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

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

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

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

|   | Large      accelerated filer                                                |   | Accelerated      filer         |
|--------|-----------------------------------------------------------------------------|--------|--------------------------------|
|   | Non-accelerated      filer (do not check if      smaller reporting company) | X      | Smaller      reporting company |

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

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Page No.                                          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------|
| PART      I.  FINANCIAL INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                              |
|  Item      1.  Financial      Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              |
|  Condensed      Consolidated Balance Sheets at September 30, 2008 (unaudited)      andDecember 31,    2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |         3 |
|  Condensed      Consolidated Statements of Operations for the Three and      Nine-MonthPeriods Ended September 30,      2008 and 2007 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |              4 |
|  Condensed      Consolidated Statements of Changes in Stockholders’ Equity for      theThree and Nine-Month Periods      Ended September 30, 2008 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |              5 |
|  Condensed      Consolidated Statements of Cash Flows for the Nine-Month      PeriodsEnded September 30, 2008 and      2007 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |              6      |
|  Notes      to Unaudited Condensed Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |              8 |
|  Item      2.     Management's      Discussion and Analysis of Financial Condition and  Results of      Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |            17            |
|  Item      3.     Quantitative and      Qualitative Disclosures About Market      Risk                                                                                                                         |            23            |
|  Item      4.     Controls and      Procedures                                                                                                                                                                 |            23            |
|  PART      II.  OTHER INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                              |
|  Item      1.     Legal      Proceedings                                                                                                                                                                       |            23            |
|  Item      1A.  Risk      Factors                                                                                                                                                                                             |            24            |
|  Item      2.     Unregistered Sales of      Equity Securities and Use of      Proceeds                                                                                                                        |            24            |
|  Item      3.     Defaults Upon Senior      Securities                                                                                                                                                         |            24            |
|  Item      4.     Submission of Matters      to a Vote of Security      Holders                                                                                                                                |            24            |
|  Item      5.     Other      Information                                                                                                                                                                       |            24            |
|  Item      6.     Exhibits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                              |
| (a)      Exhibits                                                                                                                                                                                                                                                |           24                  |
|  Signatures                                                                                                                                                                                                                             |            26            |

----

|                                                                                                                                                                                                                                                                         |   | September      30 |                |   | December      31 |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------------------|--------|------------------|--------|
|                                                                                                                                                                                                                                                                         |   | 2008              |                |   | 2007             |   |
| Assets                                                                                                                                                                                                                                                                       |   | Unaudited         |                |   |             |   |
| Current      assets:                                                                                                                                                                                                                                                         |   |              |                |   |             |   |
| Cash and cash      equivalents                                                                                                                                                                                                                                               |   | $                 | 1,276               |   |             | $      | 1,144 |   |
| Accounts receivable, net of      allowances of $153 and $117 at September 30, 2008 and December 31, 2007      respectively                                                                                                                                                   |   |              | 581                 |   |             |   | 452 |   |
| Prepaid expenses and other      current assets                                                                                                                                                                                                                               |   |              | 141                 |   |             |   | 135 |   |
|                                                                                                                                                                                                                                                                         |   |              |                |   |             |   |   |   |
| Total current      assets                                                                                                                                                                                                                                                    |   |              | 1,998               |   |             |   | 1,731 |   |
|  Property      and equipment, net                                                                                                                                                                                                                                       |   |              | 47                  |   |             |   | 77 |   |
| Patents                                                                                                                                                                                                                                                                      |   |              | 3,244               |   |             |   | 3,528 |   |
| Capitalized      software development costs                                                                                                                                                                                                                                  |   |              | 1,423               |   |             |   | 1,109 |   |
| Deferred      financing costs                                                                                                                                                                                                                                                |   |              | 376                 |   |             |   | − |   |
| Other      assets                                                                                                                                                                                                                                                            |   |              | 30                  |   |             |   | 30 |   |
|                                                                                                                                                                                                                                                                         |   |              |                |   |             |   |   |   |
| Total assets                                                                                                                                                                                                                                                                 |   | $                 | 7,118               |   |             | $      | 6,475 |   |
|                                                                                                                                                                                                                                                                         |   |              |                |   |             |   |   |   |
| Liabilities      and Stockholders' Equity                                                                                                                                                                                                                                    |   |              |                |   |             |   |   |   |
| Current      liabilities:                                                                                                                                                                                                                                                    |   |              |                |   |             |   |   |   |
| Short-term debt – net of      unamortized fair value assigned to warrants of $350 at December 31, 2007,      including related party debt of $1,170 at December 31, 2007, net of      unamortized fair value assigned to warrants                                      |   |              |   −      |   |             |   |   1,370 |   |
| Accounts payable                                                                                                                                                                                                                                                             |   |              | 164                 |   |             |   | 135 |   |
| Accrued    compensation                                                                                                                                                                                                                                                      |   |              | 338                 |   |             |   | 364 |   |
| Other accrued      liabilities                                                                                                                                                                                                                                               |   |              | 297                 |   |             |   | 298 |   |
| Deferred revenue                                                                                                                                                                                                                                                             |   |              | 266                 |   |             |   | 431 |   |
|                                                                                                                                                                                                                                                                         |   |              |                |   |             |   |   |   |
| Total current      liabilities                                                                                                                                                                                                                                               |   |              | 1,065               |   |             |   | 2,598 |   |
|                                                                                                                                                                                                                                                                         |   |              |                |   |             |   |   |   |
| Long-term      debt –net of unamortized fair value assigned to warrants of $1,034 and $21      at September 30, 2008 and December 31, 2007, including related party debt      of $2,498 at September 30, 2008, net of unamortized fair value assigned to      warrants |   |              |     2,683 |   |             |   |     96 |   |
|                                                                                                                                                                                                                                                                         |   |              |                |   |             |   |   |   |
| Commitments      and contingencies                                                                                                                                                                                                                                           |   |              |                |   |             |   |   |   |
| Stockholders'      equity:                                                                                                                                                                                                                                                   |   |              |                |   |             |   |   |   |
| Preferred stock, $.01 par value;      $1,061 liquidation preference; 10,000 shares authorized; 1,040 outstanding      at September 30, 2008 and 0 at December 31, 2007,    respectively                                                                                      |   |              | 1,061               |   |             |   | – |   |
| Common stock, $.01 par value;      225,000 shares authorized; 129,057 shares issued and outstanding at      September 30, 2008 and December 31, 2007                                                                                                                         |   |              | 1,291               |   |             |   | 1,291 |   |
| Additional paid-in      capital                                                                                                                                                                                                                                              |   |              | 95,018              |   |             |   | 93,785 |   |
| Accumulated    deficit                                                                                                                                                                                                                                                       |   |              | (93,979             | )      |             |   | (91,260 | ) |
| Accumulated other comprehensive      loss                                                                                                                                                                                                                                    |   |              | (21                 | )      |             |   | (35 | ) |
|                                                                                                                                                                                                                                                                         |   |              |                |   |             |   |   |   |
| Total      stockholders' equity                                                                                                                                                                                                                                              |   |              | 3,370               |   |             |   | 3,781 |   |
|                                                                                                                                                                                                                                                                         |   |              |                |   |             |   |   |   |
| Total      liabilities and stockholders' equity                                                                                                                                                                                                                              |   | $                 | 7,118               |   |             | $      | 6,475 |   |
|                                                                                                                                                                                                                                                                         |   |              |                |   |             |   |   |   |

----

|                                                                                                                                                                                                                                                                                                                                                               |   | Three      Months Ended |    |   | Nine      Months Ended |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|--------|------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                               |   | September      30,      |    |   | September      30,     |   |
|                                                                                                                                                                                                                                                                                                                                                               |   | 2008                    |    |   | 2007                   |   |   | 2008 |   |   | 2007 |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                    |    |   |                   |   |   |   |   |   |   |   |
| Revenues                                                                                                                                                                                                                                                                                                                                                           |   |                    |    |   |                   |   |   |   |   |   |   |   |
| Product                                                                                                            |   | $                       | 546     |   |                   | $      | 275 |   |   | $ | 1,006 |   |   | $ | 818 |   |
| Maintenance                                                                                                        |   |                    | 175     |   |                   |   | 181 |   |   |   | 552 |   |   |   | 527 |   |
| Total Revenues                                                                                                                                                                                                                                                                                                                                                     |   |                    | 721     |   |                   |   | 456 |   |   |   | 1,558 |   |   |   | 1,345 |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Operating      costs and expenses:                                                                                                                                                                                                                                                                                                                                 |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales                                                                                                                                                                                                                                                                                                                                                      |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Product                                                                                                                                     |   |                    | 216     |   |                   |   | 59 |   |   |   | 543 |   |   |   | 221 |   |
| Maintenance                                                                                                                                 |   |                    | 47      |   |                   |   | 41 |   |   |   | 120 |   |   |   | 99 |   |
| Research and      development                                                                                      |   |                    | 73      |   |                   |   | 86 |   |   |   | 169 |   |   |   | 346 |   |
| Sales and      marketing                                                                                           |   |                    | 337     |   |                   |   | 365 |   |   |   | 1,052 |   |   |   | 922 |   |
| General and      administrative                                                                                    |   |                    | 535     |   |                   |   | 510 |   |   |   | 1,554 |   |   |   | 1,508 |   |
| Total operating costs and      expenses                                                                                                                                                                                                                                                                                                                            |   |                    | 1,208   |   |                   |   | 1,061 |   |   |   | 3,438 |   |   |   | 3,096 |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Loss      from      operations                                                       |   |                    | (487    | )      |                   |   | (605 | ) |   |   | (1,880 | ) |   |   | (1,751 | ) |
|                                                                                                                                                                                                                                                                                                                                                               |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Interest      and other income (expense), net                                                                                                                                                                                                                                                                                                                      |   |                    | 40      |   |                   |   | 4 |   |   |   | 45 |   |   |   | 9 |   |
| Interest      expense:                                                                                                                                                                                                                                                                                                                                             |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Related party (Note      5)                                                                                        |   |                    | (55     | )      |                   |   | (46 | ) |   |   | (147 | ) |   |   | (95 | ) |
| Other (Notes 4 and      5)                                                                                         |   |                    | (26     | )      |                   |   | (42 | ) |   |   | (67 | ) |   |   | (116 | ) |
| Amortization      of loan discount and deferred financing:                                                                                                                                                                                                                                                                                                         |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Related party (Note      5)                                                                                        |   |                    | (204    | )      |                   |   | (95 | ) |   |   | (512 | ) |   |   | (242 | ) |
| Other (Notes 4 and      5)                                                                                         |   |                    | (23     | )      |                   |   | (323 | ) |   |   | (131 | ) |   |   | (566 | ) |
|                                                                                                                                                                                                                                                                                                                                                               |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Minority      interest                                                               |   |                    | − |   |                   |   | 2 |   |   |   | − |   |   |   | 6 |   |
| Net      loss                                                                                                      |   |                    | (755    | )      |                   |   | (1,105 | ) |   |   | (2,692 | ) |   |   | (2,755 | ) |
| Accretion      of beneficial conversion feature, Preferred shares (Note    7):                                                                                                                                                                                                                                                                                     |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
|       Related      party                                                             |   |                    | − |   |                   |   | − |   |   |   | (273 | ) |   |   | − |   |
| Other                                                                                                                                                                                                                                                                                                       |   |                    | − |   |                   |   | − |   |   |   | (98 | ) |   |   | − |   |
| Preferred      stock dividends:                                                                                                                                                                                                                                                                                                                                    |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Related      party                                                                                                 |   |                    | (16     | )      |                   |   | − |   |   |   | (20 | ) |   |   | − |   |
| Other                                                                                                                                                                                                                                                                                                       |   |                    | (5      | )      |                   |   | − |   |   |   | (7 | ) |   |   | − |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss attributable to common      stockholders                                                                                                                                                                                                                                                                                                                  |   | $                       | (776    | )      |                   | $      | (1,105 | ) |   | $ | (3,090 | ) |   | $ | (2,755 | ) |
| Basic      and diluted loss per common share                                                                                                                                                                                                                                                                                                                       |   | $                       | (0.01   | )      |                   | $      | (0.01 | ) |   | $ | (0.02 | ) |   | $ | (0.03 | ) |
| Weighted      average common shares outstanding, basic and diluted                                                                                                                                                                                                                                                                                                 |   |                    | 129,057 |   |                   |   | 111,530 |   |   |   | 129,057 |   |   |   | 108,891 |   |

----

|                                                                                    |   | PreferredSharesOutstanding |         |   |  PreferredSharesAmount |   |         |  CommonSharesOutstanding |   |   |   CommonStock |   |   |  AdditionalPaid-InCapital |   |   |   AccumulatedDeficit |   |         | AccumulatedOtherComprehensiveLoss |   |   |    Total |    |
|-----------------------------------------------------------------------------------------|--------|----------------------------|--------------|--------|-----------------------------|--------|--------------|-------------------------------|--------|--------|-------------------------|--------|--------|--------------------------------|--------|--------|--------------------------------|--------|--------------|-----------------------------------|--------|--------|-------------------------|---------|
|                                                                                    |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |         |                              |   |   |                    |    |
| Balances      as of December 31, 2007                                                   |   |                       | −      |   |                        | $      | −      |                          |   |   | 129,057                 |   |   | $                              | 1,291  |   |                           | $      | 93,785       |                              |   | $      | (91,260                 | )       |   | $ | (35 | ) |   | $ | 3,781 |   |
| Stock      based employee compensation                                                  |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   | 14           |                              |   |   |                    |    |   |   |   |   |   |   | 14 |   |
|                                                                                    |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |         |                              |   |   |                    |    |   |   |   |   |   |   |   |   |
| Comprehensive      loss:                                                                |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |         |                              |   |   |                    |    |   |   |   |   |   |   |   |   |
| Net loss                                                                                |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |         |                              |   |   | (850                    | )       |   |   |   |   |   |   | (850 | ) |
| Foreign currency      translationadjustment                                             |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |         |                              |   |   |                    |    |   |   | (2 | ) |   |   | (2 | ) |
| Total      comprehensive loss                                                           |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |         |                              |   |   |                    |    |   |   |   |   |   |   | (852 | ) |
| Balance      as of March 31, 2008                                                       |   |                       | −      |   |                        |   | −      |                          |   |   | 129,057                 |   |   |                           | 1,291  |   |                           |   | 93,799       |                              |   |   | (92,110                 | )       |   |   | (37 | ) |   |   | 2,943 |   |
| Stock      based employee compensation                                                  |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   | 26           |                              |   |   |                    |    |   |   |   |   |   |   | 26 |   |
| Fair      value of warrants issued  in connection with Long-term      debt    |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |   1,231 |                              |   |   |                    |    |   |   |   |   |   |   |   1,231 |   |
| Conversion      of Short-term notes into Preferred Shares, net of expenses of      $127 |   |                       |   1,040 |   |                        |   |   1,040 |                          |   |   |                    |   |   |                           |   |   |                           |   | (127         | )                                 |   |   |                    |    |   |   |   |   |   |   |   913 |   |
| Beneficial      Conversion Feature associated with the Preferred Shares                 |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |   371   |                              |   |   |                    |    |   |   |   |   |   |   |   371 |   |
|  Accretion      of beneficial conversion  feature      on preferred stock     |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   | (371         |  )                           |   |   |                    |    |   |   |   |   |   |   | (371 | )  |
| Preferred      share dividends                                                          |   |                       |         |   |                        |   | 6            |                          |   |   |                    |   |   |                           |   |   |                           |   | (6           | )                                 |   |   | (6                      |  ) |   |   |   |   |   |   | (6 | ) |
| Comprehensive      loss:                                                                |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |         |                              |   |   |                    |    |   |   |   |   |   |   |   |   |
| Net loss                                                                                |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |         |                              |   |   | (1,087                  | )       |   |   |   |   |   |   | (1,087 | ) |
| Foreign currency translation      adjustment                                            |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |         |                              |   |   |                    |    |   |   | 15 |   |   |   | 15 |   |
| Total      comprehensive loss                                                           |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |         |                              |   |   |                    |    |   |   |   |   |   |   | (1,072 | ) |
| Balance      as of June 30, 2008                                                        |   |                       | 1,040        |   |                        | $      | 1,046        |                          |   |   | 129,057                 |   |   | $                              | 1,291  |   |                           | $      | 94,923       |                              |   | $      | (93,203                 | )       |   | $ | (22 | ) |   | $ | 4,035 |   |
| Stock      based employee compensation                                                  |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   | 89           |                              |   |   |                    |    |   |   |   |   |   |   | 89 |   |
| Preferred      share dividends                                                          |   |                       |         |   |                        |   | 15      |                          |   |   |                    |   |   |                           |   |   |                           |   | 6            |                              |   |   | (21                     | )       |   |   |   |   |   |   | - |   |
| Comprehensive      loss:                                                                |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |         |                              |   |   |                    |    |   |   |   |   |   |   |   |   |
| Net loss                                                                                |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |         |                              |   |   | (755                    | )       |   |   |   |   |   |   | (755 | ) |
| Foreign currency translation      adjustment                                            |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |         |                              |   |   |                    |    |   |   | 1 |   |   |   | 1 |   |
| Total      comprehensive loss                                                           |   |                       |         |   |                        |   |         |                          |   |   |                    |   |   |                           |   |   |                           |   |         |                              |   |   |                    |    |   |   |   |   |   |   | (754 | ) |
| Balance      as of September 30, 2008                                                   |   |                       | 1,040        |   |                        | $      | 1,061        |                          |   |   | 129,057                 |   |   | $                              | 1,291  |   |                           | $      | 95,018       |                              |   | $      | (93,979                 | )       |   | $ | (21 | ) |   |   | 3,370 |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | Nine      Months EndedSeptember      30, |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 2008                                     |   |   | 2007 |   |
| Cash      flows from operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                     |   |   |   |   |
| Net      loss                                                                                                                                                                                          |   | $                                        | (2,692 | ) |   | $ | (2,755 | ) |
| Adjustments to reconcile net loss      to net cash      used      for operating      activities:                                                                         |   |                                     |   |   |   |   |   |   |
| Depreciation and      amortization                                                                                                                                                                                              |   |                                     | 673    |   |   |   | 588 |   |
| Amortization of discount on      convertible notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                     | -      |   |   |   | 498 |   |
| Amortization of discount and      deferred financing costsrelated party      debt                                                                                                                                               |   |                                     | 512    |   |   |   | 242 |   |
| Amortization of discount and      deferred financing costson other      debt                                                                                                                                                    |   |                                     | 131    |   |   |   | 68 |   |
| Stock based employee      compensation                                                                                                                                                                                          |   |                                     | 128    |   |   |   | 107 |   |
| Minority      interest                                                                                                                                                                                                          |   |                                     | -      |   |   |   | (6 | ) |
| Changes in operating assets and      liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                     |   |   |   |   |   |   |
|    Accounts      receivable,      net                                                                                                                                                                            |   |                                     | (129   | ) |   |   | 83 |   |
|    Prepaid      expenses and other current assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                     | (6     | ) |   |   | (3 | ) |
|    Accounts      payable                                                                                                                                                                                         |   |                                     | 29     |   |   |   | 47 |   |
|    Accrued      compensation                                                                                                                                                                                     |   |                                     | (26    | ) |   |   | 90 |   |
|    Other accrued      liabilities                                                                                                                                                                                |   |                                     | (1     | ) |   |   | 154 |   |
|    Deferred      revenue                                                                                                                                                                                         |   |                                     | (165   | ) |   |   | 301 |   |
| Net cash used for      operating  activities                                                                                                                                                                          |   |                                     | (1,546 | ) |   |   | (586 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                     |   |   |   |   |   |   |
| Cash      flows from investing activities:Acquisition of property and      equipment                                                                                                                   |   |                                     | (14    | ) |   |   | (4 | ) |
| Capitalized software development      costs                                                                                                                                                            |   |                                     | (659   | ) |   |   | (611 | ) |
| Net cash used for investing      activities                                                                                                                                                                                     |   |                                     | (673   | ) |   |   | (615 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                     |   |   |   |   |   |   |
| Cash      flows from financing activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                     |   |   |   |   |   |   |
| Deferred financing      costs                                                                                                                                                                          |   |                                     | (452   | ) |   |   | - |   |
| Proceeds from issuance of      short-term      debt                                                                                                                                                    |   |                                     | 125    |   |   |   | - |   |
| Proceeds from the sale of common      stock, net of expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                     | -      |   |   |   | 2,602 |   |
| Proceeds from issuance of      long-term      debt                                                                                                                                                     |   |                                     | 3,000  |   |   |   | 1,120 |   |
| Principal payments on short-term      debt                                                                                                                                                             |   |                                     | (250   | ) |   |   | - |   |
| Principle payments on long-term      debt                                                                                                                                                              |   |                                     | (37    | ) |   |   |   |   |
| Principal payments on capital      lease obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                     | -      |   |   |   | (5 | ) |
| Net cash provided by for      financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                     | 2,386  |   |   |   | 3,717 |   |
|  Effect      of exchange rate changes on      cash                                                                                                                  |   |                                     | (35    | ) |   |   | (3 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                     |   |   |   |   |   |   |
| Net      increase in cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                     | 132    |   |   |   | 2,513 |   |
| Cash      and cash equivalents at beginning of period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                     | 1,144  |   |   |   | 727 |   |
| Cash      and cash equivalents at end of      period                                                                                                                     |   | $                                        | 1,276  |   |   | $ | 3,240 |   |

----

|  Short-term notes and accrued      interest exchanged for convertible preferred stock                                                                                                                                                                                                                                                                                                                                                                         |   | $      |  1,040 |   |   | $      |  − |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|--------|---------------|--------|
| Short term notes and accrued      interest exchanged for long term notes                                                                                                                                                                                                                                                                                                                                                                                           |   | $      | 638         |   |   | $      | −       |   |
| Accretion of beneficial      conversion feature on convertible preferred shares                                                                                                                                                                                                                                                                                                                                                                                    |   | $      | 371         |   |   | $      | −       |   |
| Fair value of beneficial      conversion feature and warrants                                                                                                                                                                                                                                                                                                                                                                                                      |   | $      | −     |   |   | $      | 546           |   |
| Supplemental      disclosure of cash flow information                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |        |   |   |   |          |   |
| Interest      paid                                                                         |   | $      | 130         |   |   | $      | 82            |   |

----

| Item      1. | Interim financial      statements and basis ofpresentation |
|--------------|------------------------------------------------------------|

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

----

| Item      1. | Interim financial      statements and basis ofpresentation |
|--------------|------------------------------------------------------------|

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

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

----

| Item      1. | Interim financial      statements and basis of presentation  (continued) |
|--------------|--------------------------------------------------------------------------|

| 3. | Patents      (continued) |
|----|--------------------------|

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

----

| Item      1. | Interim financial      statements and basis of presentation  (continued) |
|--------------|--------------------------------------------------------------------------|

| 4. | Short-term debt      (continued) |
|----|----------------------------------|

| 5.   | Long-term      debt |
|----------------|---------------------|

----

| Item      1. | Interim financial      statements and basis of presentation  (continued) |
|--------------|--------------------------------------------------------------------------|

| 5. | Long-term debt      (continued) |
|----|---------------------------------|

| 6. | Net (loss) per      share |
|----|---------------------------|

| 7. | Equity |
|----|--------|

----

| Item      1. | Interim financial      statements and basis ofpresentation |
|--------------|------------------------------------------------------------|

| 7. | Equity |
|----|--------|

|                         |   | Three      and Nine Months EndedSeptember      30, 2008 |   | Three      and Nine Months EndedSeptember      30, 2007 |
|------------------------------|--------|---------------------------------------------------------|--------|---------------------------------------------------------|
| Risk      free interest rate |   | 3.32%      - 5.11%                                      |   | 3.65%      - 5.11%                                      |
| Expected      life (years)   |   | 3.21      –  6.88                            |   | 3.19      -7.00                                         |
| Expected      volatility     |   | 80.96%      – 104.57%                             |   | 51.68%      – 104.57%                             |
| Expected      dividends      |   | None                                                    |   | None                                                    |

|                                  |   | Three      Months Ended September      30, |    |   | Nine      months Ended September      30, |   |
|---------------------------------------|--------|--------------------------------------------|---------|--------|-------------------------------------------|--------|
|                                  |   | 2008                                       |    |   | 2007                                      |   |   | 2008 |   |   | 2007 |   |
|  Research      and development   |   | $                                          | 25      |   |                                      | $      | 11 |   |   | $ | 27 |   |   | $ | 17 |   |
| Sales      and marketing              |   |                                       | 7       |   |                                      |   | 17 |   |   |   | 27 |   |   |   | 54 |   |
| General      and administrative       |   |                                       | 57      |   |                                      |   | 3 |   |   |   | 59 |   |   |   | 11 |   |
| Director      options                 |   |                                       | − |   |                                      |   | 16 |   |   |   | 16 |   |   |   | 25 |   |
| Stock-based      compensation expense |   | $                                          | 89      |   |                                      | $      | 47 |   |   | $ | 129 |   |   | $ | 107 |   |

----

| Item      1. | Interim financial      statements and basis ofpresentation |
|--------------|------------------------------------------------------------|

| 7. | Equity |
|----|--------|

|                                                   |   | As      of September 30, |    |
|--------------------------------------------------------|--------|--------------------------|---------|
|                                                   |   | 2008                     |    |   | 2007 |   |
|     Options                        |   |   Shares(000)  |    |   | Weighted      Average Exercise Price |   |   | Weighted      average Remaining Contractual Term |   |   |  Aggregate      Intrinsic Value |   |   |   Shares(000) |   |   | Weighted      Average Exercise Price |   |   | Weighted      average Remaining Contractual Term |   |   |  Aggregate      Intrinsic Value |   |
| Outstanding      at January 1,                         |   |                     | 6,036   |   |   | $ | 0.59 |   |   |   |   |   |   |   |   |   | 5,893 |   |   | $ | 0.69 |   |   |   |   |   |   |   |
| Granted                                                |   |                     | 1,875   |   |   | $ | 0.15 |   |   |   |   |   |   |   |   |   | 695 |   |   | $ | 0.21 |   |   |   |   |   |   |   |
| Exercised                                              |   |                     | − |   |   |   |   |   |   |   |   |   |   |   |   |   | − |   |   |   |   |   |   |   |   |   |   |   |
| Forfeited      or expired                              |   |                     | (295    | ) |   | $ | 0.55 |   |   |   |   |   |   |   |   |   | (577 | ) |   | $ | 0.95 |   |   |   |   |   |   |   |
| Outstanding      at September 30                       |   |                     | 7,616   |   |   | $ | 0.48 |   |   |   | 4.2 |   |   | $ | − |   |   |   | 6,011 |   |   | $ | 0.60 |   |   |   | 4.8 |   |   | $ | − |   |
|  Vested      and expected to vest at September 30 |   |                     | 7,616   |   |   | $ |   0.48 |   |   |   | 4.2 |   |   | $ | − |   |   |   | 6,011 |   |   | $ |   0.60 |   |   |   | 4.8 |   |   | $ | − |   |
| Exercisable      at September 30                       |   |                     | 5,929   |   |   | $ | 0.57 |   |   |   | 4.0 |   |   | $ | − |   |   |   | 5,261 |   |   | $ | 0.65 |   |   |   | 4.6 |   |   | $ | − |   |

|                                            |                        |   | As      of September 30, 2008       |   |
|-------------------------------------------------|-----------------------------|--------|-------------------------------------|--------|
|                                            |                        |   | Options      Outstanding            |   |   | Options      Exercisable |   |
|    Range      of Exercise Prices |                        |   |   Number      Outstanding |   |   | Weighted      Average Remaining Contractual Life(in years) |   |   | Weighted      Average Exercise Price |   |   |   Number      Outstanding |   |   | Weighted      Average Exercise Price |   |
| $                                               | 0.14      – 0.50      |   |                                |   | 4,187 |   |   |   | 5.4 |   |   | $ | 0.25 |   |   |   | 2,500 |   |   | $ | 0.30 |   |
|                                            | 0.51      – 1.00 |   |                                |   | 3,341 |   |   |   | 3.6 |   |   |   | 0.73 |   |   |   | 3,341 |   |   |   | 0.73 |   |
|                                            | 1.01      – 2.00 |   |                                |   | 73 |   |   |   | 3.5 |   |   |   | 1.66 |   |   |   | 73 |   |   |   | 1.66 |   |
|                                            | 2.01      – 3.00 |   |                                |   | − |   |   |   | − |   |   |   | − |   |   |   | − |   |   |   | − |   |
|                                            | 3.01      – 7.50 |   |                                |   | 15 |   |   |   | 1.7 |   |   |   | 3.56 |   |   |   | 15 |   |   |   | 3.56 |   |
|                                            |                        |   |                                |   | 7,616 |   |   |   | 4.6 |   |   | $ | .48 |   |   |   | 5,929 |   |   | $ | 0.57 |   |

----

| Item      1. | Interim financial      statements and basis ofpresentation |
|--------------|------------------------------------------------------------|

| 7. | Equity |
|----|--------|

|                                            |                        |   | As      of September 30, 2007       |   |
|-------------------------------------------------|-----------------------------|--------|-------------------------------------|--------|
|                                            |                        |   | Options      Outstanding            |   |   | Options      Exercisable |   |
|    Range      of Exercise Prices |                        |   |   Number      Outstanding |   |   | Weighted      Average Remaining Contractual Life(in years) |   |   | Weighted      Average Exercise Price |   |   |   Number      Outstanding |   |   | Weighted      Average Exercise Price |   |
| $                                               | 0.14      – 0.50      |   |                                |   | 2,429 |   |   |   | 5.5 |   |   | $ | 0.32 |   |   |   | 1,702 |   |   | $ | 0.35 |   |
|                                            | 0.51      – 1.00 |   |                                |   | 3,341 |   |   |   | 4.6 |   |   |   | 0.73 |   |   |   | 3,318 |   |   |   | 0.73 |   |
|                                            | 1.01      – 2.00 |   |                                |   | 176 |   |   |   | 2.2 |   |   |   | 1.31 |   |   |   | 176 |   |   |   | 1.31 |   |
|                                            | 2.01      – 3.00 |   |                                |   | 50 |   |   |   | 0.1 |   |   |   | 3.00 |   |   |   | 50 |   |   |   | 3.00 |   |
|                                            | 3.01      – 7.50 |   |                                |   | 15 |   |   |   | 2.7 |   |   |   | 3.56 |   |   |   | 15 |   |   |   | 3.56 |   |
|                                            |                        |   |                                |   | 6,011 |   |   |   | 4.8 |   |   | $ | 0.63 |   |   |   | 5,261 |   |   | $ | 0.68 |   |

|   Nonvested      Shares    |   |  Shares |   |   | Weighted      AverageGrant-DateFair      Value |   |
|--------------------------------------|--------|--------------|--------|--------|------------------------------------------------|--------|
| Nonvested      at January 1, 2008    |   |         | 672    |   |                                           | $      | 0.32 |   |
| Granted                              |   |         | 1,875  |   |                                           |   | 0.12 |   |
| Forfeited                            |   |         | (117   | )      |                                           |   | 0.17 |   |
| Vested                               |   |         | (743   | )      |                                           |   | 0.33 |   |
| Nonvested      at September 30, 2008 |   |         | 1,687  |   |                                           | $      | 0.17 |   |

----

| Item      1. | Interim financial      statements and basis ofpresentation |
|--------------|------------------------------------------------------------|

| 7. | Equity      (continued) |
|----|-------------------------|

----

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

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

| ·   | The      Company’s inability to protect its trade secrets or other proprietary      rights, operate without infringing upon the proprietary rights of others      and prevent others from infringing on the proprietary rights of the      Company; and |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

----

----

----

----

----

|                                    |   | Payments      due by period |   |
|-----------------------------------------|--------|-----------------------------|--------|
| Contractual      obligations            |   | Total                       |   |   | 2008 |   |   | 2009 |   |   | 2010 |   |   | 2011 |   |   | 2012 |   |   | Thereafter |   |
| Long-term      debt related party (1)   |   |  $                     | 3,479  |   |   |  $ | – |   |   | $ |        – |   |   |  $ | 3,638 |   |   |  $ | – |   |   |  $ | – |   |   |  $ | – |   |
| Long-term      debt (2)                 |   |                        | 239    |   |   |   |   |   |   |   | 80 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating      lease commitments (3)    |   |                        | 858    |   |   |   | 66 |   |   |   | 272 |   |   |   | 280 |   |   |   | 240 |   |   |   | – |   |   |   | – |   |
| Total      contractual cash obligations |   | $                           | 4,576  |   |   | $ | 66 |   |   | $ | 352 |   |   | $ | 3,918 |   |   | $ | 240 |   |   | $ | – |   |   | $ | – |   |

| 1.   | Long-term      debt related party reported on the balance sheet is net of approximately      $991 in discounts representing the fair value of warrants issued to the      debt holders. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | Long-term      debt reported on the balance sheet is net of approximately $53 in      discounts representing the fair value of warrants issued to the debt      holders. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

|   |           Not applicable. |
|--------|-----------------------------------------------|

| ExhibitNumber |  Document                                                                                                                                                                                                                                                                                                          |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1           | By-laws      of the Company adopted on October 6, 1986, incorporated herein by      reference to Exhibit 3.5 to the Company's Registration Statement on      Form 10 (File No. 0-19301).                                                                                                            |
| 3.2           | Amended      and Restated Certificate of Incorporation of the Company dated May 10,      1995, as filed with the Delaware Secretary of State’s office on May 18,      1995,      incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly      Report on Form 10-Q filed August 14, 2008. |
| 3.3           | Certificate      of Amendment to the Company’s Amended and Restated Certificate of      Incorporation dated June 12, 1998, incorporated herein by reference to      Exhibit 10.24 to the Company’s 1998 Form 10-K, filed April 6,      1999 (File No. 0-19301).                              |
| 3.4           | Certificate      of Amendment to the Company’s Amended and Restated Certificate of      Incorporation dated January 24, 2001, incorporated herein by      reference to Exhibit 3.5 to the Company’s Registration Statement on Form      S-1/A, filed December 20, 2007.                                |
| 3.5           | Certificate      of Elimination of the Company’s Certificate of Designation of the Series A      Preferred Stock dated August 17, 2001, incorporated herein by      reference to Exhibit 3.6 to the Company’s Registration Statement on Form      S-1/A, filed December 20, 2007.                      |
| 3.6           | Certificate      of Amendment to the Company’s Amended and Restated Certificate of      Incorporation dated August 17, 2007, incorporated herein by reference to      Exhibit 3.7 to the Company’s Registration Statement on Form S-1/A, filed      December 20, 2007.                                      |
| 3.7           | Certificate of      Amendment to the Company’s Amended and Restated Certificate of      Incorporation dated June 30, 2008, incorporated herein by reference      to Exhibit 3.7 to the Company’s Quarterly Report on Form 10-Q filed August      14, 2008.                                                  |
| 4.19          | Form of Common Stock      Purchase Warrant issued by the Company, incorporated herein by      reference to Exhibit 4.19 to the Company’s Quarterly Report on Form 10-Q      filed August 14, 2008.                                                                                                                |
| 4.20          | Form of Additional      Common Stock Purchase Warrant, incorporated herein by reference to      Exhibit 4.20 to the Company’s Quarterly Report on Form 10-Q filed August      14, 2008.                                                                                                                           |
| 4.21          | Form of Secured      Promissory Note issued by the Company dated June 5, 2008,      incorporated herein by reference to Exhibit 4.21 to the Company’s      Quarterly Report on Form 10-Q filed August 14, 2008.                                                                                                   |
| 4.22          | Form of Additional      Secured Promissory Note, incorporated herein by reference to      Exhibit 4.22 to the Company’s Quarterly Report on Form 10-Q filed August      14, 2008.                                                                                                                                 |
| 4.23          | Certificate of      Designations dated June 4, 2008 with respect to Series A Cumulative      Convertible Preferred Stock, incorporated herein by reference to      Exhibit 4.23 to the Company’s Quarterly Report on Form 10-Q filed August      14, 2008.                                                        |
| 10.41         | Credit      Agreement dated June 5, 2008, between Communication Intelligence      Corporation and the Lenders Party Hereto and SG Phoenix as Collateral      Agent,      incorporated herein by reference to Exhibit 10.41 to the Company’s      Quarterly Report on Form 10-Q filed August 14, 2008.             |
| 10.42         | Pledge      and Securities Agreement dated June 5, 2008, among Communication      Intelligence Corporation and the parties identified there in,      incorporated herein by reference to Exhibit 10.42 to the Company’s      Quarterly Report on Form 10-Q filed August 14, 2008.                                 |
| 10.43         | Securities      Purchase Agreement dated June 5, 2008, among Communication Intelligence      Corporation and the parties identified there in,      incorporated herein by reference to Exhibit 10.43 to the Company’s      Quarterly Report on Form 10-Q filed August 14, 2008.                                   |

----

| ExhibitNumber     |  Document                                                                                                                                                                                                                                                                        |
|-------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.44             | Registration      Rights Agreement dated June 5, 2008, among Communication Intelligence      Corporation and the parties identified there in,      incorporated herein by reference to Exhibit 10.44 to the Company’s      Quarterly Report on Form 10-Q filed August 14, 2008. |
| *  31.1 | Certification      of Company’s Chief Executive Officer pursuant to Rule 13a-14(a) and Rule      15d-14(a) of the Securities Exchange Act of 1934, as    amended.                                                                                                               |
| *  31.2 | Certificate      of Company’s Chief Financial Officer pursuant to Rule 13a-14(a) and Rule      15d-14(a) of the Securities Exchange Act of 1934, as    amended.                                                                                                                 |
| *  32.1 | Certification      of Chief Executive Officer pursuant to 18 USC Section 1350, as adopted      pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                             |
| *  32.2 | Certification      of Chief Financial Officer pursuant to 18 USC Section 1350, as adopted      pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                             |

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

----

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

| October      28, 2008 |   | /s/      Francis V. Dane                                                                                |
|-----------------------|--------|---------------------------------------------------------------------------------------------------------|
| Date                  |   | Francis      V. Dane                                                                                    |
|                  |   | (Principal      Financial Officer and Officer Duly Authorized to Sign on Behalf of the      Registrant) |