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

                                   -----------

                                    FORM 10-K
                 X Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                   For the Fiscal Year Ended December 31, 2003

  ___ Transaction report pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 For the transition period from ___ to ____


                           Commission File No. 0-19301

                     Communication Intelligence Corporation
             (Exact name of registrant as specified in its charter)

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


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

           Issuers telephone number, including area code: 650-802-7888

 Securities registered under Section 12(b) of the Securities Exchange Act: None
           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.01 par value

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

Yes X   No
   ---    ----

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  into Part III of this Form 10-K or any  amendment to
this Form 10-K. X
               ----
     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in rule 12b-2 of the Securities Exchange Act of 1934). Yes      No X
                                                                  -----   ----

     The  aggregate  market  value of the voting  stock  (Common  Stock) held by
non-affiliates  of  the  registrant  as  of  June  30,  2003  was  approximately
$36,674,598  based on the closing sale price of $0.37 on such date,  as reported
by the Nasdaq  Over the  Counter  Market.  The number of shares of Common  Stock
outstanding as of the close of business on March 26, 2004 was 100,101,428.

     Documents  Incorporated by reference:  The registrant has incorporated into
Part III of Form 10K, by reference,  portions of its definitive  proxy statement
for its 2004 annual meeting.


<PAGE>


                     COMMUNICATION INTELLIGENCE CORPORATION

                           ANNUAL REPORT ON FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 2003

                                TABLE OF CONTENTS


                                                                            Page

 PART I...................................................................    3
 Item 1. Business.........................................................    3
 Item 2. Properties.......................................................   12
 Item 3. Legal Proceedings................................................   12
 Item 4. Submission of Matters to a Vote of Security Holders..............   12
 PART II..................................................................   12
 Item 5. Market For Registrant's Common Equity and
         Related Stockholder Matters......................................   12
 Item 6. Selected Financial Data..........................................   13
 Item 7. Management's Discussion and Analysis of Financial Condition
 and Results of Operations................................................   15
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk......   25
 Item 8. Financial Statements and Supplementary Data......................   25
 Item 9. Changes in and Disagreements with Accountants on Accounting
 and Financial Disclosure.................................................   25
 Item 9A. Controls and Procedures.........................................   26
 PART III.................................................................   26
 Item 10. Directors and Executive Officers of the Registrant..............   26
 Item 11. Executive Compensation..........................................   26
 Item 12. Security Ownership of Certain Beneficial Owners and Management..   26
 Item 13. Certain Relationships and Related Transactions..................   26
 Item 14. Principal Accounting Fees and Services..........................   26
 PART IV..................................................................   27
 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...27
-----------

CIC(R)and  its  logo,  Handwriter(R),   Jot(R),   InkTools(R)??,   Sign-it(R)??,
WordComplete(R)?, and? INKshrINK(R)and The Power To Sign Online(R)are registered
trademarks  of the  Company.  HRS(TM),  InkSnap(TM),  PenX(TM),  QuickNotes(TM),
RecoEcho(TM),?  Sign-On(TM)??  Speller(TM)and  iSign(TM)?are  trademarks  of the
Company.  Applications for registration of various trademarks are pending in the
United States,  Europe and Asia. The Company  intends to register its trademarks
generally in those  jurisdictions  where  significant  marketing of its products
will be undertaken in the foreseeable future.



                                      -2-
<PAGE>


                                     PART I
Item 1.  Business

     Unless  otherwise  stated all amounts in Parts I through Part IV are stated
in thousands ("000s").

General

     Communication  Intelligence  Corporation  (the  Company  or  "CIC")  is the
leading supplier of biometric signature  verification and natural input software
and a leading supplier of electronic  signature  solutions  focused on emerging,
high potential  applications  including paperless workflow,  handheld computers,
smartphones  and  eCommerce,   enabling  the  world  with  "The  Power  to  Sign
Online(R)".   CIC's   products  are  designed  to  increase  the  ease  of  use,
functionality,  and security of electronic devices and eBusiness processes.  CIC
sells directly to OEMs and Enterprises and has products  available through major
retail outlets such as, CompUSA, Staples, OfficeMax, and key integration/channel
partners or direct via our website.  Industry  leaders  such as Charles  Schwab,
Fujitsu, Handspring, IBM, Oracle, PalmSource,  Prudential,  Siebel Systems, Sony
Ericsson,  Symbol  and  TVA  have  licensed  the  company's  technology.  CIC is
headquartered  in Redwood Shores,  California and has a joint venture,  CICC, in
Nanjing,   China.   For  more   information,   please   visit  our   website  at
http://www.cic.com (the information on our website, however, is not part of this
annual report).

     Revenues for the year ended  December 31, 2003 decreased 7% to $3.0 million
as compared to $3.3 million for the prior year. Revenue was negatively  impacted
by the  continuing  weak economy and  uncertainty  of the  geopolitical  climate
throughout  2003  suppressing  corporate  confidence  and  delaying IT spending.
Despite difficult market conditions,  eSignature revenue for the last six months
of 2003 increased approximately 90% over 2002, from $407,000 to $768,000 and the
2003  eSignature  revenue for all of 2003  increased  to $1.8  million from $1.6
million or 11% over 2002  revenues.  This  increase in 2003  eSignature  revenue
virtually  offset the decline in natural  input  revenue that was  significantly
impacted by declining  handheld computer and smartphone  shipments and a decline
in retail related sales of our text entry products.

     A November 2003 report by IDC  indicates  that IT spending will increase 5%
globally in 2004,  pent up  corporate  IT demand  having  reached  unprecedented
levels,  and a November  2003 Goldman  Sacks survey  projects that the financial
services industry is the most likely to boost IT spending in 2004.

Segments

     The    Company's    financial    information    is    presented    in   two
segments--handwriting   recognition  software  and  systems   integration.   The
handwriting  recognition segment is comprised of three revenue categories:  OEM,
enterprise and online sales. All handwriting  recognition  software is developed
around the Company's core technology.  Systems  integration  represents the sale
and  installation  of third party  computer  equipment  and systems that use the
Company's  software  products.  All  systems  integration  revenue is  generated
through the Company's joint venture.

Core Technologies

     The Company's core  technologies are classified into two broad  categories:
"natural  input  technologies"  and  "transaction  and  communication   enabling
technologies." These technologies include multilingual  handwriting  recognition
systems  (Jot(R)  and  the  Handwriter(R)  Recognition  System,  referred  to as
HRS(TM)),  electronic signature,  handwritten biometric signature  verification,
cryptography,   electronic  ink  recording   tools   (InkTools(R),   Sign-it(R),
iSign(TM), SignatureWallet(TM) and Sign-on(TM)), and operating system extensions
that  enable  pen  input  (PenX(TM)).  Other  consumer  and  original  equipment
manufacturer ("OEM") products include electronic notetaking (QuickNotes(TM), and
InkSnap(TM)) and software that can predict text input (WordComplete(R)).

     Natural Input  Technologies.  CIC's natural input technologies are designed
to allow  users to  interact  with a  computer  or  handheld  device by using an
electronic pen or "stylus" as the primary input device or in conjunction  with a
keyboard.   CIC's  natural  input  offerings  include  multilingual  handwriting
recognition systems,  software keyboards,  predictive text entry, and electronic

                                      -3-
<PAGE>

ink  capture  technologies.  Many  small  handheld  devices  such as  electronic
organizers,  pagers and smart cellular  phones do not have a keyboard.  For such
devices,  handwriting  recognition and software  keyboards offer the most viable
solutions for performing  text entry and editing.  CIC's  predictive  text entry
technology  simplifies  data entry even further by reducing the number of actual
letters  required  to  be  entered.   The  Company's  ink  capture  technologies
facilitate  the  capture of  electronic  ink for  notetaking,  drawings or short
handwritten messages.

     Transaction  and  Communication   Enabling   Technologies.   The  Company's
transaction and  communication  enabling  technologies are designed to provide a
cost-effective means for securing electronic transactions, providing network and
device access control,  and enabling  workflow  automation of traditional  paper
form  processing.  CIC believes  that these  technologies  offer more  efficient
methods for conducting  electronic  transactions while providing more functional
user authentication and heightened data security.  The Company's transaction and
communication  enabling technologies have been fundamental in its development of
software   for   electronic   signatures,    handwritten   biometric   signature
verification, data security, and data compression.

Handwriting recognition segment products

Key Handwriting recognition segment products include the following:

 Handwriter,       Chinese Multi-lingual handwriting recognition software

 Inktools          A suite of application development tools
                   for electronic signatures, biometric signature
                   verification and cryptography

 iSign             Web based development tools for electronic signature
                   and biometric signature verification

 PenX              Operating systems extensions for the Windows operating
                   system that enables pen-based functionality and handwriting

 QuickNote
 and InkSnap       Electronic handwritten notetaking software

 Sign-it
 and Sign-it
 Server            Electronic signatures for the enterprise market

 Sign-On and
 SignatureWallet   Biometric Signature verification software for device
                   access and data protection

 WordComplete      Predictive text entry software

Products  and  upgrades  for the  Handwriting  recognition  products  that  were
introduced and first shipped in 2003 include the following:

iSign for Windows v2.1
InkTools for Windows v2.7
Jot for Palm OS v2.01 - v2.04
Sign-it for Acrobat v3.3 - v3.4
Japanese Sign-it for Acrobat v3.4
Sign-it for Word v4.1
Signature Wallet for Palm OS v2.0
WordComplete v3.0 - v3.03
Chinese Sign-it for Word v1.0
ChineseSign-it for Acrobat v1.0
Chinese Sign-it Server v1.0
Chinese OCX Tools w/ WPS & TIFF support

                                      -4-
<PAGE>

     Handwriting   recognition  software  analyzes  the  individual  strokes  of
characters   written   with  a  pen/stylus   and  converts   these  stokes  into
machine-readable  text  characters.  This  software  is  especially  useful  for
portable electronic devices that are too small to employ a keyboard, and for the
input of ideographic script characters such as those used in written Chinese and
Japanese. The Company currently has two recognition system offerings, Handwriter
and Jot. CIC's Handwriter  Recognition System ("HRS(TM)") recognizes handwritten
input on Windows and Windows CE based pen  computers  and desktop PCs for either
English  or  simplified  and  traditional  Chinese  characters.  HRS  accurately
recognizes  handwritten  characters with no recognizer training required, so the
user can write  naturally.  HRS is a  full-context  recognizer  that offers some
unique   features  such  as  automatic   spacing  between  words  and  automatic
capitalization  of the first  letter of new  sentences.  HRS is also an integral
component of the Company's PenX software and Inktools  Software  Development Kit
("SDK") that is currently  sold to consumers,  OEMs and vertical  market channel
partners.

     Jot recognizes  handwritten  input and is  specifically  designed for small
devices.  Unlike many  recognizers  that compete in the market for handheld data
input  solutions,  Jot  offers a user  interface  that  allows  for the input of
natural upper and lowercase letters, standard punctuation and European languages
without  requiring  the user to memorize  unique  characters  or  symbols.  This
recognizer offers rapid and accurate  recognition without requiring the consumer
to spend time  training the system.  Jot has been  licensed to such key OEMs as:
Microsoft, Sony Ericsson, Symbian, palmOne,  PalmSource,  National Semiconductor
and Vtech.  Jot has been ported to many  operating  systems,  including Palm OS,
Windows,  Windows CE, VT-OS,  EPOC,  QNX, Linux and OS/9, and is currently under
development for others.  The standard version of Jot, which is available through
OEM,  Enterprise and Online product offerings,  recognizes and supports input of
Roman-based Western European languages.

     InkTools is an electronic signature and handwritten signature  verification
software  developers'  kit that captures and analyzes the image,  speed,  stroke
sequence  and  acceleration  of a  person's  handwritten  electronic  signature.
InkTools  provides an effective and inexpensive  handwriting  security check for
immediate  authentication.  It  also  stores  certain  forensic  elements  of  a
signature for use in determining whether a person actually electronically signed
a document.  The  InkTools kit also  includes  software  libraries  for industry
standard  encryption  and  hashing to  protect  the  sensitive  nature of a user
signature.  Commercial  applications  for this type of software include document
approval,  verification  of the identity of users  participating  in  electronic
transactions  and  securing  log-in  access to  computer  systems  or  protected
networks.  This software  toolkit is used  internally  by CIC as the  underlying
technology in its Sign-On,  iSign,  SignatureWallet and Sign-it products as well
as the integrated solutions provided by the Systems Integration operation of the
joint  venture  in China.  It has been  licensed  to  numerous  key  development
partners and end-users, including Chase Manhattan Bank, EDS, BNX, Siebel Systems
and Nationwide (UK).

     Sign-On  and   SignatureWallet  are  product  offerings  that  utilize  the
Company's  handwritten  biometric signature  verification  technology to provide
access and data security on portable devices. This provides the additional level
of security needed for devices that are increasingly  being used in business and
generally contain sensitive data. Currently available for the Palm 3.x or later,
Windows CE and Windows XP Tablet PC Edition  operating  systems,  the product is
also being ported to other platforms.

     Sign-it  is  a  family  of  electronic  signature  products  for  recording
electronic signatures as they are being written as well as binding and verifying
electronic  signatures  within standard  consumer  applications.  These products
combine the strengths of  handwritten  signatures and  cryptography  to process,
transact  and create  electronic  documents  with the same legal  standing  as a
traditional wet signature on paper in accordance  with the Electronic  Signature
in National and Global Commerce act. Organizations wishing to process electronic
forms  requiring  varying levels of security can reduce the need for paper forms
by  adding  electronic  signature   technologies  to  their  workflow  solution.
Currently,  Sign-it is available for MS Word,  AutoCAD and Adobe(R)  Acrobat(R),
while support for additional application environments are in development.

     iSign  provides  functionality  similar to  InkTools  but was  specifically
designed for web based  architectures.  The current  product  supports  either a
Windows implementation with Internet Information Server and Internet Explorer or
Java  implementations  based on J2EE. The product was designed to meet the needs
of  higher-end  server  products and a broad base of client  systems,  which can
range from Windows devices to PDAs.

                                      -5-
<PAGE>



Enterprise Revenues

     The Company's  Enterprise  related  revenue for the last six months of 2003
increased  approximately  90% over 2002, from $407,000 to $768,000 and the total
2003 revenue  increased to $1.8  million  from $1.6  million,  or 11% over 2002,
reflecting the increasing  demand for CIC's  eSignature  solutions.  The Company
believes  that the  increasing  focus on corporate  accountability,  including a
growing  demand for  auditable  business  approval  processes,  is driving  many
enterprises to add eTransactions to their priority deployments in 2004.

Enterprises that have licensed the Company's technology include the following:

 Licensee              Product(s) licensed   Application of Products
 --------------------- -------------------   -----------------------------------
 Accelio                     Inktools        E-Signature for mobile forms
 Agricultural Bank of China  InkTools        E-signature for document automation
 Al-Faris                    Multiple        Reseller and integrator in the
                                             Middle East focused on e-signatures
 Allergan Sales              Sign-It         Clinical regulatory applications
 Ameridial                   Inktools        E-signature for internal
                                             use documents
 Assurant Group              Sign-It         Sales force automation, new
                                             account openings
 Audata, Limited             Multiple        Multiple applications focused
                                             on paperless environment and
                                             security
 Baptist Health              Inktools        E-signature for patient records
 BF Goodrich, Aircraft       Sign-It         E-signature for internal use;
                                             Sensor Division documents
 Canada Customs              Sign-It         E-signature for internal use
                                             documents
 Charles Schwab              Sign-It         New account openings
 China Ministry of Railways  InkTools        E-signature for document automation
 Decade Software             PenX & InkTool  Windows pen computer upgrades
 E-Com Asia Pacific Pty Ltd. Multiple        Regional reseller, multiple
                                             applications
 EDS                         InkTools        Information assurance for network
                                             and application security
 Federal Reserve Bank        Sign-On         Biometric mobile device; access
                                             security
 FMC Corp.                   Sign-It         E-signature for internal use
                                             documents
 First American Bank         Sign-It         E-signature for various financial
                                             and internal documents
 First Command Financial     Sign-It         E-signature for document automation
 IA Systems                  InkTools        E-signature for loan organization
 ILI Technologies, (Ltd.)    InkTools
                             & iSign         Various e-signature applications
                                             for the vertical markets in Israel
 Industrial & Commercial     InkTools        E-signature for document automation
 Bank of China

                                      -6-
<PAGE>



 Licensee                      Product(s) licensed  Application of Products
 ----------------------------- -------------------------------------------------
  Integrate Online              InkTools      Mortgage closing
  Nanjing Agricultural Bureau   InkTools      E-signature for document
                                              automation
  National Healthcare           Sign-It       E-signature for document
                                              automation
  Nationwide Building Society   InkTools      E-signature for document
                                              automation
  Naval Surface Warfare         InkTools      E-signature for material center
                                              receipts
  Novabase                      Sign-It       Systems integrator for various
                                              vertical market
                                              applications
  Old Republic National         Sign-It       Title processing applications
  Orange County, CA             Sign-It       Automate building permit process
  PHT Corporation               Sign-It       Clinical trial documents
  Physician WebLink             Sign-It       Automate patent enrollment
                                              / records / billing
  Proware                       InkTools      E-signature for judicial orders
  Prudential Insurance Co.      Sign-It EX    E-Signature for mobile forms
  PSC Communications            Multiple      Reseller and OEM partner in the
                                              UK focused on
                                              e-signature
  PureEdge                      Sign-It       E-signature for financial
                                              documents
  RecordsCenter.com             InkTools      Legal contracts and other
                                              significant documents
  St. Vincent's Hospital        Multiple      E-signature for document
                                              automation
  Siebel                        Multiple      Sample delivery of regulated drugs
  Siemens Medical Solutions     Multiple      E-signature for healthcare
  Symbol Technologies           Multiple      Reseller for all major products
  Tennessee Valley Authority    Multiple      E-signature for approval of
                                              internal documents
  Turner Construction/Oracle    iSign         E-signature for document
                                              automation
  Wisconsin Electric Power      Sign-On       Biometric mobile device; access
                                              company security

     A recent report by IDC indicates that IT spending will increase 5% globally
in 2004, pent up corporate IT demand having reached  unprecedented levels, and a
year end Goldman Sacks survey projects that the financial  services  industry is
the most likely to boost IT spending in 2004.

OEM Revenues

     OEM revenue  representing  the Company's  natural  input  products for 2003
declined 18% versus the prior year, to $218 from $266, reflecting the continuing
depressed  levels of  shipments  for both  handheld  computers  and touch screen
enabled smartphones.

     In early 2003,  PalmSource  announced  that it had  licensed  CIC's  Jot(R)
handwriting recognition software to replace Graffiti(R) as the standard and only
handwriting  software on all new Palm Powered(R) devices.  Under this agreement,

                                      -7-
<PAGE>

"Graffiti 2 powered by Jot" is embedded by PalmSource in current versions of its
Palm  OS(R)  platform.  The new  Graffiti 2  handwriting  software  supports  an
intuitive,  more natural form of input,  minimizing  learning time for new users
and easing the transition for experienced users. Due to the continuing depressed
levels of handheld computer shipments throughout 2003 and existing OEM inventory
levels,  the transition by OEMs to PalmSource's  latest operating  systems (with
Graffiti 2/Jot) was much slower than anticipated.  CIC first received  royalties
in the second quarter of 2003, representing less than 10% of total PalmSource OS
reported shipments with fourth quarter royalties reflecting approximately 70% of
total PalmSource OS reported  shipments.  It is projected that the transition to
Jot based  PalmSource  operating  systems by OEM's will exceed 90% in the second
quarter of 2004 thereby  providing  CIC  increased  royalties  from Palm Powered
devices being shipped. Industry estimates project that 2004 PalmSource shipments
will be up 14% over 2003.

Online/Retail Revenues

     Revenues  from the Company's  software sold directly  through it's website,
(www.cic.com)  and at the retail point of sale  totaled $300 in 2003,  15% below
the $351 for the prior year,  reflecting  the  continuing  suppressed  levels of
handheld computer  shipments in 2003 as well as the overall decrease in consumer
spending both online and at retail stores due to the continuing weak economy.

     Retail sales are generated  through an agreement with Elibrium  Inc.,  that
positions CIC's Palm OS based software  offerings  directly at the point of sale
at  retailers  including  Comp USA,  Staples,  and Office Max,  and from leading
online suppliers of software enhancements for Palm powered devices, Handango and
PalmGear.

China Handwriting Recognition Revenues

     CIC China ("CICC"),  90% owned by CIC, was established  over nine years ago
and is headquartered in Nanjing China. The Joint Venture is 10% owned by Jiangsu
Hongtu  Electronics  Group,  the  leading  DVD  supplier in the US with its APEX
brand, and a leading supplier of other high technology products and systems.

     Revenue  from CICC  totaled $1.0 million in 2003, a decline of 18% over the
$1.2 million in the prior year. Revenue from eSignature based software increased
33% in 2003 over 2002, from $239 to $319,  reflecting  China's increasing demand
for  office  automation,  their  robust  economy  and  CICC's  channel  strategy
implemented in the second quarter of 2003. This channel  strategy  leverages the
installed base of reference  accounts to attract major channel  partners who can
rapidly   establish   China-wide  market  coverage  and  penetration  for  CIC's
technology.  Some key CIC China  deployments  in 2003 included  Hudong-Zhonghua,
China's largest  shipbuilder,  SINOPEC,  China's second largest oil producer and
the Shanghai Municipal Government.

System Integration Revenues

     The growth in the  eSignature  based  revenue was offset by the decrease in
system integration  related revenue.  Over the prior two years, CICC has emerged
as the leading  supplier in Jiangsu  Province of a fast growing mobile  industry
application for regulated goods with an estimated 70% market share.  The decline
in system integration  revenue reflects the decision not to expand this business
to other provinces,  which would require significant  increases in base costs to
provide  turn-key  capabilities,  but  rather  to  focus  on the  emerging  high
potential  eSignature/  office  automation market in China,  leveraging  channel
partners capabilities.

Marketing

Handwriting Recognition Segment

     The Company's  products are marketed  through three sales  approaches:  OEM
sales,  enterprise  and  online/retail  sales.  OEM sales  efforts  are aimed at
license  revenues  derived  primarily from smart handheld device  manufacturers.
Enterprise sales efforts are directed at both software  providers and end-users.
Online/retail  sales represent  revenues  generated from the Company's  software
sold through its website and retail outlets.

                                      -8-
<PAGE>

     OEM Licensed Products. The Company currently licenses software products for
Windows(R)3.x,  Windows95,  Windows'98,  WindowsNT, WindowsCE, EPOC, QNX, VT-OS,
Palm and Linux.  The Company also ports its products to other  platforms to meet
the  specifications of licensees.  The Company's PenX,  Sign-it,  and Handwriter
Recognition  System are  licensed for portable  PCs  utilizing  the,  Windows98,
Windows NT,  Windows 2000,  Windows XP and WindowsCE  operating  systems and are
primarily used for field force  automation  and in pen-input PC peripherals  for
desktop use. Jot, QuickNotes,  Sign-On,  WordComplete and the Company's software
keyboard  are  licensed  primarily  for the new,  smaller  classes  of  personal
computers   that  utilize  the  Windows  CE   operating   systems  and  handheld
communicators  such  as  smartphones  and  PDAs  that  use the  Palm or  Symbian
operating system.

     Enterprise Solution Products.  The Company offers several products targeted
at the broad  enterprise  market.  The Company  believes  that this market could
benefit from  workflow  automation  solutions  using  electronic  signatures  or
handwriting  authentication  such as new account  openings,  regulated  document
submissions and device/network  security.  For these markets, the Company offers
several products,  including InkTools,  a high performance  software developer's
kit for  implementing  systems using  electronic ink and electronic  signatures,
which is available for almost all major operating systems: it also offers iSign,
which provides the same  functionality as InkTools but is specifically  designed
for  distributed  application  architectures  and Sign-it,  which is designed to
provide  this  functionality  within  the  framework  of the  most  common  word
processing applications and electronic form publishing environments.

     Online Product Offerings.  The Company's Online Sales department is charged
with  the sale of its  shrink-wrapped  software  applications  and  tools.  This
currently includes most of the Company's products and everyone from consumers to
software  developers and  corporations  are  customers.  These products are sold
through retail outlets and over the Internet,  on the Company's own website, and
by  other  Internet-based  electronic  resellers.  Consumer  versions  of  these
products are being sold for users of the Palm  connected  organizers and Windows
CE devices.  Much of the growth in Online sales since 1998 was  attributable  to
sales of these products to users of Palm OS devices.

Systems Integration Segment

     The Company's systems  integration  activity is confined to CIC China where
services  are provided to Chinese  enterprises  and  government  users and other
joint ventures in the Peoples Republic of China involving the re-sale of desktop
computers,  monitors,  servers and other computer related products together with
customized  software in mostly office  automation  and  materials  replenishment
planning applications. See China Revenue segment.

Copyrights, Patents and Trademarks

Handwriting Recognition Segment

     The Company  relies on a combination  of patents,  copyrights,  trademarks,
trade secrecy and contractual  provisions to protect its software  offerings and
technologies.   The  Company  has  a  policy  of  requiring  its  employees  and
contractors to respect proprietary  information through written agreements.  The
Company also has a policy of requiring  prospective  business  partners to enter
into  non-disclosure  agreements  before  disclosure  of any of its  proprietary
information.

     Over the years,  the Company has developed and patented  major  elements of
its  software  offerings  and  technologies.  In  addition,  in October 2000 the
Company  acquired,  from PenOp,  Inc. and its subsidiary,  a significant  patent
portfolio  relevant to the markets in which the Company sells its products.  The
Company's  material  patents  and the  years in which  they each  expire  are as
follows:

       Patent No.                           Expiration
 ------------------------------------ --------------------------------------
         4718102                              2005
         5049862                              2008
         5544255                              2013
         5647017                              2014
         5818955                              2015

                                      -9-
<PAGE>



        Patent No.                           Expiration
 ------------------------------------ --------------------------------------
          5933514                              2016
          6064751                              2017
          6091835                              2017
          6212295                              2018
          6381344                              2019
          6487310                              2019

     The Company believes that these patents provide a competitive  advantage in
the  electronic  signature  and  handwriting  recognition  markets.  The Company
believes  the  technology  covered  by the  patents  is unique  and allows it to
produce  superior  products.  The Company also  believes  these patents are very
broad in their  coverage.  The  technology  goes  beyond the simple  handwritten
signature and includes  measuring  electronically the manner in which the person
signs to ensure tamper  resistance  and security of the resultant  documents and
the  use  of  other  systems  for  identifying  an  individual  and  using  that
information  to close a transaction.  The Company  believes that the patents are
sufficiently  broad in coverage  that any  product  with  substantially  similar
functionality will infringe its patents. Moreover, because the majority of these
patents  do not  expire for  between 9 and 15 years  from the date  hereof,  the
Company believes that it has sufficient time to develop new related  technology,
which may be patentable,  and to establish CIC as market leader in these product
areas.  Accordingly,  the Company believes that for a significant period of time
the patents will deter competitors from introducing  competing  products without
creating substantially different technology or licensing its technology.

     The Company has an extensive list of registered and unregistered trademarks
and applications in the United States and other  countries.  The Company intends
to register its trademarks  generally in those  jurisdictions  where significant
marketing of its products will be undertaken in the foreseeable future.

Systems Integration Segment

     Systems  integration  does not rely to any material degree on the Company's
products  and,  therefore,  its patents  and their  ultimate  expiration  do not
significantly impact the systems integration segment.

Material Customers

Handwriting Recognition Segment

     Historically,  the Company's handwriting  recognition segment revenues have
been  derived  from a limited  number of  customers.  One  customer,  a national
insurance  company,  accounted  for 19% of total  segment  revenues for the year
ended December 31, 2003. One customer,  Nationwide  Building Society,  accounted
for 11% of total  segment  revenues for the year ended  December  31, 2002.  One
customer, The Prudential Insurance Company of America accounted for 16% of total
segment revenues for the year ended December 31, 2001.

Systems Integration Segment

     One customer,  Fujitsu Ltd.  accounted for 21% of total system  integration
revenue for the year ended December 31, 2003.  This same customer  accounted for
30% and 16% of total segment  revenues for the years ended December 31, 2002 and
2001, respectively.

Seasonality of Business

     The Company  believes  that  neither of its segments is subject to seasonal
fluctuations.

                                      -10-
<PAGE>

Backlog

Handwriting Recognition Segment

     Backlog  approximated  $170 at December  31,  2003,  representing  advanced
payments on service  maintenance  agreements  that are expected to be recognized
over the next twelve months. At December 31, 2002 and 2001, backlog approximated
$247  and  $88,   respectively,   representing   advanced  payments  on  service
maintenance agreements and non-recurring engineering projects.

Systems Integration Segment

     There was no backlog at December  31, 2003.  At December  31,  2002,  2001,
backlog was approximately $34 and $178, respectively.

Competition

Handwriting Recognition Segment

     The Company faces  competition at different  levels.  Certain  competitors,
e.g.,  PenPower Group, and Decuma AB, have developed or are developing  software
offerings,  which may compete directly with the Company's offerings. Most of the
Company's direct competitors,  e.g., Microsoft Corporation,  Silanis Technology,
Inc.,  and  Advanced  Recognition  Technology,  Inc.,  have  focused on only one
element of such offerings, such as handwriting recognition technology, signature
capture/verification  or pen-based  operating  environments  or other  pen-based
applications.  The Company believes that it has a competitive  advantage in some
cases due to its range of product offerings. There can be no assurance, however,
that competitors, including some with greater financial or other resources, will
not succeed in  developing  products or  technologies  that are more  effective,
easier to use or less expensive than the Company's products or technologies that
would render its products or technologies obsolete or non-competitive.

Systems Integration Segment

     The Company's  Joint Venture  competes  with other systems  integrators  of
similar size (less than 100 employees) in China for small to mid-size enterprise
opportunities.  The Company primarily  competes on price and quality and breadth
of services for these opportunities. The Company believes that it is competitive
in its pricing and has been  consistently  recognized  by its  customers for its
high quality of service.

Employees

     As of December 31, 2003, the Company  employed an aggregate of 48 full-time
employees.  The  Company's  handwriting  recognition  segment  consisted  of  40
employees,  18 of which are in the  United  States and 22 of which are in China.
The Company employed 8 full-time employees in its systems integration segment in
China. From time to time, the Company also utilizes  additional  personnel on an
as needed basis.  The Company believes it has good relations with its employees.
None  of  the  Company's  employees  are  a  party  to a  collective  bargaining
agreement.

Geographic Areas

     For the years ended December 31, 2003,  2002, and 2001, the Company's sales
in China as a percentage of total sales were 34%, 38% and 29%, respectively. For
the year ended December 31, 2003,  2002,  and 2001,  the Company's  sales in the
United   States  as  a  percentage  of  total  sales  were  66%,  62%  and  71%,
respectively.  Included in the U.S. sales are export sales.  For the years ended
December 31, 2003, 2002, and 2001, the Company's export sales as a percentage of
total revenues were approximately 14%, 12%, and 16%, respectively.

                                      -11-
<PAGE>


Forward Looking Statements

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

Item 2. Properties

     The  Company  currently  leases its  principal  facilities,  consisting  of
approximately  9,634 square feet, in Redwood Shores,  California,  pursuant to a
sub-lease  that expires in 2006. The Joint Venture  leases  approximately  1,500
square feet in Nanjing,  China. The Company believes that its current facilities
will be suitable to continue operations in the foreseeable future.

Item 3. Legal Proceedings

     There were no legal proceeding pending at December 31, 2003.

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

     None
                                     PART II

Item 5. Market For Registrant's Common Equity and Related Stockholder Matters

     The  Company's  common  stock is  listed  on the  NASDAQ  Over the  Counter
Bulletin Board ("OTC") under the trading symbol CICI.OB. Prior to March 14, 2003
it was listed on the Nasdaq SmallCap Market under the symbol CICI. The following
table  sets  forth  the high and low sale  prices  of the  common  stock for the
periods noted.

                                                             Sale Price
                                                              Per Share
     Year    Period                                         High      Low

     2002    First Quarter..............................   $ 1.18  $ 0.56
             Second Quarter.............................   $ 1.15  $ 0.63
             Third Quarter..............................   $ 0.66  $ 0.24
             Fourth Quarter.............................   $ 0.50  $ 0.21
     2003    First Quarter..............................   $ 0.53  $ 0.13
             Second Quarter.............................   $ 0.44  $ 0.15
             Third Quarter..............................   $ 0.65  $ 0.34
             Fourth Quarter.............................   $ 0.45  $ 0.30
     2004    First Quarter (through March 26, 2004).....   $ 1.10  $ 0.35

     As of March 26,  2004,  the closing  sale price of the Common  Stock on the
Nasdaq  OTC was $0.65 per share and  there  were  approximately  942  registered
holders of the Common Stock.

                                      -12-
<PAGE>



     To date,  the Company has not paid any  dividends  on its Common  Stock and
does not anticipate paying dividends in the foreseeable  future. The declaration
and payment of dividends on the Common Stock is at the  discretion  of the Board
of Directors  and will depend on, among other things,  the  Company's  operating
results, financial condition, capital requirements,  contractual restrictions or
such other factors as the Board of Directors may deem relevant.

     All  securities  sold  during 2003 by the  Company  were either  previously
reported on our form 10Qs filed with the Securities  and Exchange  Commission or
sold pursuant to registration statements filed under the Securities Act of 1933,
as amended.

     During the three months ended December 31, 2003, the Company granted 30,000
and 25,000 stock options,  respectively, to two employees with an exercise price
of $0.37 and $0.39 per  share,  respectively,  under the  Company's  1999  Stock
option  Plan.  During  the  years  ended  December  31,  2003,2002,   and  2001,
respectively, the Company granted the following options to purchase Common Stock
to employees at the prices per share.

                                                  Approximate Exercise
            Year             Number of Shares         Price Per Share
  --------------------- ----------------------- ------------------------
            2003                   858                    $0.32
            2002                 1,108                    $0.60
            2001                 1,367                    $1.21

     The  information  required by Item 201(d) of Regulation S-K is incorporated
by  reference  to  Note 6  ("Stockholders  Equity")  of  Notes  to  Consolidated
Financial Statements for the Year Ended December 31,2003, pageF-17.

Item 6. Selected Financial Data

     The selected consolidated financial data presented below as of December 31,
2003,  2002,  2001,  2000,  and 1999 and for each of the years in the  five-year
period  ended  December  31,  2003 are  derived  from the  audited  consolidated
financial statements of the Company. The consolidated financial statements as of
December 31, 2003 and 2002, and for each of the years in the  three-year  period
ended  December 31, 2003, are included in Item 8 of this Form 10-K. The selected
consolidated  financial  data should be read in  conjunction  with the Company's
audited  financial  statements  and the notes thereto and other portions of this
Form 10-K  including  "Business"  and  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations."

                                             Year Ended December 31,
                                ------------------------------------------------
                                 2003      2002      2001      2000      1999
                                ------------------------------------------------
                                    (In thousands, except per share amounts)
Statement of Operations Data:
Revenues......................  $3,034    $3,272    $5,947    $7,312    $ 6,518
Research and development
 expenses(1)..................   1,302     1,485     1,808     1,603      1,363
Sales and marketing expenses..     905     1,543     2,054     2,239      1,877
General and administrative
 expenses.....................   2,219     2,424     2,791     2,181      1,683
Loss from operations..........  (2,157)   (3,337)   (2,946)   (1,607)    (1,722)
Net loss available to common
 stockholders.................  (2,345)   (3,561)   (3,215)   (1,799)    (1,740)
Basic and diluted loss
 per share....................   (0.02)    (0.04)    (0.04)    (0.02)     (0.02)

                                      -13-
<PAGE>


                                              As of December 31,
                                 -----------------------------------------------
                                  2003       2002      2001     2000       1999
                                 -----------------------------------------------
                                               (In thousands)
Balance Sheet Data:
Cash, cash equivalents
 and restricted cash...........  $1,039    $  711    $ 2,588   $ 2,349   $ 2,374
Working capital(2).............  (2,895)      443      3,017     3,109     3,054
Total assets...................   7,215     7,168     10,072    11,302     4,963
Deferred revenue...............     165       165         88        61        35
Long-term obligations..........      13     3,000      3,000     1,427     1,338
Stockholders' equity (3).......   2,187     2,934      6,060     8,307     2,349
-----------

(1)  Excludes   software   development  costs  capitalized  in  accordance  with
     Statement of Financial Accounting Standards No. 86 of $20, and $20, for the
     years  ended  December  31,  2001,  and  2000,  respectively.  No  software
     development costs were capitalized in the years ended December 31, 2003 and
     2002.

(2)  Current liabilities used to calculate working capital at December 31, 2003,
     2002,  2001,  2000, and 1999 include  deferred  revenue of $165, $165, $88,
     $61, and $35, respectively.

(3)  The Company has never paid dividends to the holders of its common stock.

                                      -14-
<PAGE>


Item 7. Management's Discussion and Analysis of Financial Condition
        and Results of Operations

     Unless  otherwise  stated  herein,  all  figures in this MD& A section  are
stated in thousands ("000s").

Overview

     The Company was initially incorporated in Delaware in October 1986. In each
year since its  inception,  the Company has incurred  losses.  For the five-year
period ended December 31, 2003,  operating losses  aggregated  approximately $12
million  and at  December  31,  2003,  the  Company's  accumulated  deficit  was
approximately $82 million.

New Accounting Pronouncements

     See note 1, Notes to Financial Statements included under Part IV. Item 15.

Critical Accounting Policies

     The  preparation  of  financial   statements  and  related  disclosures  in
conformity with accounting principles generally accepted in the United States of
America  requires  management to make judgments,  assumptions and estimates that
affect the amounts reported in the Company's  consolidated  financial statements
and the accompanying  notes.  The amounts of assets and liabilities  reported in
its balance  sheets and the amounts of revenues and  expenses  reported for each
period presented are affected by these estimates and assumptions  which are used
for, but not limited to, revenue  recognition,  allowance for doubtful accounts,
intangible asset impairments,  inventory,  customer base,  software  development
costs research and  development  costs,  foreign  currency  translation  and net
operating loss  carryforwards.  Actual results may differ from these  estimates.
The  following  critical  accounting  policies  are  significantly  affected  by
judgments,  assumptions  and estimates  used by the Company's  management in the
preparation of the consolidated financial statements.

     Revenue is recognized when earned in accordance with applicable  accounting
standards,  including  AICPA  Statement of Position  ("SOP") No. 97-2,  Software
Revenue Recognition,  as amended, Staff Accounting Bulletins 101 ("SAB 101") and
the interpretive  guidance issued by the Securities and Exchange  Commission and
EITF  issue  00-21  of the  FASB's  Emerging  Issues  Task  Force.  The  Company
recognizes revenues from sales of software products upon shipment, provided that
persuasive  evidence of an  arrangement  exists,  collection is determined to be
probable,  all  nonrecurring  engineering  work  necessary to enable the Company
products to function  within the customer's  application  has been completed and
the Company's product has been delivered  according to  specifications.  Revenue
from  service  subscriptions  is  recognized  as costs are  incurred or over the
service  period.  Software  license  agreements may contain  multiple  elements,
including  upgrades  and  enhancements,  products  deliverable  on a when and if
available basis and post contract support.

     Revenue from software license agreements is recognized upon delivery of the
software, provided that persuasive evidence of an arrangement exists, collection
is determined to be probable,  all  nonrecurring  engineering  work necessary to
enable the Company's products to function within the customer's  application has
been  completed and the Company has delivered its product  according to contract
specifications.  Deferred  revenue is recorded for  upgrades,  enhancements  and
post-contract  support,  which is paid for in addition to license  fees,  and is
recognized  as costs are incurred or over the support  period.  Vendor  specific
objective  evidence  of the fair value for  multiple  element  software  license
agreements  is  determined  by the price  charged for the same element when sold
separately or the price determined by management  having the relevant  authority
when the element is not yet sold separately. The price established by management
for the  element  not yet sold  separately  will not  change  prior to  separate
introduction of that element into the marketplace.

     Revenue from system integration  activities,  which represents the sale and
installation of third party computer  equipment and limited  related  consulting
services,  is recognized  upon  installation  of the third party hardware and/or
software as projects are short term in nature,  provided that a contract exists,
collectibility  of the  receivable  is  reasonably  assured  and the  system  is
functioning   according  to  specifications.   Service   subscription   revenues

                                      -15-
<PAGE>

associated  with the system  integration  activities are recognized as costs are
incurred or over the service period which ever is longer.

     The allowance for doubtful accounts is based on the Company's assessment of
the   collectibility   of  specific  customer  accounts  and  an  assessment  of
international,  political and economic risk as well as the aging of the accounts
receivable.  If  there  is a  change  in  actual  defaults  from  the  Company's
historical experience,  the Company's estimates of recoverability of amounts due
it could be affected and the Company would adjust the allowance accordingly.

     The Company performs  intangible  asset impairment  analyses on a quarterly
basis in  accordance  with the guidance in  Statement  of  Financial  Accounting
Standard No. 142,  Goodwill  and Other  Intangible  Assets  ("SFAS No. 142") and
Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal
of Long Lived Assets ("SFAS No. 144").  The Company uses SFAS 144 in response to
changes in industry and market conditions that affects its patents,  the Company
then  determines  if an  impairment  of its assets  has  occurred.  The  Company
reassess the lives of its patents and tests for impairment quarterly in order to
determine  whether the book value of each patent  exceeds the fair value of each
patent.  Fair  value is  determined  by  estimating  future  cash flows from the
products  that are and will be  protected  by the  patents and  considering  the
following additional factors:

o    whether there are legal,  regulatory or contractual  provisions known to it
     that limit the useful life of each patent to less than the assigned  useful
     life;

o    whether the Company needs to incur material costs or make  modifications in
     order for it to continue to be able to realize the  protection  afforded by
     the patents;

o    whether any effects of obsolescence or significant  competitive pressure on
     the  Company's  current  or future  products  are  expected  to reduce  the
     anticipated cash flow from the products covered by the patents;

o    whether  demand  for  products  utilizing  the  patented   technology  will
     diminish, remain stable or increase; and

o    whether  the  current  markets  for  the  products  based  on the  patented
     technology will remain constant or will grow over the useful lives assigned
     to the patents.

     Customer  Base.  To  date,   the  Company's   revenues  have  been  derived
principally  from  end-users,  manufacturers,   retailers  and  distributors  of
computer  products in North  America,  Europe and the Pacific  Rim.  The Company
performs  periodic  credit  evaluations  of its  customers  and does not require
collateral.   The  Company  maintains  reserves  for  potential  credit  losses.
Historically,  such  losses  have been  insignificant  and  within  management's
expectations.

     Software Development Costs. Software development costs are accounted for in
accordance with Statement of Financial  Accounting Standards No. 86, "Accounting
for the Costs of Computer  Software to be Sold,  Leased or  Otherwise  Marketed"
("SFAS 86"). Under SFAS 86,  capitalization of software development costs begins
upon the establishment of technological  feasibility,  subject to net realizable
value  considerations.  The costs capitalized  include the coding and testing of
the product after the  technological  feasibility has been  established and ends
upon the release of the product.  The capitalized costs are amortized to cost of
sales on a straight-line basis over the estimated life of the product, generally
three  years.  As  of  December  31,  2003,  2002  and  2001,  such  costs  were
insignificant.

     Research and Development Costs.  Research and development costs are charged
to expense as incurred.

     Foreign Currency Translation. The Company considers the functional currency
of the Joint Venture to be the respective local currency and, accordingly, gains
and  losses  from  the  translation  of the  local  foreign  currency  financial
statements are included as a component of "accumulated other comprehensive loss"
in the  Company's  consolidated  balance  sheets.  Foreign  currency  assets and
liabilities are translated into U.S. dollars at exchange rates prevailing at the
end of the  period,  except  for  long-term  assets  and  liabilities  that  are


                                      -16-
<PAGE>

translated at historical exchange rates. Revenues and expenses are translated at
the  average  exchange  rates in effect  during  each  period,  except for those
expenses included in balance sheet accounts,  which are translated at historical
exchange rates. Net foreign currency  transaction  gains and losses are included
as  components  of  "interest  income and other  income  (expense),  net" in the
Company's  consolidated  statements of  operations.  Due to the stability of the
currency in China,  net foreign currency  transaction  gains and losses were not
material for the year ended December 31, 2003, 2002 and 2001, respectively.

     Net  Operating  Loss  Carryforwards.   Utilization  of  the  Company's  net
operating  losses may be subject to an annual  limitation  due to the  ownership
change  limitations  provided by the  Internal  Revenue Code of 1986 and similar
state  provisions.  As a result,  a portion of the Company's net operating  loss
carryforwards may not be available to offset future taxable income.  The Company
has provided a full valuation  allowance for deferred tax assets at December 31,
2003 of $27 million based upon the Company's history of losses.

Segments

     The Company  reports in two segments:  handwriting  recognition and systems
integration.  For purposes of Management  Discussion  and Analysis,  handwriting
recognition  includes  online/retail  revenues and  corporate  sales,  including
enterprise  and  original   equipment   manufacturers   ("OEM")  revenues.   All
handwriting   recognition  software  is  developed  around  the  Company's  core
technology.  Handwriting  recognition product revenues are generated through the
Company's  web site and a direct sales force to  individual  or  enterprise  end
users.  The  Company  also  licenses  a version of its  handwriting  recognition
software to OEM's. The handwriting  recognition  software is included as part of
the OEM's  product  offering.  From time to time,  the  Company is  required  to
develop an interface (port) for its software to run on a new customer's hardware
platform or within the customer's  software  operating  system.  The development
contract revenues are included in the handwriting  recognition  segment.  System
integration  represents  the  sale and  installation  of  third  party  computer
equipment and systems that utilize the Company's  products.  System  integration
sales are derived  through a direct  sales force that then  develops a system to
utilize the Company's  software  based on the customer's  requirements.  Systems
integration sales are accomplished solely through the Company's Joint Venture.

Results of Operations

     The following table provides  unaudited  financial  information for each of
the Company's two segments.

                                              Years Ended December 31,
                                         2003             2002            2001
                                     ------------     -----------   ------------

  Handwriting recognition
    Online/retail                    $     300         $     351      $     913
    Corporate                            1,703             1,667          2,958
    Nonrecurring Maintenance fees
    (net)--M10 (previously PenOp)            -                 -            352
    China                                  319               239            323
                                     ------------     ------------   -----------

Total Handwriting recognition        $   2,322         $   2,257      $   4,546
Systems integration
    China Total Systems integration  $     712         $   1,015      $   1,401
                                     ------------     ------------   -----------

Total revenues                       $   3,034         $   3,272      $   5,947
                                     ------------     ------------   -----------

Cost of Sales
    Handwriting recognition          $     141         $     423      $   1,149
    Systems integration                    624               734          1,091
                                    ------------     ------------   -----------
Total cost of sales                  $     765         $   1,157      $   2,240

Operating cost and expenses
   Research and development          $   1,302         $   1,485      $   1,808

                                      -17-
<PAGE>

                                               Years Ended December 31,
                                         2003             2002            2001
                                     -----------      ------------   -----------

   Sales and Marketing                     905             1,543          2,054
   General and administrative            2,219             2,424          2,791
                                     -----------      ------------   -----------

Total operating costs and expenses   $   4,426         $   5,452      $   6,653
                                     -----------      ------------   -----------

Interest and other income (expense)
     net, and minority interest      $    (188)        $    (224)     $    (269)
                                     -----------      ------------   -----------

Net loss                             $  (2,345)        $  (3,561)     $  (3,215)
                                     ===========      ============   ===========

Amortization of intangible assets
   Cost of sales                     $      14         $      14      $      12
   General and administrative              379               378            440
                                     -----------      ------------   -----------
Total amortization of intangible
assets (See note 1)                  $     393         $     392      $     452
                                     ===========      ============   ===========


Years Ended December 31, 2003 and December 31, 2002

Revenues

     Handwriting  recognition segment.  Handwriting recognition segment revenues
include   online/retail,   corporate  and  China  software  sales.   Handwriting
recognition  segment  revenues  increased  3%, or $65, to $2,322 for the twelve
months  ended  December 31, 2003 as compared to $2,257 in the  comparable  prior
year.

     Online/retail  revenues  declined  15%, or $51, for the twelve months ended
December 31, 2003,  compared to the prior year. In November of 2002,  PalmSource
replaced  Graffiti(R)  with  CIC's  Jot as the  standard  and  only  handwriting
software on all new Palm  PoweredTM  devices.  The Company  believed that future
online/retail revenues would increase due to the Palm license agreement, as Palm
operating system users were expected to upgrade the software on their devices to
the Company's Jot product. The Company did experience increases in online/retail
revenues  in the first and second  quarters  of 2003 that it  believed  were the
result of the Palm announcement.  The increases were short lived and the Company
believes that the increase in  online/retail  revenues were not sustained due to
economic  conditions and significantly  reduced consumer  spending.  The Company
does  not  anticipate  that  it will  experience  significant  increases  in its
Online/Retail revenues in the near future.

     Corporate  revenues  increased  2%, or $36,  over the twelve  months  ended
December 31, 2003,  compared to the prior year.  OEM revenues for natural  input
products  included in corporate  sales  decreased  18%, or $48,  over the twelve
months ended  December 31, 2003,  compared to the prior year.  This decrease was
primarily  due to  decreases  in the  amount of royalty  reported  by two of the
Company's licensees.  The Company believes OEM revenues will increase in 2004 as
Palm Source  shipments of the older operating system are replaced with their new
operating  system  incorporating  the  Company's  Jot  product.  Despite  Palm's
prediction  of declines in  projected  shipments  of its  products,  the Company
believes new agreements signed with Symbol Technologies,  Inc. and VeriFone will
offset any downturn in Palm unit shipments and lead to increased OEM revenues in
2004.  Enterprise sales included in corporate sales increased 6%, or $84, during
the twelve  months  ended  December 31,  2003,  compared to the prior year.  The
increase  in  enterprise  revenues  was due to an  increase  in  orders  in 2003
compared to 2002. The Company believes that enterprise revenues will increase in
2004 due to the  relationships  it has established with new channel partners and
value added resellers.

     Software sales in China increased 33%, or $80, over the twelve months ended
December  31,  2003,  compared  to the prior  year.  The  increase is due to the
continued sales efforts focused on establishing  China-wide  channel partners to
accelerate sales growth implemented in the second quarter of 2003.

     Systems  integration  Segment.  System integration segment revenue declined
30%, or $303, to $712 during the twelve months ended December 31, 2003, compared
to $1,015 in the prior year.  The Company  believes that the SARS related health


                                      -18-
<PAGE>

crises in China in the first half of 2003 negatively impacted system integration
revenues  and further  hampered  the  implementation  of its plans to expand its
system  integration  sales efforts into other  provinces in China.  The decrease
also  reflects the need for the Joint  Venture to expand sales  coverage  from a
traditional  focus on the local  Nanjing and Jiangsu  Province  markets to other
provinces within China. The potential return of SARS during the winter and early
spring months may again  negatively  impact system  integration  revenues due to
customer  contact  required  during the  selling and  installation  phase of the
system integration revenue cycle.

Cost of Sales.

     Handwriting  recognition  segment cost of sales includes royalty and import
tax payments,  third party hardware costs, direct mail costs, engineering direct
costs and amortization of intangible assets excluding patents. Cost of sales for
the  handwriting  recognition  segment  decreased  67%, or $282, to $141 for the
twelve months ended December 31, 2003 compared to $423 in the prior year period.

     Online/retail  cost of sales  decreases 93%, or $242, to $17 for the twelve
months ended  December 31, 2003  compared to $259 in the  comparable  prior year
period.  The decrease was due  primarily to the  elimination  of the direct mail
campaign  and  related  costs as a result of  reductions  in the number of names
available  and a poor sales  close  rate.  The  Company  does not  anticipate  a
material increase in costs associated with online/retail  sales and has no plans
to reinstate the direct mail program in the foreseeable future.

     Enterprise  and OEM cost of sales  decreased  69%,  or $66,  to $30 for the
twelve  months ended  December 31, 2003  compared to $96 in the prior year.  The
decrease was due primarily to the lower volume of third party hardware sales and
engineering  development costs associated with sales compared to the same period
last year.

     Handwriting  recognition  segment cost of sales for software  sold in China
increased  38%, or $26, to $94 for the twelve  months  ended  December  31, 2003
compared  to $68 in the  prior  year  period.  The  increase  is due to a higher
component of third party hardware  included with the sales during the first half
of 2003 compared to the first half of 2002. The Company  anticipates  that third
party hardware sales associated with the software sold in China will increase in
the future due to the method of selling software solutions in China.

     Systems  integration segment cost of sales decreased 15%, or $110, to $624,
for the twelve months ended December 31, 2003 compared to $734 in the prior year
period. The decrease in costs was due primarily to the lower sales volumes.  The
cost of sales as a  percentage  of sales was 88% in 2003  compared to 64% in the
prior year  period.  The Company  took a one time charge of $38 to cost of goods
sold for older inventory  associated with the System Integration  segment in the
fourth quarter of 2003. The Company  believes that systems  integration  cost of
sales will remain at the higher percentage of sales as the Joint Venture expands
its sales  territories into other provinces where competition will become a more
significant factor.

Operating expenses

     Research  and  Development  Expenses.   Research  and  Development  expense
decreased 12%, or $183, to $1,302 for the twelve months ended December 31, 2003,
as compared to $1,485 in the prior year  period.  Engineering  expenses  consist
primarily of salaries and related costs, outside engineering, maintenance items,
and allocated facilities expenses. Salaries and related expense declined 13%, or
$126,  to $828 for the year ended  December 31, 2003, as compared to $954 in the
prior  year  period,  due  primarily  to the  reduction  in  head  count  of two
engineers.  Outside  engineering cost and expenses  declined 68%, or $67, to $31
for the year ended December 31, 2003, compared to $98 in the prior year periods.
The decline is due  primarily to a reduction  in the use of outside  engineering
services compared to the prior year. Other engineering expenses decreased 6%, or
$28, to $442 for the twelve  months ended  December 31, 2003 as compared to $470
in the prior year period. The decrease is primarily due to lower maintenance and
depreciation  expense  compared  to the prior year  periods.  Engineering  costs
transferred to cost of sales decreased $38 due to less development contract work
performed in 2003 as compared to 2002. The Company  believes that the reductions
in  engineering  head count and expenses will not have an adverse  effect on its
product  engineering  and  development   efforts.   The  Company  draws  on  the
engineering  capabilities  of the Joint  Venture as  required  and,  maintains a
relationship with an outside engineering group familiar with its products. These
two  resources  can be engaged on an as needed basis to fill future  engineering
requirements.

                                      -19-
<PAGE>

     Sales and Marketing Expenses.  Sales and marketing expenses declined 41% or
$638, to $905 for the year ended December 31, 2003,  compared to $1,543, for the
comparable  period in the prior year.  Sales and marketing  expenses  consist of
salaries,  commissions and related expenses,  professional services, advertising
and promotion,  general office and allocated facilities  expenses.  Salaries and
related  expenses  declined  46%, or $288 for the year ended  December 31, 2003,
compared to the prior year period.  The decline in salaries and related  expense
is due  primarily  to the actions  taken in the prior  year,  in the face of the
declining  economic  environment  and reduced IT spending,  which  resulted in a
reduction  of three  sales  persons  during  the first  three  quarters  of 2003
compared to the prior year. The Company continues to roll out a channel strategy
for its  handwriting  recognition  segment  intended to  increase  the amount of
market  coverage  by  utilizing  the sales force of the  channel  partners.  The
Company  continues to sign new partner  agreements in both the US and China. The
Company believes these channel partners will produce increasing  revenues in the
near term.  Professional  services  declined 89%, or $65,  during the year ended
December 31, 2003,  compared to the prior year period.  The decline is primarily
due to $37 in outside  commission expense and $14 in salaries expense paid to an
outside sales consultant  during the prior year.  Advertising  expense decreased
100%, or $112, for the year ended December 31, 2003,  compared to the prior year
period. This decrease is due to the discontinuance of in-the-box advertising for
the Company's  natural input products during 2003, as compared to the prior year
period.  Commission  expense  decreased  24%, or $34, to $100 for the year ended
December 31, 2003,  compared to $134 in the comparable period in the prior year.
The  decrease  in  commission  expense is due  primarily  to an  increase in OEM
revenues which are  considered  house accounts and have no commission due on the
revenue compared to the prior year.  Other expenses  including  travel,  general
office and allocated  facilities  expenses  declined $140 in 2003 as compared to
2002 due to reduced head count.

     General and Administrative  Expenses.  General and administrative  expenses
decreased 8%, or $205, to $2,219, for the year ended December 31, 2003, compared
to $2,424 in the prior year period.  General and administrative expense consists
of salaries, professional fees, investor relations expenses, patent amortization
and office and allocated  facilities costs.  Salaries and wages increased 3%, or
$24,  for the year ended  December  31,  2003,  compared to the same period last
year, due primarily to salary  increases.  Professional  service  expenses which
include consulting,  legal and outside accounting fees,  decreased 21%, or $128,
to $468  compared to $596 in the  comparable  prior year.  The  decrease was due
primarily to a decreases in legal fees during the twelve  months ended  December
31, 2003 compared to the prior year. Other administrative expenses decreased 2%,
or $18,  during the year ended  December  31,  2003,  compared to the prior year
period. The decrease was due primarily to reduced spending.

     Interest Income and Other Income (Expense),  Net. Interest income and other
income (expense), net increased $18 to $1 income for the year ended December 31,
2003,  compared to the prior year period.  The increase in income was due to the
refund of value  added  tax from 2002  received  by the  Joint  Venture  and the
elimination  of credit card fees as a result of  outsourcing  the  Company's web
store at the end of the first quarter of 2003.

     Interest expense.  Interest expense remained constant at $205 for the years
ended  December  31, 2003 and 2002,  respectively.  Despite the  decrease in the
interest  rates during the current year, the increase of $750 in short term debt
and resultant interest expense offset the decline over the prior year.

Years Ended December 31, 2002 and December 31, 2001

Revenues

     Handwriting  recognition segment.  Handwriting recognition segment revenues
include   online/retail,   corporate  and  China  software  sales.   Handwriting
recognition  segment revenues  declined 51%, or $2,332, to $2,214 for the twelve
months ended  December 31, 2002, as compared to $4,546 in the  comparable  prior
year.

     Online/retail  revenues  declined  62% or $562 for the twelve  months ended
December  2002,  compared to the prior year.  This decrease was primarily due to
the  curtailment  of the direct mail  campaign at the end of the second  quarter


                                      -20-
<PAGE>

2002 due to the  reduced  availability  of new names and poor  sales  close rate
compared to the prior year. In November 2002,  PalmSource  replaced  Graffiti(R)
with CIC's Jot as the  standard  and only  handwriting  software on all new Palm
PoweredTM  devices.  The Company  believes  future  online/retail  revenues will
increase due to the Palm license  agreement as Palm  operating  system users are
expected to upgrade the software on their  devices to the Company's Jot product.
Due to the current economic conditions and poor consumer spending the timing and
amount of the anticipated  increase in  online/retail  revenues are difficult to
predict.

     Corporate revenues  decreased 44%, or $1,291,  over the twelve months ended
December 31, 2002 compared to the prior year. OEM revenues included in corporate
sales  decreased  68%, or $782,  over the twelve months ended December 31, 2002,
compared to the prior year. This decrease was primarily due to a decrease in the
amount of royalty  reported  by two of the  Company's  licensees  located in the
Pacific Rim and reduced  development  contract revenue recognized as compared to
the prior year.  The Company  believes OEM revenues will increase in 2003 due to
Palm Source's  replacement of Graffiti(R)  with the Company's Jot product as the
standard and only handwriting  software on all new Palm PoweredTM  devices.  The
poor economy and Palm's  prediction  of declines in  projected  shipments of its
products may limit or defer the Company's  anticipated increases in OEM revenues
to later in 2003. Enterprise sales included in corporate sales decreased 28%, or
$509,  during the twelve months ended  December 31, 2002,  compared to the prior
year.  The  Company  believes  the  decrease  was due to the reduced IT spending
resulting from the weak economy.

     The  Company  previously  engaged  in a  transaction  with PenOp to provide
nonrecurring  maintenance  services  from  pre-existing  PenOp  contracts in the
aggregate amount of $1.5 million,  of which $877 was recorded (net) in the three
months  ended  December 31, 2000.  During the twelve  months ended  December 31,
2001,  the  Company  recognized  $352 in  nonrecurring  maintenance  fees net of
expenses of $48.

     Software sales in China declined 39%, or $127, over the twelve months ended
December  31,  2002,  compared to the prior year.  The  decrease  resulted  from
competitive  pressures  from  local  Chinese  companies  with  similar  types of
software offerings. See Competition Handwriting Recognition Segment.

     Systems  integration  Segment.  System integration segment revenue declined
24%, or $343, during the twelve months ended December 31, 2002,  compared to the
prior  year.  The  decrease  was  primarily  due to a  decrease  in sales to two
customers  compared to the prior year and an increase in competition  from small
local Chinese companies. See Competition System Integration Segment.

Cost of Sales.

     Handwriting  recognition segment.  Handwriting  recognition segment cost of
sales include  online/retail,  corporate and China  software  sales costs.  Such
costs are made up of royalty  and  import tax  payments,  third  party  hardware
costs,  direct mail costs,  amortization of intangible  assets excluding patents
and  engineering  direct costs.  Cost of sales for the  handwriting  recognition
segment  decreased  63%, or $726,  during the twelve  months ended  December 31,
2002, compared to the prior year.

     Online/retail  cost of sales  decreases 68% or $546 during the current year
compared to the twelve months ended  December 31, 2001.  The decrease was due to
the  elimination  of direct  mailing  campaign and related  costs as a result of
reductions in the number of names available and a poor sales close rate.

     Enterprise and OEM cost of sales decreased 67%, or $193,  during the twelve
months ended December 31, 2002, compared to the prior year. The decrease was due
to the lower  sales  volumes of products  requiring  third  party  hardware  and
reduction in OEM technology  import tax and engineering  development  costs over
the twelve months ended December 31, 2002 as compared to the prior year.

     China handwriting  recognition segment cost of sales increased 24%, or $13,
during the twelve  months ended  December 31, 2002,  compared to the prior year.
The increase is due primarily to third party hardware costs  associated with the
sale of the software compared to the prior year.

                                      -21-
<PAGE>

Systems integration segment.

     China Systems  integration segment cost of sales declined 33%, or $357, for
the twelve months ended  December 31, 2002,  as compared to the prior year.  The
decrease  was  due  primarily  to  the  24%  decline  in  revenues  between  the
twelve-month comparable periods as discussed above.

Operating expenses

     Research  and  Development  Expenses.  Research  and  development  expenses
decreased  18%, or $323,  to $1,485 for the year ended  December  31,  2002,  as
compared to $1,808 in the prior year.  Engineering expenses consist primarily of
salaries  and  related  costs,  outside  engineering,   maintenance  items,  and
allocated facilities  expenses.  These expenses are offset by the capitalization
of software  development  costs and direct costs  associated  with  nonrecurring
engineering  contracts  charged to cost of sales. The decrease was due primarily
to the 71%, or $245,  reduction in outside engineering costs associated with the
assimilation of the PenOp intellectual  property into the Company's products. In
addition,  salaries  and related  expenses  decreased  $123,  or 11%, due to the
reduction  in  head  count  of a  total  of  three  engineers  compared  to  the
twelve-month period of the prior year. Software development costs capitalized in
2002  declined  100% or $20  compared  to 2001.  Direct  costs  associated  with
nonrecurring engineering contracts charged to cost of sales declined 64%, or $68
during the twelve  months  ended  December  31,  2002 as  compared to the twelve
months in the prior year. Travel,  maintenance and allocated facilities expenses
declined $43 in 2002 as compared to the twelve months in 2001.  These  decreases
were due to reduced activity and spending resulting from lower sales experienced
in 2002, compared to the twelve months in 2001.

     Sales and Marketing Expenses. Sales and marketing expenses declined 25%, or
$511,  to $1,543 for the twelve  months ended  December  31,  2002,  compared to
$2,054 for the twelve months in 2001.  Sales and marketing  expenses  consist of
salaries,  commissions and related expenses,  professional services, advertising
and promotion,  general office and allocated facilities  expenses.  The decrease
was  primarily  due to 57%,  or $245,  decrease  in  professional  services  and
advertising  expenses for the twelve months ended  December 31, 2002 compared to
the prior  year  period.  The  decrease  was due to  non-recurring  expense of a
marketing  study completed in the prior year and the reduction in resource guide
advertisements  included  in the  box  that  accompanies  third  party  handheld
devices.  Salaries,  commissions and related  expenses  declined 10%, or $85, in
2002 compared to the twelve months ended December 31, 2001. The decrease was due
to a reduction in personal of two sales persons in the third quarter of 2002, as
the Company  attempted  to trim  expenses  in  response to a weakening  economy.
Allocated  facilities and general office expenses decreased 23%, or $180, during
the twelve  months ended  December  31, 2002 as compared to the prior year.  The
decrease was primarily  due to the one time charge in 2001 in  recruiting  costs
and a decrease  in the  allocated  facilities  expenses  compared  to the twelve
months ended December 31, 2001.  The Company's  sales efforts have been directed
towards  customers that have  previously  purchased  products and currently have
pilot programs in process utilizing the Company's software.  These customers are
expected to purchase additional software products once they have completed their
studies and implement  their software  solutions.  The Company  believes that an
improving  economy and the current  number of customer  pilot  programs  nearing
completion  will provide  future  revenues  over a period of time  sufficient to
allow us to timely expand the Company's  sales efforts to generate the potential
new demand.

     General and Administrative  Expenses.  General and administrative  expenses
decreased 13%, or $368, to $2,424 for the twelve months ended December 31, 2002,
compared  to  $2,791 in the  prior  year.  General  and  administrative  expense
consists of salaries,  professional fees,  investor relations  expenses,  patent
amortization  and  office and  allocated  facilities  costs.  The  decrease  was
primarily due to lower professional  service fees resulting from the resignation
of the  former  Chairman  of the Board and the  elimination  of $159 in  related
salary and office fees and $51 in other  professional fees. In addition investor
relations expenses  decreased 47%, or $172,  compared to the twelve months ended
December 31, 2001. The decrease was due to nonrecouring expenses in 2001 related
to an aborted  financing and reductions in the costs associated with shareholder
communications.   Other  office  expenses  and  allocated   facilities  expenses
decreased 5%, or $53, over the twelve months ended December 31, 2002 compared to
the prior year.  These  reductions  were  offset by an 11%, or $67,  increase in
payroll and related cost associated with salary increases.

                                      -22-
<PAGE>

Interest Income and Other Income (Expense), Net

     Interest and other income  (expense)  net  decreased  16%, or $45, over the
twelve months ended  December 31, 2002 compared to the prior year.  The decrease
was  primarily  due to the decrease in the interest  rate paid on the  Company's
$3,000 debt over the year.

Liquidity and Capital Resources

     Cash and cash equivalents at December 31, 2003 totaled $1,039,  compared to
cash and cash  equivalents  of $711 at December  31,  2002.  This  increase  was
primarily  attributable to $2,353 provided by financing  activities.  These cash
inflows were offset by $1,995 of cash used in  operations,  and $30 of cash used
in  investing  activities.  The  effect of  exchange  rate  changes  on cash was
immaterial. The cash used in operations was primarily due to the loss of $1,843,
net  of a loss  on  the  disposal  of  fixed  assets,  provision  for  inventory
obsolescence  and  depreciation  and  amortization  of $502,  and an increase in
accounts  receivable of $265 and reductions to other accrued liabilities of $87.
These outflows were offset by reductions to  inventories,  prepaid  expenses and
other assets of $108, and increases in accounts payable and accrued compensation
of $92. The cash used in investing  activities  of $30 was to purchase  computer
equipment  and third party  software  for internal  use. The $2,353  provided by
financing  activities consisted primarily of $1,589 in proceeds from the sale of
common stock  through the equity line of credit,  an increase in long-term  debt
related  party of $24 which was used to replace the van by the Joint  Venture in
China,  and through the issuance of short-term debt of $750 with Cornell Capital
Partners Ltd.. These cash inflows were offset by $7 in payments on capital lease
obligations and $3 in payments of long-term debt, related party.

Financing.

     On December 19, 2003,  the Company,  in connection  with the equity line of
credit discussed  below,  borrowed $750 from Cornell Capital  Partners,  LP. The
proceeds of the loan were used for working capital purposes. The loan is secured
by shares of the Company's common stock held in escrow.  The promissory note was
due and payable in seven installments, commencing January 19, 2004 and ending on
March 1,  2004,  and  could be paid in cash or shares  of the  company's  common
stock.  The Company has the option to delay the  commencement of the installment
payments for an unlimited  number of 30 day periods for an amount equal to 2% of
the  principal  amount owed on or before the  beginning  of the  current  option
period.  The 2% fee may be made in cash or shares of common stock.  Any delay in
the commencement date will result in an equal delay in the due date of the note.
If the note is not paid in full when due, the  outstanding  principal owed shall
be due and payable in full  together  with  interest at the rate of 2% per annum
commencing from the due date.

     Subsequent to December 31, 2003,  the Company  exercised its right to delay
the  commencement  of the  installment  payments by paying the 2% fee  discussed
above.  Such fees  aggregated  $38 were paid in cash and  expensed.  The company
intends to repay the loan by issuing shares of its Common stock.

     In June 2003 the Company's joint venture borrowed from one of its directors
approximately  $24  denominated  in U. S. dollars to purchase a replacement  van
used in the Company's operations.  The note bears interest at the rate of 5% per
annum and is due in June 2006.

     In July 2002, the Company  negotiated a Line of Credit  Agreement  expiring
two years from the date of an  effective  registration  statement  with  Cornell
Capital Partners, LP ("Line of Credit") (see Note 1, to the Financial Statements
"Equity Line of Credit Agreement").  The Company may periodically issue and sell
shares of its common stock for a total purchase price of $15 million, subject to
the number of shares  available  for  issuance  and the  purchase  price of such
shares.  The maximum  amount of each advance is $1 million in any 30-day period.
The Company must pay to Cornell Capital  Partners,  L.P. an advance fee equal to
6.5% of the amount of each advance.  The Company filed a Registration  Statement
on Form S-1 covering  approximately  24 million  shares for use under the equity
line of credit. On February 13, 2003, the Form S-1 was declared  effective.  The
Company  intends to use the  proceeds  from the equity line to repay  short-term
debt and for working capital  purposes to the extent that future cash flows from
operations fall short of the Company's requirements.

     The Company is required to keep the registration  statement effective until
the earlier of when the investor has sold all of the shares  acquired  under the
Line of Credit or the  investor  is able to resell  the  shares  under  Rule 144
without regard to the volume  limitations  set forth in that rule. At all times,
the registration statement must cover, at a minimum, the number of shares issued
under the Line of Credit.  The  Company is  required  to fulfill  its  reporting
obligations under the Securities Exchange Act of 1934, as amended, and otherwise
take  whatever  steps are  necessary to enable the investor to resell the shares
acquired under the Line of Credit without restriction.  Finally, the Company has
agreed to  indemnify  the  investor for any damages the investor may suffer as a
result of  misstatements  or omissions,  other than  misstatements  or omissions
attributable to the investor. Since the inception of the credit line the Company
has borrowed $2,750 less a 6.5% financing fee from Cornell Capital Partners, LP.
As of  December  31,  2003,  $2,000  has  been  repaid  through  the sale of the
Company's common stock pursuant to the terms of the equity line of credit.

                                      -23-
<PAGE>

     On June 19, 2001, the Company consummated a three-year $3 million financing
(the "Loan") with a charitable remainder annuity trust of which the trustee is a
former director and former officer of the Company (the "Trust"). The proceeds of
the Loan were used to refinance $1,500 of indebtedness  outstanding to the Trust
pursuant  to a loan made by the Trust to the  Company in October  1999,  and for
working  capital  purposes.  The Loan bears  interest at the rate of 2% over the
prime rate  publicly  announced  by Citibank N. A. from time to time,  which was
6.00% per annum at December 31, 2003,  and is due June 18, 2004. The Loan may be
pre-paid by the Company in whole or in part at any time without penalty, subject
to the right of the Trust to convert  the  outstanding  principal  amount of the
Loan into shares of common stock.  Pursuant to the terms of the Loan,  the Trust
has the option, at any time prior to maturity,  to convert all or any portion of
the outstanding  principal amount of the Loan into shares of common stock of the
Company at a conversion price of $2.00 per share, subject to adjustment upon the
occurrence  of certain  events.  If, prior to maturity of the Loan,  the Company
consummates  one or more  financings  providing  $5  million  or  more in  gross
proceeds,  the Company is required to apply 50% of the  proceeds in excess of $5
million  to the then  outstanding  principal  amount  of the  Loan.  The Loan is
secured  by a  first  priority  security  interest  in  and  lien  on all of the
Company's  assets  as  now  owned  or  hereafter  acquired  by the  Company.  In
connection  with the  Loan,  the  Company  entered  into a  registration  rights
agreement  with the Trust which  obligates  the  Company to file a  registration
statement with the Securities and Exchange  Commission  covering the sale of the
shares of the Company's  common stock issuable upon conversion of the Loan if it
receives a demand by the holder of the Loan to do so, and to use its  reasonable
best efforts to cause such registration statement to become effective.

Contractual Obligations.

     The Company had the following material commitments as of December 31, 2003

                                             Payments due by periods
------------------------------    ----------------------------------------------
                                           Less than  One to    Four to   After
Contractual obligations             Total  One year   three      five     five
                                                      years      years    years
------------------------------    -------- ---------  --------  -------  -------

Short term debt (1)                $ 3,750   $ 3,750   $   -   $    -   $     -
Long term-debt                          21         8      13        -         -
Capital Lease Obligations               30         8      22        -         -
Operating lease commitments (2)      1,157       419     739        -         -
                                  --------   --------  ------- -------  --------

Total contractual cash obligations $ 4,958   $ 4,185   $ 774    $   -   $     -
                                  ========   ========  ======= ======== ========

1.   Three million of short-term debt may be pre-paid by the Company in whole or
     in part at any time  without  penalty,  subject to the right to convert the
     outstanding  principal  amount into shares of common  stock at a conversion
     price of $2.00 per share,  subject to  adjustment  upon the  occurrence  of
     certain events. The remaining $750 in short-term debt may be repaid in cash
     or shares of the Company's common stock.

2.   The operating  lease  commenced on November 1, 2002.  The cost of the lease
     will increase  approximately 3% per annum over the term of the lease, which
     expires on October 31, 2006.

                                      -24-
<PAGE>

     The  Company  leases  facilities  in the United  States and China  totaling
approximately  11,100 square feet.  The Company's  rental  expense for the years
ended December 31, 2003, 2002 and 2001 was  approximately  $450, $418, and $443,
respectively. Sublease income was approximately $35 and $104 for the years ended
December  31, 2001 and 2000,  respectively.  In addition to the base rent in the
United  States,  the  Company  pays a  percentage  of the  increase,  if any, in
operating cost incurred by the landlord in such year over the operating expenses
incurred by the  landlord  in the base year.  The  Company  believes  the leased
offices will be adequate for the Company's needs over the term of the lease.

     As of December 31, 2003,  the Company's  principal  source of liquidity was
its cash and cash  equivalents  of  $1,039.  In each year  since  the  Company's
inception the Company has incurred  losses.  Although there can be no assurance,
the Company  believes  that its current cash and  resources,  together  with the
expected revenue levels,  will provide  sufficient funds for planned  operations
for at least  the next  twelve  months.  However,  if the  Company  is unable to
generate  adequate cash flow from sales, or if expenditures  required  achieving
the Company's  plans are greater than  expected,  the Company may need to obtain
additional  funds or reduce  discretionary  spending.  There can be no assurance
that additional funds will be available when needed,  or if available will be on
favorable  terms or in the amounts the Company may required.  If adequate  funds
are not available when needed,  the Company may be required to delay, scale back
or  eliminate  some or all of its  marketing  and  development  efforts or other
operations,  which  could  have a  material  adverse  effect  on  the  Company's
business, results of operations and prospects.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     Interest Rate Risk. The Company has an investment portfolio of fixed income
securities that are classified as cash equivalents.  These securities,  like all
fixed  income  instruments,  are subject to interest  rate risk and will fall in
value if the market interest rates increase.  The Company attempts to limit this
exposure by investing  primarily in short-term  securities.  The Company did not
enter into any short-term  security  investments  during the twelve months ended
December 31, 2003.  Foreign  Currency Risk. The Company operates a subsidiary in
China and from time to time makes certain  capital  equipment or other purchases
denominated  in foreign  currencies.  As a result,  the Company's cash flows and
earnings  are exposed to  fluctuations  in interest  rates and foreign  currency
exchange  rates.  The  Company   attempts  to  limit  these  exposures   through
operational strategies and generally has not hedged currency exposures.

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

Item 8. Financial Statements and Supplementary Data

     The Company's audited consolidated financial statements for the years ended
December 31,  2003,  2002,  and 2001 begin on page F-1 of this Annual  Report on
Form 10-K, and is incorporated into this item by reference.

Item 9.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosure
            None

                                      -25-
<PAGE>



Item 9A. Controls and Procedures

     Under  the  supervision  and  with  the   participation  of  the  Company's
management,  including the Company's Chief Executive Officer and Chief Financial
Officer, the Company has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures pursuant to applicable rules under the
Securities Exchange Act of 1934, as amended,  within 90 days of the date of this
report.  Based on that  evaluation,  the Company's Chief  Executive  Officer and
Chief  Financial  Officer  have  concluded  that these  disclosure  controls and
procedures  are effective.  There were no  significant  changes in the Company's
internal controls or in other factors that could  significantly  affect internal
controls subsequent to the date of their evaluation.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

     Information  with respect to this Item is  incorporated by reference to the
Company's  definitive  proxy  statement  with  respect to its Annual  Meeting of
Stockholders  to be held on June 21, 2004. The definitive  proxy statement is to
be filed  with the  Commission  not  later  than 120 days  after  the end of the
physical year covered by this report.

Item 11. Executive Compensation

     Information  with respect to this Item is  incorporated by reference to the
Company's  definitive  proxy  statement  with  respect to its Annual  Meeting of
Stockholders to be held on June 21, 2004, and is incorporated  into this item by
reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     Information  with respect to this Item is  incorporated by reference to the
Company's  definitive  proxy  statement  with  respect to its Annual  Meeting of
Stockholders to be held on June 21, 2004, and is incorporated  into this item by
reference.

Item 13. Certain Relationships and Related Transactions

     Information  with respect to this Item is  incorporated by reference to the
Company's  definitive  proxy  statement  with  respect to its Annual  Meeting of
Stockholders to be held on June 21, 2004, and is incorporated  into this item by
reference.

Item 14. Principal Accounting Fees and Services

     Information  with respect to this Item is  incorporated by reference to the
Company's  definitive  proxy  statement  with  respect to its Annual  Meeting of
Stockholders to be held on June 21, 2004, and is incorporated  into this item by
reference.


                                      -26-
<PAGE>



                                     PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

                          Index to Financial Statements

                                                                           Page
   (a)(1) Financial Statements
          Report of Stonefield Josephson, Inc., Independent Auditors.....   F-1
          Consolidated Balance Sheets at December 31, 2003 and 2002......   F-2
          Consolidated Statements of Operations for the years
          ended December 31, 2003, 2002, and 2001........................   F-3
          Consolidated Statements of Changes in Stockholders' Equity
         (Deficit) for the years ended December 31, 2003, 2002 and 2001..   F-4
          Consolidated Statements of Cash Flows for the years ended
          December 31, 2003, 2002 and 2001...............................   F-5
          Notes to Consolidated Financial Statements.....................   F-6
   (a)(2) Financial Statement Schedule
          Schedule II Valuation and Qualifying Accounts and Reserves.....   S-1

(b) Reports on Form 8-K

     Current Report on Form 8-K,  incorporated  by reference,  dated October 30,
2003, with respect to:

1. The Company's financial results for the quarter ended September 30, 2003.


(c) Exhibits

   Exhibit                                               Document
   Number

          2.0 Second Amended Plan of Reorganization of the Company, incorporated
              herein by reference to the Company's Form 8-K filed October 24,
              1994.
          2.1 Orderly Liquidation Valuation, Exhibit F to the Second Amended
              Plan of Reorganization, incorporated herein by reference to the
              Company's Form 8-K filed October 19, 1994.
          2.2 Order Confirming Plan of Reorganization, incorporated herein by
              reference to the Company's Form 8-K filed November 14, 1994.
          3.1 Certificate of Incorporation of the Company, as amended,
              incorporated herein by reference to Exhibits 3.1, 3.2, 3.3 and 3.4
              to the Company's Registration Statement on Form 10 (File No.
              0-19301).
          3.2 Certificate of Amendment to the Company's Certificate of
              Incorporation (authorizing the reclassification of the Class A
              Common Stock and Class B Common Stock into one class of Common
              Stock) as filed with the Delaware Secretary of State's office on
              November 1, 1991, incorporated herein by reference to Exhibit 3 to
              Amendment 1 on Form 8 to the Company's Form 8-A (File No.
              0-19301).
          3.3 By-laws of the Company adopted on October 6, 1986, incorporated
              herein by reference to Exhibit 3.5 to the Company's Registration
              Statement on Form 10 (File No. 0-19301).
          4.1 1984 Stock Option Plan of the Company, as amended and restated as
              of October 15, 1987 and as amended by resolutions of the
              stockholders of the Company passed on August 15, 1989 and October
              8, 1990 to increase the aggregate shares covered thereby to
              1,000,000, incorporated herein by reference to Exhibit 4.4 to the
              Company's Registration Statement on Form 10 (File No. 0-19301).
          4.2 Form of Stock Option Grant under 1984 Stock Option Plan,
              incorporated herein by reference to Exhibit 4.5 to the Company's
              Registration Statement on Form 10 (File No. 0-19301).

                                      -27-
<PAGE>

          4.3 1991 Stock Option Plan of the Company, incorporated herein by
              reference to Exhibit 4.5 of the Company's Form S-1 dated December
              23, 1991 (Registration No. 33-43879).
          4.4 1991 Non-Discretionary Stock Option Plan, incorporated herein by
              reference to Exhibit 4.6 of the Company's Form S-1 dated December
              23, 1991 (Registration No. 33-43879).
          4.5 Form of Incentive Stock Option Grant under 1991 Stock Option Plan,
              incorporated herein by reference to Exhibit 4.7 of the Company's
              Form S-1 dated December 23, 1991 (Registration No. 33-43879).
          4.6 Form of Non-Qualified Stock Option Grant under 1991 Stock Option
              Plan, incorporated herein by reference to Exhibit 4.8 of the
              Company's Form S-1 dated December 23, 1991 (Registration No.
              33-43879).
          4.7 Form of Stock Option Grant under 1991 Non-Discretionary Stock
              Option Plan, incorporated herein by reference to Exhibit 4.9 of
              the Company's Form S-1 dated December 23, 1991 (Registration No.
              33-43879).
          4.8 1994 Stock Option Plan, incorporated herein by reference to
              Exhibit G of the Company's Second Amended Disclosure Statement
              filed on Form 8-K dated October 19, 1994 and approved by
              shareholders on November 14, 1994.
          4.9 Form of Warrant of the Company dated March 28, 1997 issued in
              connection with the Waiver by and among the Company and the
              signatories thereto, incorporated herein by reference to Exhibit
              4.9 of the Company's 1996 Form 10-K (File No. 0-19301).
         4.10 1999 Stock Option Plan, incorporated herein by reference to
              Exhibit A of the Company's Definitive Proxy Statement filed on May
              4, 1999 and approved by shareholders on June 7, 1999.
              .
        +10.1 Licensing and Development Agreement for Use and Marketing of
              Program Materials dated September 25, 1992 between the Company and
              International Business Machines Corporation, incorporated herein
              by reference to Exhibit 10.13 of the Company's 1992 Form 10-K
              (File No. 0-19301)
         10.2 Standby Stock Purchase Agreement between the Company and Philip
              Sassower dated October 3, 1994, incorporated herein by reference
              to Exhibit 10.13 of the Company's 1994 Form 10-K (File No.
              0-19301)
         10.3 Form of Subscription Agreement between the Company and the
              Purchasers, dated November 28, 1995, incorporated herein by
              reference to Exhibit 1 of the Company's Form 8-K dated November
              28, 1995.
         10.4 Form of Registration Rights Agreement between the Company and the
              Purchasers, dated November 28, 1995, incorporated herein by
              reference to Exhibit 1 of the Company's Form 8-K dated November
              28, 1995.
         10.5 Form of Warrant of the Company issued to Libra Investments, Inc.
              on November 28, 1995, incorporated herein by reference to Exhibit
              1 of the Company's Form 8-K dated November 28, 1995.
         10.6 Form of Registration Rights Agreement between the Company and
              Libra Investments, Inc., dated November 28, 1995, incorporated
              herein by reference to Exhibit 1 of the Company's Form 8-K dated
              November 28, 1995.
         10.7 Form of Subscription Agreement between the Company and various
              investors, dated June 13, 1996, incorporated herein by reference
              to Exhibit 1 of the Company's Form 8-K dated June 27, 1996.
         10.8 Form of Registration Rights Agreement between the Company and
              various investors, dated June 13, 1996, incorporated herein by
              reference to Exhibit 2 of the Company's Form 8-K dated June 27,
              1996.
         10.9 Form of Preferred Stock Investment Agreement, dated as of December
              31, 1996, between the Company and the investors listed on Schedule
              1 thereto, incorporated herein by reference to Exhibit 1 of the
              Company's Form 8-K dated December 31, 1996.
        10.10 Form of Registration Rights Agreement between the Company and the
              Investors Listed on Schedule 1 thereto, incorporated herein by
              reference to Exhibit 2 of the Company's Form 8-K dated December
              31, 1996.
        10.11 Form of Certificate of Designation of the Company with respect to
              the 5% Cumulative Convertible Preferred Stock, incorporated herein
              by reference to Exhibit 3 of the Company's Form 8-K dated December
              31, 1996.


                                      -28-
<PAGE>

        10.12 Waiver, dated March 26, 1997, effective December 31, 1996, by and
              among the Company and the signatories thereto, incorporated herein
              by reference to Exhibit 10.19 of the Company's 1996 Form 10-K
              (File No. 0-19301).
        10.13 Form of Subscription Agreement between the Company and each
              subscriber, dated as of November 25, 1997, incorporated herein by
              reference to Exhibit 10.1 of the Company's Form 8-K dated December
              3, 1997.
        10.14 Certificate of Designations of the Company with respect to the
              Series B 5% Cumulative Convertible Preferred Stock, incorporated
              herein by reference to Exhibit 10.2 of the Company's Form 8-K
              dated November 13, 1997.
        10.15 Form of Registration Rights Agreement, by and among the Company
              and the signatories thereto, dated as of November 25, 1997,
              incorporated herein by reference to Exhibit 10.3 to the Company's
              Form 8-K dated November 13, 1997.
        10.16 Amendment to the Company's Certificate of Designation with respect
              to the 5% Cumulative Convertible Preferred Stock dated June 12,
              1998, incorporated herein by reference to Exhibit 10.23 of the
              Company's 1998 Form 10-K (File No. 0-19301).
        10.17 Amendment to the Company's Amended and Restated Certificate of
              Incorporation dated June 12, 1998 incorporated herein by reference
              to Exhibit 10.24 of the Company's 1998 Form 10-K (File No.
              0-19301).
        10.18 Employment Agreement dated August 14, 1998 between James Dao and
              the Company incorporated herein by reference to Exhibit 10.25 of
              the Company's 1998 Form 10-K (File No. 0-19301).
      ++10.19 Software Development and License Agreement dated December 4, 1998
              between Ericsson Mobile Communications AB and the Company
              incorporated herein by reference to Exhibit 10.26 of the Company's
              1998 Form 10-K (File No. 0-19301).
        10.20 Loan and Warrant Agreement dated October 20, 1999 between the
              Company and the Philip S. Sassower 1996 Charitable Remainder
              Annuity Trust.
        10-21 Asset Purchase Agreement between the Company and PenOp Ltd and
              PenOp Inc. incorporated herein by reference to the Company's Form
              8-K dated October 6, 2000.
        10-22 Loan Agreement dated June 19, 2001 between the Company and the
              Philip S. Sassower 1996 Charitable Remainder Annuity Trust.
        10-23 Equity Line of Credit Agreement between the Company and Cornell
              Capital Partners, LP, incorporated by reference to the Company's
              Registration Statement on Form S1 dated February 13, 2003 (File
              No. 333-103157)
        14.00 Code of Ethics
        *21.1 Schedule of Subsidiaries.
        *23.1 Consent of Stonefield Josephson, Accountancy Corporation,
              Independent Accountants.
         31.1 Certification of Company's Chief Executive Officer pursuant
              to Section 302 of the
              Sarbanes-Oxley Act of 2002
         31.2 Certificate of Company's Chief Financial Officer pursuant to
              Section 302 of the Sarbanes-Oxley Act of 2002
         32.1 Certification of Chief Executive Officer pursuant to 18
              USC Section 1750, as adopted pursuant to
              Section 906 of the Sarbanes-Oxley Act of 2002
         32.2 Certification of Chief Financial Officer pursuant to 18
              USC Section 1750, as adopted pursuant to
              Section 906 of the Sarbanes-Oxley Act of 2002


+    Confidential  treatment  of  certain  portions  of this  exhibit  have been
     previously  granted pursuant to a request for  confidentiality  dated March
     29, 1993, filed pursuant to the Securities Exchange Act of 1934.

*    Filed herewith.

++   Confidential  treatment  of  certain  portions  of this  exhibit  have been
     requested  from the SEC  pursuant  to a request for  confidentiality  dated
     March 30, 1999, filed pursuant to the Securities and Exchange Act of 1934.


                                      -29-
<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned; thereunto duly authorized, in the City of Redwood
Shores, State of California, on March 28, 2003.

                        COMMUNICATION INTELLIGENCE CORP.


                                    By: /s/ Francis V. Dane
                            -----------------------------------------------
                                             Francis V. Dane
                           (Principal Financial Officer and Officer Duly
                            Authorized to Sign on Behalf of the Registrant)


                                      -30-
<PAGE>


                                   SIGNATURES


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the  following  persons on behalf of  Registrant
and in the capacities indicated on March 28, 2003.

   Signature                                       Title


/s/ Guido DiGregorio            Chairman, President and Chief Executive Officer
--------------------            (Principal Executive Officer)
    Guido DiGregorio

/s/ Francis V. Dane              Chief Legal Officer and Chief Financial Officer
--------------------             (Principal Financial and Accounting Officer)
Francis V. Dane

/s/ Michael Farese               Director
--------------------
    Michael Farese

/s/ Louis P.Panetta              Director
--------------------
    Louis P.Panetta

/s/ Chien Bor Sung               Director
--------------------
    Chien Bor Sung

/s/ David Welch                  Director
--------------------
    David Welch


                                      -31-
<PAGE>




                           Independent Auditors' Report

Board of Directors and Stockholders of
Communication Intelligence Corporation
Redwood Shores, California


We have audited the  accompanying  consolidated  balance sheets of Communication
Intelligence  Corporation and its subsidiary  ("the Company") as of December 31,
2003 and 2002 and the related consolidated statements of operations,  changes in
stockholders'  equity,  cash flows and financial  statement schedule for each of
the three years in the period ended  December  31, 2003,  as listed in the index
appearing under Item 15(a)(1) and (2) of this Annual Report on Form 10-K.  These
consolidated  financial  statements  and  financial  statement  schedule are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  consolidated  financial  statements  and  financial  statement
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis, evidence supporting the amounts and the disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Communication  Intelligence  Corporation  and its subsidiary as of December 31,
2003, and 2002 and the results of their operations and their cash flows for each
of the three years in the period ended  December 31, 2003,  in  conformity  with
accounting  principles generally accepted in the United States of America.  Also
in our opinion,  the related financial  statement  schedule,  when considered in
relation  to the  basic  consolidated  financial  statements  taken  as a whole,
presents fairly, in all material respects, the information set forth therein.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's significant recurring operating
losses,  working capital  deficit,  accumulated  deficit and negative cash flows
from operations raise substantial doubt about its ability to continue as a going
concern.  Management's  plans in regard to these  matters are also  described in
Note 1. The  consolidated  financial  statements do not include any  adjustments
that might result from the outcome of this uncertainty.



STONEFIELD JOSEPHSON INC.
Certified Public Accountants

Santa Monica, California
February 20, 2004


                                      F-1
<PAGE>


                     Communication Intelligence Corporation
                           Consolidated Balance Sheets
                    (In thousands, except par value amounts)


                                                            December 31,
                                               ---------------------------------
                                                       2003              2002
                                               ---------------------------------

Assets
Current assets:
  Cash and cash equivalents..................     $    1,039        $      711
  Accounts receivable, net of allowances
  of $256 and $243 at December 31, 2003
  and 2002, respectively.....................            742               477
  Inventories................................             47               113
  Prepaid expenses and other current assets..            177               244
                                               ---------------   ---------------

        Total current assets..................         2,005             1,545

Property and equipment, net...................           138               159
Patents.......................................         5,042             5,421
Other assets..................................            30                43
                                               ---------------   ---------------
        Total assets..........................    $    7,215        $    7,168
                                               ===============   ===============


Liabilities and Stockholders' Equity
Current liabilities:
  Short-term debt - related party.............     $    3,008        $        -
  Short-term debt - other.....................            750                 -
  Accounts payable............................            243               160
  Accrued compensation........................            259               250
  Other accrued liabilities...................            475               527
  Deferred revenue............................            165               165
                                               ---------------   ---------------
        Total current liabilities.............          4,900             1,102


Long-term debt - related party................             13             3,000

Minority interest.............................            115               132

Commitments

Stockholders' equity:
  Common stock, $.01 par value; 125,000
  shares authorized; 100,102 and 91,481
  shares issued and outstanding at December 31,
  2003 and  2002, respectively.................          1,001             915
  Additional paid-in capital..................          83,528          82,025
  Accumulated deficit..........................        (82,164)        (79,819)
  Accumulated other comprehensive loss.........           (178)           (187)
                                               ---------------   ---------------
Total stockholders' equity.....................          2,187           2,934
                                               ---------------   ---------------
   Total liabilities and stockholders' equity..     $    7,215      $    7,168
                                               ===============   ===============





                 The accompanying notes form an integral part of
                    these Consolidated Financial Statements


                                      F-2
<PAGE>


                     Communication Intelligence Corporation
                      Consolidated Statements of Operations
                    (In thousands, except per share amounts)

                                                Years ended December 31,
                                       -----------------------------------------
                                             2003           2002          2001
                                       -----------------------------------------

Revenues:
  Online.............................. $      300     $      351    $      913
  Corporate...........................      1,703          1,667         2,958
   Nonrecurring maintenance
   fees - M10 (Previously PenOp)......          -              -           352
  China...............................      1,031          1,254         1,724
                                         -----------   -----------  ------------
                                            3,034          3,272         5,947
                                         -----------   -----------  ------------
Operating costs and expenses:
   Cost of sales:
     Online...........................         17            259           805
     Corporate........................         30             96           290
     China............................        718            802         1,145
   Research and development...........      1,302          1,485         1,808
   Sales and marketing................        905          1,543         2,054
   General and administrative.........      2,219          2,424         2,791
                                         ----------    -----------   -----------
                                            5,191          6,609         8,893
                                         ----------    -----------   -----------

Loss from operations..................     (2,157)        (3,337)       (2,946)

Interest income and other
income (expense), net.................          1            (17)           16
Interest expense......................       (205)          (205)         (282)
Minority interest.....................         16             (2)           (3)
                                         -----------   -----------   -----------

Net loss.............................. $   (2,345)    $   (3,561)   $   (3,215)
                                         ===========   ===========   ===========


Basic and diluted loss per share...... $    (0.02)    $    (0.04)   $    (0.04)
                                         ===========   ===========   ===========

Weighted average shares...............     97,436         91,298        90,571
                                         ===========   ===========   ===========






                 The accompanying notes form an integral part of
                     these Consolidated Financial Statements


                                      F-3
<PAGE>


                     Communication Intelligence Corporation
           Consolidated Statements of Changes in Stockholders' Equity
                                 (In thousands)


                                                            Accumulated
                                        Additional             Other
                          Common  Common  Paid-In    Accum. Comprehensive
                          Shares  Stock   Capital   Deficit    Loss       Total
                          -----------------------------------------------------
Balances as of December
 31, 2000..................89,667 $ 897  $ 80,656  $(73,043)  $ (203)  $  8,307
                           -----------------------------------------------------
Exercise of options for
  1,176 shares of Common
  Stock                     1,176    11       892         -        -        903

Issuance of 68 shares of
  Common Stock in exchange
  for services                 68     1        57         -        -         58

Foreign currency translation
  adjustment                    -     -         -         7        -          7
Net loss                                             (3,215)             (3,215)
                           -----------------------------------------------------
Balances as of December 31,
  2001.....................90,911  $909  $ 81,605  $(76,258)  $ (196)  $  6,060
                           -----------------------------------------------------

Exercise of options for 570
shares of Common Stock.....   570  $  6  $    420  $          $        $    426
Foreign currency translation
adjustment.................                                        9          9

Net loss.....................                        (3,561)             (3,561)

                           -----------------------------------------------------
Balances as of
December 31, 2002          91,481  $ 915  $ 82,025 $(79,819)  $ (187)  $  2,934
  .......................
                           -----------------------------------------------------

Sale of Common 8,621 shares
  through Cornell Capital
  net of expenses.......... 8,621  $  86  $  1,503  $          $       $  1,589
Foreign currency translation
  adjustment.................                                       9         9

Net loss.....................                        (2,345)             (2,345)

                           -----------------------------------------------------
Balances as of December 31,
  2003....................100,102  $1,001 $  83,528 $(82,164)  $ (178) $  2,187
                           -----------------------------------------------------



                 The accompanying notes form an integral part of
                    these Consolidated Financial Statements

                                      F-4
<PAGE>


                     Communication Intelligence Corporation
                      Consolidated Statements of Cash Flows
                                 (In thousands)

                                                  Years ended December 31,
                                            ------------------------------------
                                               2003          2002          2001
                                            ------------------------------------

Cash flows from operating activities
Net loss.......................................$ (2,345)  $  (3,561)  $  (3,215)
Adjustments to reconcile net loss to
 net cash used in operating activities:
  Depreciation and amortization................     456         467         687
  Equity securities issued for services........       -          -           58
  Non-cash compensation........................       -          -           46
  Loss on disposal of property and equipment...       8          6            -
  Provision for inventory obsolescence.........      38          -            -
  Changes in operating assets and liabilities
    Accounts receivable, net...................    (265)       566          717
    Inventories................................      28         16           42
    Prepaid expenses and other current assets..      67       (105)         135
    Other assets...............................      13        156          (14)
    Accounts payable...........................      83        (46)        (469)
    Accrued compensation.......................       9         42          (55)
    Other accrued liabilities..................     (87)       295         (117)
    Deferred revenue...........................       -         77           26
                                                ---------- ---------- ----------


Net cash used in operating activities..........  (1,995)    (2,087)      (2,159)
                                                ---------- ----------- ---------


Cash flows from investing activities
Acquisition of property and equipment..........     (30)       (30)         (58)
                                                ---------- ----------- ---------
Net cash used in investing activities..........     (30)       (30)         (58)
                                                ---------- ----------- ---------
Cash flows from financing activities
Proceeds from issuance of short-term debt......     750          -          181
Proceeds from issuance of long-term debt -
related party..................................      24          -        3,000
Principal payments on short-term debt..........       -       (181)      (1,620)
Principal payments on long-term debt -
 related party.................................      (3)         -            -
Principal payments on capital lease
obligations....................................      (7)        (5)          (8)
Proceeds from issuance of common stock, .......   2,000          -            -
Offering costs.................................    (411)         -            -
Proceeds from exercise of stock options........       -        426          903
                                                ----------  ---------  ---------
Net cash provided by (used in)
financing activities...........................   2,353        240        2,456
                                                ----------  ---------  ---------

Net increase (decrease) in cash and
 cash equivalents..............................     328     (1,877)         239
Cash and cash equivalents at beginning
 of year.......................................     711      2,588        2,349
                                                ----------  ---------- ---------

Cash and cash equivalents at end of year........$ 1,039     $  711    $   2,588
                                                ==========  ========== =========



                 The accompanying notes form an integral part of
                     these Consolidated Financial Statements

                                      F-5
<PAGE>


                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies

The Company

     Communication Intelligence Corporation and its Joint Venture (the "Company"
or "CIC") develops and markets natural input and biometric electronic signature
solutions aimed at the emerging markets such as, e-commerce, wireless
Internet/information devices, and corporate security. These emerging markets for
CIC's products include all areas of personal computing, as well as electronic
commerce and communications.

     The Company's research and development activities have given rise to
numerous technologies and products. The Company's core technologies are
classified into two broad categories: "natural input technologies" and
"transaction and communication enabling technologies". CIC's natural input
technologies are designed to allow users to interact with a computer or handheld
device through the use of an electronic pen or "stylus". Such products include
the Company's multi-lingual Handwriter(R) Recognition System, and its
Handwriter(R) for Windows(R) family of desktop computing products. CIC's
transaction and communication enabling technologies provide a means for
protecting electronic transactions and discretionary communications. CIC has
developed products for dynamic signature verification, electronic ink data
compression and encryption and a suite of development tools and applications
which the Company believes could increase the functionality of its core products
and facilitate their integration into original equipment manufacturers' ("OEM")
hardware products and computer systems and networks.

     Through its 90% owned joint venture, Communication Intelligence Computer
Corporation, in China (the "Joint Venture"), the Company provides system
integration services and markets its pen-based business computer systems to
Chinese businesses, government users and other joint ventures.

     For the  five-year  period ended  December 31, 2003,  the Company  incurred
aggregate losses of $12,600 and, at December 31, 2003, the Company's accumulated
deficit  was  approximately  $82,164 and its current  liabilities  exceeded  its
current assets by $2,908. In addition,  the Company had negative cash flows from
operations of $1,995,  $2,087 and $2,159 for the years ended  December 31, 2003,
2002 and 2001,  respectively.  These factors raise  substantial  doubt about the
Company's  ability to continue  as a going  concern.  The Company has  primarily
funded these losses through the sale of debt and equity securities.

Going Concern

     The accompanying  financial statements have been prepared assuming that the
Company will  continue as a going  concern.  The Company has suffered  recurring
losses  from  operations  that raise a doubt  about its ability to continue as a
going concern.

     The Company filed a registration statement with the Securities and Exchange
Commission  in February 2003 in order to obtain  funding from equity  financing.
However,  there can be no assurance that the Company will have adequate  capital
resources  to fund  planned  operations  or that any  additional  funds  will be
available  to the Company  when needed,  or if  available,  will be available on
favorable terms or in amounts required by the Company.  If the Company is unable
to obtain adequate capital  resources to fund operations,  it may be required to
delay,  scale back or eliminate some or all of its operations,  which may have a
material  adverse  effect on the Company's  business,  results of operations and
ability to operate as a going concern. The consolidated  financial statements do
not  include  any  adjustments  that  might  result  from  the  outcome  of this
uncertainty.

Basis of Consolidation

     The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United States of
America, and include the accounts of CIC and its 90% owned Joint Venture in the
People's Republic of China. All inter-company accounts and transactions have
been eliminated. All amounts shown in the accompanying consolidated financial
statement are in thousands of dollars except per share amounts.

                                      F-6
<PAGE>

                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

Nature of Business,  Basis of Presentation and Summary of Significant Accounting
Policies (continued)

Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, revenue
recognition, allowance for doubtful accounts, long lived assets impairment,
inventory, and disclosure of contingent assets and liabilities, at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.

Fair Value of Financial Instruments

     The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable, short-term debt and
long-term debt approximate fair value due to their short maturities.

Cash and Cash Equivalents

     The Company  considers all highly liquid  investments  with maturity at the
date of purchase of three months or less to be cash equivalents.

        The Company's cash and cash equivalents, at December 31, consisted of
the following:

                                                          2003        2002
                                                     ----------- ------------

Cash in bank.......................................    $    110    $    260
Money market funds.................................         929         451
                                                     ----------- ------------

  Cash and cash equivalents............... ........    $  1,039    $    711
                                                     =========== ============

Concentrations of Credit Risk

     Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents, and
accounts receivable. The Company maintains its cash and cash equivalents with
various financial institutions. This diversification of risk is consistent with
Company policy to maintain liquidity, and mitigate against risk of loss as to
principal. Although such amounts may exceed the F. D. I. C. limits, the Company
limits the amount of credit exposure with any one financial institution and
believes that no significant concentration of credit risk exists with respect to
cash and cash equivalents.

     At December 31, 2003, the Joint Venture had approximately $92 in cash
accounts held by a financial institution in the People's Republic of China. The
Joint Venture deposits are not covered by any federal deposit insurance program
that is comparable to the programs applicable to U.S. deposits.

     To date, accounts receivable have been derived principally from revenues
earned from end users, manufacturers, retailers and distributors of computer
products in North America, Europe and the Pacific Rim. The Company performs
periodic credit evaluations of its customers, and does not require collateral.
The Company maintains reserves for potential credit losses; historically, such
losses have been insignificant and within management's expectations.

     The allowance for doubtful accounts is based on the Company's assessment of
the collectibility of specific customer accounts and an assessment of
international, political and economic risk as well as the aging of the accounts
receivable. If there is a change in actual defaults from the Company's
historical experience, the Company's estimates of recoverability of amounts due
it could be affected and the Company will adjust the allowance accordingly.


                                      F-7
<PAGE>

                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)

Inventories

     Inventories are stated at the lower of cost or market, cost being
determined using the first-in first-out ("FIFO") method. Cost principally
includes direct materials. At December 31, 2003 and 2002, inventories consisted
of finished goods. At December 31, 2003 the Company recorded a provision of $38
to System Integration Cost of Sales for older obsolete inventory.

Property and Equipment, Net

     Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized over
their estimated useful lives, not to exceed the term of the related lease. The
cost of additions and improvements is capitalized, while maintenance and repairs
are charged to expense as incurred. Depreciation expense was $63, $75 and $163
for the year ended December 31, 2003, 2002 and 2001, respectively. The Chinese
Joint Venture disposed of certain assets at cost of $76 and $36 in 2003 and
2002, respectively.

     Property and equipment, net at December 31, consists of the following:

                                                       2003         2002
                                                    ------------ ------------

Machinery and equipment.............................  $1,247       $1,273
Office furniture and fixtures.......................     432          432
Leasehold improvements..............................      84           84
Purchased software..................................     218          216
                                                    ------------ ------------

                                                       1,981        2,005
Less accumulated depreciation and amortization......  (1,843)      (1,846)
                                                    ------------ ------------

                                                     $   138      $   159
                                                    ============ ============

     Included in property and equipment, as of December 31, 2003 and 2002, are
$82 and $82, respectively, of assets acquired under capital leases. Accumulated
depreciation on such assets totaled $52 and $44 at December 31, 2003 and 2002,
respectively.

Patents

        On October 6, 2000, the Company acquired certain assets of PenOp Limited
("PenOp") and its subsidiary PenOp Inc. pursuant to an asset purchase agreement
dated as of September 29, 2000. Patents are stated at cost less accumulated
amortization which in Management's opinion represents fair value. Amortization
is computed using the straight-line method over the estimated lives of the
related assets, ranging from five to seventeen years. Amortization expense was
$379, $378 and $440 for the years ended December 31, 2003, 2002 and 2001,
respectively.

The nature of the underlying technology of each material patent is as follows:

o     Patent numbers 5544255, 5647017, 5818955 and 6064751 involve (a) the
      electronic capture of a handwritten signature utilizing an electronic
      tablet device on a standard computer system within an electronic document,
      (b) the verification of the identity of the person providing the
      electronic signature through comparison of stored signature measurements,
      and (c) a system to determine whether an electronic document has been
      modified after signature.


                                      F-8
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)

Patents (continued)

o     Patent number 6091835 involves all of the foregoing and the recording of
      the electronic execution of a document regardless of whether execution
      occurs through a handwritten signature, voice pattern, fingerprint or
      other identifiable means.

     Patents, net at December 31, consists of the following:

                                 Expiration     Life       2003         2002
                                 ----------     ----   ------------ ------------

Patent (Various)................  Various         5   $      9    $       9
Patent (Various)................  Various         7        476          476
5544255.........................   2013          13         93           93
5647017.........................   2014          14        187          187
5818955........................    2015          15        373          373
6064751........................    2017          17      1,213        1,213
6091835........................    2017          17      4,394        4,394
                                                       ------------ ------------
                                                         6,745        6,745
Less accumulated amortization..                         (1,703)      (1,324)
                                                       ------------ ------------
                                                     $   5,042    $   5,421
                                                       ============ ============


     Amortization expense for the years ending December 31, 2004, 2005, 2006,
2007, and 2008 are estimated to be $379, $379, $379, $379 and $379,
respectively. The patents identified, as "various" are technically narrow or
dated patents that the company believes are not material.

     The useful lives assigned to the patents are based upon the following
assumptions and conclusions:

o The estimated cash flow from products based upon each patent are expected to
exceed the value assigned to each patent;

o     There are no legal, regulatory or contractual provisions known to the
      Company that limit the useful life of each patent to less than the
      assigned useful life;

o     No additional material costs need to be incurred or modifications made in
      order for the Company to continue to be able to realize the protection
      afforded by the patents, and

o     The Company does not foresee any effects of obsolescence or significant
      competitive pressure on its current or future products, anticipates
      increasing demand for products utilizing the patented technology, and
      believes that the current markets for its products based on the patented
      technology will remain constant or will grow over the useful lives
      assigned to the patents because of a legal, regulatory and business
      environment encouraging the use of electronic signatures.

     The Company performs intangible asset impairment analyses on a quarterly
basis in accordance with the guidance in Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") and
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets" ("SFAS 144"). The Company uses SFAS
144 in response to changes in industry and market conditions that affects its
patents; the Company then determines if an impairment of its assets has
occurred. The Company reassesses the lives of its patents and test for
impairment quarterly in order to determine whether the book value of each patent
exceeds the fair value of each patent. Fair value is determined by estimating
future cash flows from the products that are and will be protected by the
patents and considering the additional factors listed in Critical Accounting
Policies in Item 7 of this Form 10-K.

                                      F-9
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)

Long-Lived Assets

     The Company evaluates the recoverability of its long-lived assets whenever
circumstances or events indicate such assets might be impaired. The Company
would recognize an impairment reserve in the event the net book value of such
assets exceeded the future undiscounted cash flows attributable to such assets.
No such reserves have been recorded in the three years ended December 31, 2003.

Software Development Costs

     Software  development  costs are accounted for in accordance with Statement
of Financial  Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold,  Leased or Otherwise  Marketed" ("SFAS 86"). Under SFAS 86,
capitalization  of software  development  costs begins upon the establishment of
technological feasibility,  subject to net realizable value considerations.  The
costs  capitalized  include  the coding and  testing  of the  product  after the
technological  feasibility has been established and ends upon the release of the
product. The capitalized costs are amortized to cost of sales on a straight-line
basis over the  estimated  life of the product,  generally  three  years.  As of
December 31, 2003, 2002, and 2001, such costs were insignificant.

Stock-Based Compensation

     Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). The Company has elected to continue to use the intrinsic value based
method of Accounting Principles Board Opinion No. 25,"Accounting for Stock
Issued to Employees", as allowed under SFAS 123, to account for its employee
stock-based compensation plans. The Company complies with the disclosure
provisions of SFAS 123.

Revenue Recognition

     Revenue is recognized when earned in accordance with applicable accounting
standards, including AICPA Statement of Position ("SOP") No. 97-2, "Software
Revenue Recognition", as amended, Staff Accounting Bulletins 101, "Revenue
Recognition in Financial Statements" ("SAB 101"), and the interpretive guidance
issued by the Securities and Exchange Commission and EITF issue number 00-21,
"Accounting for Revenue Arrangements with Multiple Elements", of the FASB's
Emerging Issues Task Force. The Company recognizes revenues from sales of
software products upon shipment, provided that persuasive evidence of an
arrangement exists, collection is determined to be probable, all non-recurring
engineering work necessary to enable the Company's product to function within
the customer's application has been completed and the Company's product has been
delivered according to specifications. Revenue from service subscriptions is
recognized as costs are incurred or over the service period which-ever is
longer.

     Software license agreements may contain multiple elements, including
upgrades and enhancements, products deliverable on a when and if available basis
and post contract support. Revenue from software license agreements is
recognized upon delivery of the software, provided that persuasive evidence of
an arrangement exists, collection is determined to be probable, all nonrecurring
engineering work necessary to enable the Company's products to function within
the customer's application has been completed, and the Company has delivered its
product according to specifications. Deferred revenue is recorded for upgrades,
enhancements and post contract support, which is paid for in addition to license
fees, and is recognized as costs are incurred or over the support period
which-ever is longer. Vendor specific objective evidence of the fair value for
multiple element software license agreements is determined by the price charged
for the same element when sold separately or the price determined by management
having the relevant authority when an element is not yet sold separately. The
price established by management for the element not yet sold separately will not
change prior to separate introduction of that element into the marketplace.

     Revenue from system integration activities, which represents the sale and
installation of third party computer equipment and limited related consulting

                                      F-10
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)

Revenue Recognition (continued)

services which requires little modification or customization to the software, is
recognized  upon  installation  as projects  are short term in nature,  provided
persuasive  evidence  of an  arrangement  exists,  collection  of the  resulting
receivable   is   probable   and  the  system  is   functioning   according   to
specifications.   Service  subscription  revenues  associated  with  the  system
integration  activities are recognized as costs are incurred or over the service
period which-ever is longer.

     The online/retail sales category includes sales of software made directly
from the Company's website, which are downloaded either directly by a reseller
or to a customer of such reseller. In both cases, the reseller reports the
number of units sold each month by submitting payment and a royalty report. The
reseller receives a percentage of each sale. The Company allows the on-line
resellers a right of return or right of offset. The number of units reported is
net of any product returns from prior months. The Company recognizes revenues on
the net amount reported by the resellers each month. The Company has a limited
number of resellers for its software available through the Company's website.

     The online/retail sales category also includes sales made through retail
establishments under the Elibrium agreement. Revenue from software product sales
through retail are recognized upon notification from Elibrium of the number of
units sold through Elibrium's retail customers provided collection of the
resulting receivable is reasonably assured.

Major Customers

     Handwriting Recognition Segment. Historically, the Company's handwriting
recognition segment revenues have been derived from a limited number of
customers. One customer, a major insurance company, accounted for 19% of total
segment revenue for the year ended December 31, 2003. One customer, Nationwide
Building Society, accounted for 11% of total segment revenues for the year ended
December 31, 2002. One customer, The Prudential Insurance Company of America
accounted for 16% of total segment revenues for the year ended December 31,
2001.

     Systems Integration Segment. One customer, Fujitsu Ltd., accounted for 21%
of total system integration revenue for the year ended December 31, 2003. This
same customer accounted for 30%, and 16% of total segment revenues for the years
ended December 31, 2002 and 2001, respectively.

     One customer accounted for 14% of total revenues for the year ended
December 31, 2003. One customer accounted for 10% of total revenues for the year
ended December 31, 2002. One customer accounted for 13% of total revenues for
the year ended December 31, 2001.


Research and Development

     Research and development costs are charged to expense as incurred.

Advertising

     The Company expenses advertising costs as incurred. Advertising expense for
the years ended December 31, 2003, 2002, and 2001 was $0, $112 and $203,
respectively.


                                      F-11
<PAGE>

                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)

Net Loss Per Share

     The Company calculates earnings per share under the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 requires the disclosure of both basic earnings per share, which is
based on the weighted average number of shares outstanding, and diluted earnings
per share, which is based on the weighted average number of shares and dilutive
potential shares outstanding. For the years ended December 31, 2003, 2002 and
2001, potential equivalent shares excluded from the calculation of diluted
earnings per share, as their effect is not dilutive, include stock options of
5,911, 6,452 and 7,027 of equivalent shares. There were no warrants outstanding
at December 31, 2003 or 2002. Warrants excluded from the calculation in 2001
were 237 equivalent shares.

Foreign Currency Translation

     The Company considers the functional currency of the Joint Venture to be
the local currency and, accordingly, gains and losses from the translation of
the local foreign currency financial statements are included as a component of
"accumulated other comprehensive loss" in the accompanying consolidated balance
sheets. Foreign currency assets and liabilities are translated into U.S. dollars
at the end-of-period exchange rates except for long-term assets and liabilities,
which are translated at historical exchange rates. Revenues and expenses are
translated at the average exchange rates in effect during each period except for
those expenses related to balance sheet amounts which are translated at
historical exchange rates.

     Net foreign currency transaction gains and losses are included in "Interest
income and other income (expense), net" in the accompanying consolidated
statements of operations. Foreign currency transaction gains in 2003, 2002 and
2001 were insignificant.

Income Taxes

     Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts and for tax loss and
credit carryforwards. A valuation allowance is provided against deferred tax
assets when it is determined to be more likely than not that the deferred tax
asset will not be realized.

Acquisition of Assets From PenOp

     On October 6, 2000, a wholly-owned subsidiary of the Company, (the
"Buyer"), acquired certain assets of PenOp Limited ("PenOp") and its subsidiary
PenOp Inc., (collectively, the "Sellers") pursuant to an asset purchase
agreement dated as of September 29, 2000, by and among Buyer and the Sellers for
4.7 million shares of common stock (the "Transaction Shares") of the Company
(the "Acquisition"). The Company ascribed a value of $5,728 to the assets, which
will be charged to income over the estimated lives of the assets, five to
seventeen years.

     Pursuant to the asset purchase agreement, the Company agreed to use
reasonable efforts to file a registration statement under the Securities Act of
1933, as amended (the "Act"), covering the sale of the Transaction Shares no
later than thirty (30) days from closing and to use reasonable efforts to have
the registration statement declared effective as soon as practicable thereafter.
The registration statement was declared effective on November 22, 2000.

     Subsequent to the closing, an officer and Chairman of the Board of the
Company at that time, and his designees, purchased in a private transaction an
aggregate of 1,713,728 shares of common stock received by Sellers in connection
with the Acquisition for $3.3 million.

                                      F-12
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)


1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)

Equity Line of Credit Agreement

     In July  2002,  the  Company  negotiated  a Line of Credit  agreement  with
Cornell Capital  Partners,  LP expiring two years from the effective date of the
related  registration  statement  (i.e.  February  14,  2005).  The  Company may
periodically issue and sell shares of its common stock and/or borrow funds up to
an aggregate  amount of $15,000,  subject to the number of shares  available for
issuance and the purchase  price of such  shares.  As of December 31, 2003,  the
Company  had  received   $2,000  gross   ($1,589  net  of  related   costs)  for
approximately 8,621 shares.  There is approximately  16,000 shares available for
issuance  against the Line of Credit at December 31, 2003. In addition,  in 2003
the Company borrowed $750 pursuant to the Line of Credit agreement (See Note 4).

     When the  Company  requests  an advance  under the Line of Credit,  Cornell
Capital  Partners,  L.P. will purchase shares of common stock of the Company for
100% of the "Market Price" of its stock (less a 6.5% advance fee).  Market Price
is defined as the lowest volume weighted  average price of the Company's  common
stock as reported by  Bloomberg,  LP,  calculated  over four of the five trading
days after the Company  requests an advance.  The maximum amount of each advance
may not exceed $1 million in any 30-day period.  In addition,  in no event shall
the number of shares issuable to Cornell Capital  Partners,  LP cause Cornell to
own in excess of 9.9% of the then  outstanding  shares of the  Company's  common
stock. On each advance date, the Company must pay to Cornell  Capital  Partners,
L.P. an advance fee equal to 6.5% of the amount of each advance. Closing is held
six (6)  trading  days  after such  written  notice,  at which time the  Company
delivers  shares of common stock and Cornell  Capital  Partners,  L.P.  pays the
advance amount.  Cornell Capital Partners,  L.P. cannot transfer its interest in
the Line of Credit to any  other  person  and  cannot  engage in short  sales of
shares of common stock acquired under the Line of Credit.

Recent Pronouncements

     In January 2003, the FASB issued  Interpretation No. 46,  "Consolidation of
Variable  Interest  Entities" (FIN 46). FIN 46 changes the criteria by which one
company  includes  another  entity  in its  consolidated  financial  statements.
Previously,  the criteria were based on control through voting interest.  FIN 46
requires  a variable  interest  entity to be  consolidated  by a company if that
company is subject to a majority of the risk of loss from the variable  interest
entity's  activities or entitled to receive a majority of the entity's  residual
returns or both.  A company  that  consolidates  a variable  interest  entity is
called the primary beneficiary of that entity. The consolidation requirements of
FIN 46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003.  Certain of the disclosure
requirements  apply in all financial  statements  issued after January 31, 2003,
regardless of when the variable interest entity was established.

     During  October 2003, the FASB deferred the effective date for applying the
provisions  of FIN 46 until the end of the first interim or annual period ending
after  December 31, 2003 if the variable  interest was created prior to February
1, 2003 and the public entity has not issued financial statements reporting that
variable interest entity in accordance with FIN 46.

     On December 24, 2003, the FASB issued FASB  Interpretation  No. 46 (Revised
December  2003),   "Consolidation  of  Variable  Interest  Entities,"  (FIN-46R)
primarily to clarify the required  accounting for interests in variable interest
entities.  FIN-46R  replaces  FIN-46  that was issued in January  2003.  FIN-46R
exempts  certain  entities  from  its  requirements  and  provides  for  special
effective  dates for entities that have fully or partially  applied FIN-46 as of
December 24, 2003. In certain  situations,  entities have the option of applying
or  continuing  to apply  FIN-46  for a short  period  of time  before  applying
FIN-46R.  While FIN-46R modifies or clarifies  various  provisions of FIN-46, it
also  incorporates  many FASB  Staff  Positions  previously  issued by the FASB.
Management  is currently  assessing  the impact,  if any, FIN 46 may have on the
Company; however,  management does not believe there will be any material impact
to  the  Company's  financial  position,  results  of  operations  or  liquidity
resulting from the adoption of this interpretation.

                                      F-13
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative  Instruments and Hedging  Activities."  SFAS 149 amends and clarifies
financial accounting and reporting of derivative instruments,  including certain
derivative instruments embedded in other contracts  (collectively referred to as
derivatives)  and  for  hedging  activities  under  SFAS  133,  "Accounting  for
Derivative  Instruments and Hedging Activities." This Statement is effective for
contracts  entered  into or  modified  after June 30,  2003,  except for certain
hedging  relationships  designated  after June 30,  2003.  The  adoption of this
Statement did not have a material  impact on the Company's  financial  position,
results of operations, or cash flows.

     In May  2003,  the  FASB  issued  SFAS No.  150,  "Accounting  for  Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150  establishes  standards for how an issuer  classifies  and measures  certain
financial  instruments with  characteristics  of both liabilities and equity. It
requires that issuers  classify a financial  instrument that is within its scope
as a liability  (or an asset in some  circumstances).  With certain  exceptions,
this Statement is effective for financial  instruments  entered into or modified
after May 31, 2003,  and  otherwise  is effective at the  beginning of the first
interim period beginning after June 15, 2003. The adoption of this Statement did
not have a  material  impact on the  Company's  financial  position,  results of
operations, or cash flows.

     In December 2003,  the FASB issued SFAS No. 132 (Revised 2003)  "Employers'
Disclosures about Pensions and Other Postretirement  Benefits" (SFAS 132R). This
standard  replaces  SFAS 132 of the same title  which was  previously  issued in
February  1998.  SFAS 132R was  issued in  response  to  concerns  expressed  by
financial  statement  users  about their need for more  transparency  of pension
information.  The revised  standard  increases the existing GAAP disclosures for
defined benefit pension plans and other defined  benefit  postretirement  plans.
However,  it does not change the  measurement  or  recognition of those plans as
required  under:  SFAS  87,  "Employers'  Accounting  for  Pensions";  SFAS  88,
"Employers'  Accounting for  Settlements  and  Curtailments  of Defined  Benefit
Pension  Plans  and  for  Termination  Benefits";   and  SFAS  106,  "Employers'
Accounting for Postretirement Benefits Other Than Pensions."  Specifically,  the
revised standard  requires  companies to provide  additional  disclosures  about
pension plan  assets,  benefit  obligations,  cash flows,  and benefit  costs of
defined benefit pension plans and other defined  benefit  postretirement  plans.
Also, for the first time,  companies are required to provide a breakdown of plan
assets by category, such as debt, equity and real estate, and to provide certain
expected  rates of return  and target  allocation  percentages  for these  asset
categories.  The revised  SFAS132R is effective  for financial  statements  with
fiscal years ending after  December 15, 2003 and for interim  periods  beginning
after  December 15, 2003. The adoption of this Statement did not have a material
impact on the  Company's  financial  position,  results of  operations,  or cash
flows.

     In December 2003, the Staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting  Bulletin (SAB) No. 104,  "Revenue  Recognition,"  which
supersedes  SAB No. 101,  "Revenue  Recognition  in Financial  Statements."  The
primary purpose of SAB No. 104 is to rescind  accounting  guidance  contained in
SAB  No.  101  and  the  SEC's  "Revenue  Recognition  in  Financial  Statements
Frequently  Asked  Questions and Answers"  related to multiple  element  revenue
arrangements.  The  Company  does not  expect  the  issuance  of SAB No.  104 to
significantly impact its current revenue recognition policies.


2. Chinese Joint Venture

     The Company  currently  owns 90% of a joint  venture (the "Joint  Venture")
with the Jiangsu Hongtu  Electronics  Group, a provincial agency of the People's
Republic of China (the  "Agency").  In June 1998, the registered  capital of the
Joint Venture was reduced from $10,000 to $2,550.  As of December 31, 2003,  the
Company had  contributed an aggregate of $1,800 in cash to the Joint Venture and
provided it with non-exclusive licenses to technologies and certain distribution
rights and the Agency had  contributed  certain land use rights.  Following  the
reduction in registered  capital of the Joint  Venture,  neither the Company nor
the Agency is required to make further contributions to the Joint Venture. Prior
to the  reduction in the amount of  registered  capital,  the Joint  Venture was
subject  to  the  annual  licensing  requirements  of  the  Chinese  government.
Concurrent  with the  reduction  in  registered  capital,  the  Joint  Venture's
business license has been renewed through October 18, 2043.

                                      F-14
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

3. Comprehensive Income

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting  Comprehensive Income" ("SFAS
130"). The Company adopted SFAS 130 effective January 1, 1998. SFAS 130 requires
that  all  items  recognized   under  accounting   standards  as  components  of
comprehensive earnings be reported in an annual statement that is displayed with
the same prominence as other annual financial statements. SFAS 130 also requires
that an entity classify items as other comprehensive earnings by their nature in
an annual financial  statement.  For example,  other comprehensive  earnings may
include foreign  currency  translation  adjustments,  minimum pension  liability
adjustments, and unrealized gains and losses on marketable securities classified
as available-for-sale.

     The  accumulated  other  comprehensive  loss at December  31, 2003 and 2002
consisted of cumulative foreign currency translation adjustments.

4. Short-term Debt - other

     On December  19,  2003,  the Company  borrowed  $750 from  Cornell  Capital
Partners,  LP. The proceeds of the loan were used for working capital  purposes.
The loan is  secured  by 4,621  shares of the  Company's  common  stock  held in
escrow. The promissory note is due and payable in seven installments, commencing
January 19, 2004 and ending on March 1, 2004,  and may be paid in cash or shares
of the  company's  common  stock.  The  Company  has the  option  to  delay  the
commencement  of the  installment  payments  for an  unlimited  number of 30 day
periods for an amount equal to 2% of the principal  amount owed on or before the
beginning of the current  option  period.  The 2% payment may be made in cash or
shares of common  stock.  Any delay in the  commencement  date will result in an
equal  delay in the due date of the  note.  If the note is not paid in full when
due, the  outstanding  principal  owed shall be due and payable in full together
with interest at the rate of 2% per annum commencing from the due date.

     Subsequent to December 31, 2003,  the Company  exercised its right to delay
the  commencement  of the  installment  payments by paying the 2% fee  discussed
above.  Such fees  aggregated  $38 were paid in cash and  expensed.  The company
intends to repay the loan by issuing shares of its Common stock.

5. Short-term and Long-term Debt - related party

Short-term debt - related party

     On June 19, 2001,  the Company  consummated a three-year  $3,000  financing
(the "Loan") with a charitable  remainder  annuity trust, a trustee of which was
then a director  and officer of the Company (the  "Trust").  The proceeds of the
Loan were used to  refinance  $1,500 of  indebtedness  outstanding  to the Trust
pursuant  to a loan made by the Trust to the  Company  in  October  1999 and for
working  capital  purposes.  The Loan is  secured by a first  priority  security
interest in all of the  Company's  assets as now owned or hereafter  acquired by
the  Company.  The Loan  bears  interest  at the rate of 2% over the prime  rate
publicly  announced  by  Citibank  N. A. from time to time,  which was 6.00% per
annum at December  31, 2003,  and is due June 18, 2004.  As of December 31, 2003
the Loan was  classified  as  short-term  debt.  The Loan may be pre-paid by the
Company in whole or in part at any time without penalty, subject to the right of
the Trust to convert the outstanding principal amount of the Loan into shares of
common stock.  Pursuant to the terms of the Loan,  the Trust has the option,  at
any time prior to  maturity,  to convert all or any  portion of the  outstanding
principal  amount of the Loan into  shares of common  stock of the  Company at a
conversion  price of $2.00 per share,  subject to adjustment upon the occurrence
of certain  events.  If, prior to maturity of the Loan, the Company  consummates
one or more  financings  providing  $5  million or more in gross  proceeds,  the
Company is required to apply 50% of the  proceeds in excess of $5 million to the
then outstanding principal amount of the Loan.

     In connection with the Loan, the Company entered into a registration rights
agreement  with the Trust which  obligates  the  Company to file a  registration
statement with the Securities and Exchange  Commission  covering the sale of the
shares of the Company's  common stock issuable upon conversion of the Loan if it
receives a demand by the holder of the Loan to do so, and to use its  reasonable
best efforts to cause such registration statement to become effective. The Trust
has made no demand of the  Company  to file such  registration  statement  as of
December 31, 2003.

                                      F-15
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

5. Short-term and Long-term Debt - related party (continued)

Short-term debt - related party


     In  2002,  $16 and in  2001,  $150 in  consulting  fees,  including  office
expenses, were paid to a party who, at that time, was a director and Chairman of
the Board.

     The weighted  average  interest rate was 6.8%,  6.8% and 8.8% for the years
ended December 31, 2003, 2002, and 2001, respectively.

     Interest  expense for the years ended December 31, 2003, 2002, and 2001 was
$205, $205, and $282,  respectively.  Interest  expense  associated with related
party debt was $183,  $200 and $274 for the years ended December 31, 2003,  2002
and 2001, respectively.

Long-term debt - related party

     In June 2003 the Company's Joint Venture borrowed from one of its directors
approximately  $24  denominated  in U. S. dollars to purchase a replacement  van
used in the Company's operations.  The note bears interest at the rate of 5% per
annum, and is due in June 2006. Principal payments on long term debt are $8, $8,
and $5 for the years ended December 31, 2004, 2005, and 2006, respectively.

6. Stockholders' Equity

Common Stock Options

     In 1994 the Company  adopted the 1994 Stock Option Plan (the "1994  Plan").
Under1994  Plan  directors,  officers and  employees  are eligible for grants of
incentive  and  non-qualified  stock  options.  In May  1997,  the  stockholders
approved  an  increase of 1,000  shares to the number of shares  authorized  for
issuance  under the 1994 Plan.  Accordingly,  a total of 6,000  shares of Common
Stock are authorized  for issuance  under the 1994 Plan. The exercise  prices of
options  under  the 1994  Plan are  determined  by a  committee  of the Board of
Directors, but, in the case of an incentive stock option, the exercise price may
not be less than 100% of the fair market value of the underlying Common Stock on
the date of grant.  Non-qualified options may not have an exercise price of less
than 85% of the fair market value of the underlying  Common Stock on the date of
grant.  Options under the 1994 Plan are generally  exercisable over a period not
to exceed seven years and vest quarterly over three years. At December 31, 2003,
there were 596 options  available  for grant under the 1994 Plan. As of December
31, 2003,  994 plan options were  outstanding  and  exercisable  with a weighted
average exercise price of $0.85 per share.

     The Company has issued non-plan options to its employees and directors. The
non-plan options vest over four years or prorata quarterly over three years. For
those  non-plan  options which vest over four years,  20% of the total  non-plan
options  granted  vest on the  first  anniversary  of the date of  grant  and an
additional  20%, 20%, and 40% of the total non-plan  options granted vest on the
second,  third,  and fourth  anniversaries  of the date of grant,  respectively.
Non-plan  options are  generally  exercisable  over a period not to exceed seven
years.  As of December 31, 2003,  3,115 non-plan  options were  outstanding  and
exercisable with a weighted average exercise price of $0.84 per share.

     In June 1999,  the Company  adopted and the  shareholders  approved a stock
option plan (the "1999  Plan").  Incentive and  non-qualified  options under the
1999 Plan may be granted to employees, officers, and consultants of the Company.
There are 4,000 shares of Common Stock  authorized  for issuance  under the 1999
Plan. The options have a seven year life and generally vest quarterly over three
years. At December 31, 2003, there were 2,130 shares available for future grants
As of December 31, 2003,  1,802 plan  options  were  outstanding  and 1,089 plan
options were  exercisable  with a weighted  average  exercise price of $0.79 per
share.

                                      F-16

<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

     Information with respect to the Company's 1994 Plan and the 1999 Plan is
summarized below:

                                                 Year Ended December 31,
                                     -------------------------------------------
                                             2003                     2002
                                     ---------------------    ------------------
                                                  Weighted             Weighted
                                                   Average             Average
                                       Shares     Exercise             Exercise
                                                    Price     Shares    Price
                                     -------------------------------------------

Outstanding at beginning of period..     3,337      $1.26      3,442     $1.48
Granted.............................       858      $0.32      1,108     $0.60
Exercised...........................         -      $0.00       (169)    $0.75
Forfeited...........................    (1,399)     $1.83     (1,044)    $1.34


                                      -----------           ---------
Outstanding at period end...........     2,796      $0.71     3,337      $1.27
                                      ===========           =========


Options exercisable at period end....     2,083     $0.81     2,422      $1.36
                                       ===========           =========

Weighted average grant-date
fair value of  options granted
during the period....................     $0.27               $0.60
                                       ===========           =========


The following table summarizes information about stock options outstanding under
the 1994 Plan and the 1999 Plan at December 31, 2003:
                                                      Weighted Average
                                    -------------------------------------------

                                                   Remaining
                                     Options    Contractual Life
Range of Exercise Prices           Outstanding      (Years)      Exercise Price
-------------------------------------------------------------------------------

$0.00 - $0.50..................            848        7.0             $0.31
$0.51 - $2.00..................          1,899        3.9             $0.83
$2.01 - $2.99..................              8        0.1             $2.75
$3.00 - $7.50..................             41        5.1             $3.37
                                  --------------
                                         2,796
                                  ==============

     The following table summarizes  information about stock options exercisable
under the 1994 Plan and the 1999 Plan at December 31, 2003:

                                                                 Weighted
                                             Options              Average
Range of Exercise Prices                   Exercisable         Exercise Price
                                      ------------------------------------------

      $0.00 - $0.50.................               318           $0.31
      $0.51 - $2.00.................              1716           $0.84
      $2.01 - $2.99.................                 8           $2.75
      $3.00 - $7.50.................                41           $3.37
                                      -------------------
                                                 2,083
                                      ===================


                                      F-17
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

     Effective  January 1, 1996,  the Company  adopted  Statement  of  Financial
Accounting Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS
123") as amended  by  Statement  of  Financial  Accounting  Standards  No.  148,
"Accounting for Stock-Based Compensation-Transition and Disclosures-an Amendment
of FASB  Statement  No.  123".  The  Company  has elected to continue to use the
intrinsic value based method of Accounting  Principles  Board Opinion No. 25, as
allowed  under SFAS 123, to account for its  employee  stock-based  compensation
plans. The Company complies with the disclosure provisions of SFAS 123.

     Had compensation  cost for the Company's option plans been determined based
on the fair value of the  options at the date of grant,  as  prescribed  by SFAS
123,  the  Company's  net loss  available to common  stockholders  and basic and
diluted net loss per share available to stockholders  would have been as follows
for the year ended December 31:

                                              2003          2002          2001
                                            ------------------------------------
Net loss as reported.......................  $ (2,298)   $ (3,561)    $ (3,215)
Add: Stock-based employee compensation
 expense included in  reported results
 of operations, net of related tax effects          -           -            -
Deduct: Total stock-based employee
 compensation expense  determined under
 fair value-based method for all awards, net
of related tax effects                           (380)      (795)       (1,528)
                                            -----------------------------------
   Pro forma net loss......................  $ (2,678)  $ (4,356)     $ (4,743)
                                            ====================================

Basic and diluted net loss per share
 available to stockholders:
  As reported..............................  $  (0.02)  $  (0.04)     $  (0.04)
  Pro forma................................  $  (0.03)  $  (0.05)     $  (0.05)

     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option  pricing  model with the following  weighted  average
assumptions used for grants during the applicable  periods:  risk-free  interest
rate of 2.37% for 2003,  2.26% for 2002,  and 4.1% for 2001, an expected life of
6.65  years for 2003,  8.6  years  for  2002,  and 6.0 years for 2001,  expected
volatility of 100% for all periods and dividend yield of 0% for all periods.

     The Company expects to make additional option grants each year. The Company
believes the above pro forma disclosures are not representative of the pro forma
effects on reported results of operations to be expected in future periods.

     As of December  31, 2003,  5,911  shares of Common Stock were  reserved for
issuance upon exercise of outstanding options.

Warrants

     At December 31, 2003 there were no warrants outstanding.

7. Commitments

Operating Lease Commitments

     The Company  currently leases 9,634 square feet, its principal  facilities,
(the "Principal Offices) in Redwood Shores,  California,  pursuant to a sublease
that  expires in 2006.  In  addition,  the Company  subleased  to third  parties
certain space adjacent to the Principal  Offices  through August 2001. The Joint
Venture leases approximately 1,500 square feet in Nanjing, China. In addition to
monthly rent, the U.S.  facilities are subject to additional rental payments for
utilities  and other costs above the base  amount.  Facilities  rent expense was
approximately  $450,  $418,  and $443, in 2003,  2002,  and 2001,  respectively.
Sublease income was approximately $35, for the year ended December 31, 2001.

     Future  minimum lease  payments under  noncancelable  operating  leases are
approximately, $419, $380, and $358 for the years ending December 31, 2004, 2005
and 2006, respectively. The Company's rent expense was

                                      F-18
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

Operating Lease Commitments (continued)

     reduced  by  approximately  $35 in 2001 in  connection  with the  subleases
described above.  Future minimum payments  required under capital leases,  which
expire in 2007, were insignificant at December 31, 2003.

8. Income Taxes

     As of December  31,  2003,  the Company  had  federal  net  operating  loss
carryforwards  available to reduce taxable income through 2013 of  approximately
$69,463.  The  Company  also had  federal  research  and  investment  tax credit
carryforwards of approximately $315 that expire at various dates through 2010.

        Deferred tax assets and liabilities at December 31, consist of the
following:

                                                     2003          2002
                                                ----------------------------
Deferred tax assets:
Net operating loss carryforwards............     $ 27,785       $ 26,857
Credit carryforwards................ .......          315            315
Deferred income.............................           67             40
Other, net..................................          933            945
                                                ----------------------------
Total deferred tax assets...................       29,100         28,157
                                                ----------------------------
Valuation allowance.........................      (29,100)       (28,157)
                                                ----------------------------
Net deferred tax assets.....................     $      -       $      -
                                                ============================

     Income tax (benefit) differs from the expected statutory rate as follows:

                                            2003        2002            2001

 Expected income tax benefit            $   (799)   $  (1,211)     $   (1,093)
 State   income   tax  net  of  Federal     (144)        (214)           (193)
 benefit
 Loss write off of foreign investment          -       (4,357)              -
 Change in valuation allowance               943        5,782          (1,286)
                                         ----------- ------------ -------------
   Income tax benefit                   $      -    $       -      $        -
                                         =========== ============ =============


     A full  valuation  allowance  has been  established  for the  Company's net
deferred tax assets since the  realization of such assets through the generation
of future taxable income is uncertain.

     Under the Tax Reform Act of 1986, the amounts of, and the benefit from, net
operating  losses and tax credit  carryforwards  may be  impaired  or limited in
certain  circumstances.  These circumstances  include, but are not limited to, a
cumulative  stock  ownership  change of greater  than 50%,  as  defined,  over a
three-year period.  During 1997, the Company experienced stock ownership changes
which could limit the  utilization  of its net  operating  loss and research and
investment tax credit carryforwards in future periods.

9. Segment Information

     Statement of Financial  Accounting  Standards No. 131,  "Disclosures  About
Segments of an  Enterprise  and Related  Information"  ("SFAS 131")  establishes
standards for related disclosures about products and services,  geographic areas
and major  customers.  The Company's  information  has been  stratified into two
segments - Handwriting Recognition Software and Systems Integration.

     The  accounting  policies  followed by the  segments  are the same as those
described  in the "Summary of  Significant  Accounting  Policies."  Segment data
includes revenues, as well as allocated  corporate-headquarters costs charged to
each of the operating segments.

                                      F-19
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

9. Segment Information (continued)

     The Company identifies reportable segments by classifying revenues into two
categories   Handwriting   Recognition  and  System   Integration.   Handwriting
recognition  software  is  an  aggregate  of  three  revenue  categories,   OEM,
Enterprise and Online sales. All handwriting  recognition  software is developed
around the Company's core technology. System integration represents the sale and
installation  of third party  computer  equipment  and systems  that utilize the
Company's products. All sales below represent sales to external customers.




     The table below presents information about reporting segments for the years
ended December 31:

                                    Handwriting        Systems
                                    Recognition      Integration       Total
                                 ---------------   -------------- --------------
  2003 Revenues                  $     2,322      $        712    $       3,034
       Loss from operations      $    (2,106)     $        (51)   $      (2,157)
       Total assets              $     6,294      $        921    $       7,215
       Depreciation and
       amortization              $       438      $         18    $         456

  2002 Revenues                  $      2,214     $      1,015    $       3,272
       Loss from operations      $     (3,307)    $        (30)   $      (3,337)
       Total assets              $      6,181     $      1,005    $       7,186
       Depreciation and
       amortization              $        450     $         17    $         467

  2001 Revenues                  $      4,546     $      1,401    $       5,947
       Loss from operations      $     (2,842)    $       (104)   $      (2,946)
       Total assets              $      8,662     $      1,410    $      10,072
       Depreciation and
       amortization              $        662     $         25    $         687

     The following table represents revenues and long-lived asset information by
geographic location for the period ended December 31:

                           Revenues Long Lived Assets
            ------------------------------- ------------------------------------
               2003        2002       2001       2003        2002         2001
            ---------    --------   --------   ---------  ---------  -----------

     U.S.    $ 2,003     $ 2,018    $ 4,223    $   5109   $  5,549     $  5,916

     China     1,031       1,254      1,724          71         31           44
            ---------    --------   --------   ---------  ---------- -----------
    Total    $ 3,034     $ 3,272    $ 5,947    $  5,180   $  5,580     $  5,960
            =========    ========   ========   =========  ========== ===========

     Interest expense is related solely to Handwriting  recognition  segment and
was $205, $205, and $282, for the years ended December 31, 2003, 2002, and 2001,
respectively.


     The Company's export sales from U.S. operations were 14%, 12%, and 16% of
total revenues in 2003, 2002, and 2001, respectively.

                                      F-20
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

10. Statement of Cash Flows Data

                                                     December 31,
                                           -------------------------------------
                                                2003        2002         2001
Schedule of non-cash transactions:

  Inventory reserve provision.............  $     38    $      -     $      -

  Non-cash compensation...................  $      -    $      -     $     46

  Equity securities issued for services.... $      -    $      -     $     58

10. Statement of Cash Flows Data (continued)

Supplemental disclosure of cash flow information:

     Interest paid in 2003, 2002, and 2001 was $209, $212, and $196,
respectively.

11. Employee Benefit Plans

     The  Company  sponsors a 401(k)  defined  contribution  plan  covering  all
employees meeting certain  eligibility  requirements.  Contributions made by the
Company are determined annually by the Board of Directors.  To date, the Company
has made no contributions to this plan.

12. Quarterly information (Unaudited)

     The summarized  quarterly financial data presented below, in the opinion of
Management,  reflects all adjustments which are of a normal and recurring nature
necessary to present fairly the results of operations for the periods presented.

                             First      Second     Third      Fourth
                             Quarter   Quarter    Quarter    Quarter    Total
                            --------- --------   --------    -------- ---------

2003 Unaudited
   Net sales              $  1,108    $  572     $  936       $ 418    $ 3,034
   Gross profit           $    875    $  450     $  704       $ 240    $ 2,269
   Loss before income
   taxes, and minority
   interest               $   (310)   $ (693)    $ (470)      $(888)   $(2,361)

   Net loss               $   (310)   $ (690)    $ (472)      $(873)   $(2,345)

   Basic and diluted loss
   per share              $  (0.01)   $(0.01)    $(0.01)      $(0.01)  $ (0.02)

2002 Unaudited
   Net sales              $  1,157    $1,111     $  525       $  479   $ 3,272
   Gross profit           $    716    $  808     $  321       $  270   $ 2,115
   Loss before income
   taxes, and minority
   interest               $   (688)   $(670)    $(1,068)     $(1,133)  $(3,559)

   Net loss               $   (688)   $(671)    $(1,070)    $ (1,132)  $(3,561)

   Basic and diluted loss
   per share
                            $(0.01)  $(0.01)    $(0.01)  $     (0.01)  $(0.04)


                                      F-21
<PAGE>

                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)


12. Quarterly information (Unaudited) (continued)


                              First      Second     Third      Fourth
                             Quarter    Quarter    Quarter    Quarter    Total
                           ---------- ---------- --------- ----------- ---------

2001 Unaudited
   Net sales                $ 1,618     $1,903       $  915     $1,511  $ 5,947
   Gross profit             $   996     $1,201       $  459     $1,051  $ 3,707
   Loss before income
   taxes, and minority
   interest                  $(741)      $(691)     $(1,228)     $(552) $(3,212)

   Net loss                  $(741)      $(693)     $(1,229)     $(552) $(3,215)

   Basic and diluted loss
   per share                $(0.01)     $(0.01)      $(0.01)    $(0.01)  $(0.04)



                                      F-22
<PAGE>




                                   SCHEDULE II

                     Communication Intelligence Corporation
                 Valuation and Qualifying Accounts and Reserves
                                 (In thousands)

Years Ended December 31, 2001, 2002, and 2003

                                  Balance     Charged to                Balance
                                At Beginning   Costs and                At End
                                 Of Period      Expense   Deductions  Of Period
                               ------------------------------------------------


Year ended December 31, 2001:
Accounts receivable reserves..     $118          $160       $   -         $278




Year ended December 31, 2002:
Accounts receivable reserves..     $278          $129 $      (164)        $243




Year ended December 31, 2003
Accounts receivable reserves..     $243           $25 $       (12)        $256








                                      S-1