. As of
September  30, 1997,  the Company had  contributed a total of $1,800,000 in cash
and had provided  non-exclusive  licenses to technology and certain distribution
rights,  while  the  Ministry  had  contributed  certain  land  use  rights  and
equipment.  There can be no assurance  that the Company will be able to fund the
balance of any required cash contributions to the Joint Venture,  that the Joint
Venture will be successful in developing or selling integrated  computer systems
or other Company products to the Chinese market or that the Company will realize
any significant benefits from its contributions to the Joint Venture.

Convertible  Preferred  Financing.  In December  1996,  the Company  completed a
private  placement of 450,000 shares of Preferred  Stock at $25.00 per share for
$11,250,000. In connection with the transaction, the Company received $9,495,000
in cash and accepted for  exchange,  in lieu of cash,  390,000  shares of Common
Stock for 70,200  shares of Preferred  Stock.  Each share of Preferred  Stock is
convertible  by the holder into shares of Common Stock at any time after July 1,
1997,  pursuant to a conversion formula based upon a discount from the effective
market  price of the  Common  Stock.  In  addition,  all  outstanding  shares of
Preferred  Stock  will  automatically  convert  into  shares of Common  Stock on
December 31, 1999, subject to the satisfaction of certain  conditions,  or later
under certain  circumstances.  There is no limitation on the number of shares of
Common  Stock that the Company may be required to issue in  connection  with the
Preferred Stock.

The exact number of shares of Common Stock  issuable  upon  conversion of all of
the outstanding  Preferred Stock cannot currently be determined but,  generally,
such issuance's of Common Stock will vary inversely with the market price of the
Common Stock.  On November 7, 1997,  the last reported sales price of the Common
Stock on the  Nasdaq  SmallCap  Market was $1.62.  per share.  If the  effective
market  price of the  Common  Stock on  November  7, 1997 of $1.48 per share (as
determined  pursuant to the terms of the Preferred Stock) were used to determine
the  number of  shares  of Common  Stock  issuable  upon the  conversion  of the
outstanding  Preferred Stock, the Company would be obligated to issue a total of
approximately  7,043,152  shares of Common Stock  assuming all of such currently
outstanding shares of Preferred Stock were converted at such time. To the extent
the effective market price per share of the Common Stock is lower or higher than
$ 1.48 as of any date on which  shares of  Preferred  Stock are  converted,  the
Company  would issue more or less shares of Common Stock than  reflected in such
estimate, and such difference could be material. As of November 7, 1997, a total
of 109,730  shares of Preferred  Stock have been converted in to an aggregate of
2,079,671  shares of the  Company's  Common  Stock and an  aggregate  of 340,270
shares of Preferred Stock were outstanding.

Restrictions in Investor Agreement.  In connection with the private placement in
December  1996,  the  Company  entered  into  an  investor  agreement  with  the
purchasers of the Preferred Stock (the "Investor Agreement"). Subject to certain
exceptions,  until the Restrictive Covenant Termination Date (as defined below),
the Investor  Agreement  prohibits or restricts  the Company  from,  among other
things,  declaring or paying dividends or making distributions to holders of the
Common Stock,  repurchasing any Common Stock or other equity junior or on parity
with the Preferred Stock,  authorizing or issuing other equity securities senior
to the Preferred Stock and incurring  indebtedness other than for trade payables
or a working capital facility not exceeding $10 million. In addition,  until the
Restrictive  Covenant  Termination Date, the Company is prohibited from offering
or selling debt,  shares of Common Stock or other equity  securities  (including
convertible  securities) other than in a bona-fide underwritten public offering,
or from obtaining any financing from a third party,  unless such transaction has
been  first  offered  to the  holders  of the  Convertible  Preferred.  The term
"Restrictive Covenant Termination Date" means, generally,  the date which is the
earlier of (a) January  31,  1998 or (b) the date on which all of the  Preferred
Stock has been converted.

Registration Rights; Default Payments. In connection with the Company's December
1996 private placement, the Company entered into a registration rights agreement
with the holders of the Preferred Stock (the  "Registration  Rights  Agreement")
pursuant to which the Company  agreed to file a  Registration  Statement on Form
S-3  relating to the shares of Common  Stock  issuable  upon  conversion  of the
Preferred Stock by March 31, 1997 (the "1997 Registration Statement") and to use
its  best  efforts  to cause  the 1997  Registration  Statement  to be  declared
effective  by June  29,  1997  (the  "Declaration  Date").  In April  1997,  the
Company's  1997  Registration  Statement on Form S-3 for the offering by selling
security  holders  of shares of Common  Stock  issuable  upon  conversion  of or
otherwise in respect to 450,000 shares of the Company's  Preferred Stock and the
exercise of warrants to purchase an aggregate of 637,000  shares of Common Stock
was declared effective by the Securities and Exchange  Commission.  Beginning in
July 1997,  the Preferred  Stock became  eligible to be converted by the holders
into shares of Common Stock.  As of November 7, 1997, a total of 109,730  shares
of Preferred Stock have been converted in to an aggregate of 2,079,671 shares of
the Company's Common Stock and an aggregate of 340,270 shares of Preferred Stock
were outstanding.

In the event the 1997 Registration  Statement was not declared  effective by the
Declaration  Date, the Company agreed to pay to each holder of Preferred Stock a
default payment in cash (the "Default  Payment") in an amount equal to 3% of the
liquidation  preference for the Preferred Stock held for any part of each 30-day
period subsequent to the Declaration Date until the 1997 Registration  Statement
was  declared  effective.  The  Company  also  agreed to make a similar  Default
Payment to the  holders  of  Preferred  Stock in the event that (i) the  Company
fails,  refuses  or is  unable  to  cause  the  securities  covered  by the 1997
Registration Statement to be listed on the exchange on which the Common Stock is
then traded,  (ii) any holder's  ability to sell the  securities  covered by the
1997 Registration Statement is suspended for more than 60 days in the aggregate,
or at any time during the months of December  1997 or January 1998, or (iii) the
Company does not have a sufficient number of shares of Common Stock available to
effect  conversion of the Preferred  Stock. The Default Payments must be made by
the Company each month until the  condition  or event  causing the payment to be
made no longer exists.

Dividends.   The  Preferred  Stock  entitles  the  holders  thereof  to  receive
cumulative  dividends  on each  share at the rate of $1.25 per share per  annum,
compounded semi-annually,  when payable, whether or not declared.  Dividends may
be paid at the Company's option in cash or additional shares of Preferred Stock.

Waiver;  Additional Warrant Issuance.  In March 1997, the Company and all of the
holders of the Preferred  Stock  executed a waiver (the  "Waiver") in connection
with the Company's obligations to comply with redemption provisions contained in
the Registration  Rights Agreement.  Pursuant to the Waiver,  each holder of the
Preferred  Stock  irrevocably  waived the Company's  obligations  to comply with
provisions in the  Registration  Rights Agreement which would have obligated the
Company to redeem the Preferred  Stock (or shares of Common Stock  issuable upon
conversion  of, or  otherwise  in  respect  to, the  Preferred  Stock)  and,  in
consideration  therefor,  the  Company  (a) issued to the holders (on a pro rata
basis) in accordance with the terms thereof, warrants to purchase 300,000 shares
of Common Stock  (subject to  adjustments),  with an exercise price of $2.00 per
share,  (b) waived its rights to request that the holders of the Preferred Stock
receive any Default  Payments in  additional  shares of Preferred  Stock and (c)
agreed that the holders of Preferred  Stock may convert their shares into shares
of Common Stock at approximately 72% of the effective market price of the Common
Stock in the event a change in  control  transaction  occurs  prior to  February
1998,  or later under  certain  circumstances.  As a result of the  Waiver,  the
shares of Preferred  Stock which were  classified  as  redeemable  securities at
December 31, 1996 were  reclassified as Preferred  Stock  commencing as of March
31, 1997 and, as such, were included in  stockholders'  equity  commencing as of
March 31, 1997.

         The Company has ascribed a value of $484,000 to these  warrants,  which
was  recorded as an expense in the  Company's  statement of  operations  for the
quarter  ended  March 31,  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 waiver, the shares of redeemable  convertible preferred stock have
been  reclassified as convertible  preferred stock and, as such, are included in
stockholders' equity.

Future Results and Stock Price

The  Company's  future  earnings  and stock price may be subject to  significant
volatility.  The stock markets have experienced  significant volatility in stock
prices  in  recent  years.  The  stock  prices  of  technology   companies  have
experienced  particularly  high  volatility,  including  at times  severe  price
changes that are unrelated or  disproportional  to the operating  performance of
such 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 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.


<PAGE>



Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits:

         (b)       Exhibit 27,   Financial Data Schedule

(b) Reports on Form 8-K:.

         (c) On September 22, 1997,  the Company filed a Current  Report on Form
         8-K(dated September 11, 1997) under Item 5, Other Events, reporting the
         engagement  of Gerard Klauer  Mattison & Co.,  Inc.  ("GKM') to provide
         financial  advisory services to the Company on an exclusive basis for a
         one year period,  and the  engagement of Swartz &  Associates,  Inc. to
         assist in the Company's in its search for a new Chief Executive Officer
         and Chief Financial Officer.



<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



     November 13, 1997                      /s/ Francis V. Dane
---------------------------    -----------------------------------------------
            Date                               Francis V. Dane
                                  Vice President, Secretary and Treasurer
                                  (Principal Financial Officer and Officer
                                Authorized to Sign on Behalf of the Registrant)