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, 2004

  ___ Transition 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)

          Issuer's 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  March  28,  2005  was  approximately
$46,312,078  based on the closing sale price of $0.46 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 28, 2005 was 102,250,065.



<PAGE>


                     COMMUNICATION INTELLIGENCE CORPORATION


                                TABLE OF CONTENTS


                                                                           Page

 PART I....................................................................   3
 Item 1.  Business.........................................................   3
 Item 2.  Properties.......................................................  11
 Item 3.  Legal Proceedings................................................  11
 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 and Issuer Purchases of Equity Securities....  12
 Item 6.  Selected Financial Data..........................................  13
 Item 7.  Management's Discussion and Analysis of Financial Condition
          and Results of Operations........................................  14
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......  29
 Item 8.  Consolidated Financial Statements and Supplementary Data.........  30
 Item 9.  Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosures........................................  30
 Item 9A  Controls and Procedures..........................................  30
 PART III..................................................................  31
 Item 10. Directors and Executive Officers of the Registrant...............  31
 Item 11. Executive Compensation...........................................  33
 Item 12. Security Ownership of Certain Beneficial Owners and Management...  34
 Item 13. Certain Relationships and Related Transactions...................  35
 Item 14. Principal Accounting Fees and Services...........................  35
 PART IV...................................................................  37
 Item 15. Exhibits, Financial Statement Schedules, and
          Reports on Form 8-K..............................................  37
-----------

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(R),   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 a leading supplier of
natural input software and electronic  signature  solutions focused on emerging,
high potential  applications  including paperless workflow,  handheld computers,
smartphones  and  eTransactions,  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 Enterprises,  integration/channel  partners and OEMs. Industry
leaders such as Charles Schwab,  Fujitsu, IBM, Oracle,  PalmSource,  Prudential,
Siebel Systems,  Siemens  Medical  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.

     Revenues  for the year ended  December  31, 2004 of $7.3  million more than
doubled (243%) as compared to $3.0 million for the prior year.  2004 revenue was
derived from well over one hundred  customers but was primarily  attributable to
Charles Schwab & Co., Duncan  Management  Solutions Ltd., IA Systems Inc., Misys
Healthcare  Systems,  PalmSource  Inc.,  Symbol  Technologies  Inc.,  State Farm
Insurance Companies, Wells Fargo Bank, N. A., and the Tennessee Valley Authority
..

     2004 eSignature  revenues of $6.1 million more than quadrupled  (407%) over
2003  eSignature  revenue of $1.5 million.  In addition,  the Company paid off a
$3.0  million  debt,  terminated  it's  equity  line  of  credit  agreement  and
successfully completed a $4.0 million financing.

     For the year ended  December 31, 2004,  the Company's  operating  income of
$2.3 million  represented  an  improvement of $4.5 million over the $2.2 million
operating  loss  incurred in the prior year.  Net income of $1.6 million for the
year ended  December  31,  2004  represented  an  improvement  of $3.9  million,
compared to a net loss of $2.3 million incurred in the prior year. 2004 year-end
financial  results  represent  the first  profitable  year in the history of the
Company.

     In March of 2004, CIC received the 2003 Frost & Sullivan award,  for growth
strategy  leadership in the signature  verification  market,  which commends the
Company for sales results achieved under difficult market conditions. The award,
based on Frost & Sullivan's market study,  further recognizes CIC as the leading
supplier  well  positioned  to lead the  signature  verification  market  into a
high-growth stage.

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:
eSignature, Natural Input 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 and the Handwriter(R)  Recognition System, referred to as HRS(TM)),
electronic   signature,    handwritten    biometric   signature    verification,
cryptography,   electronic  ink  recording  tools  (InkTools,   Sign-it,  iSign,
SignatureWallet(TM)  and Sign-on),  and operating system  extensions that enable
pen input (PenX).  Other consumer and original  equipment  manufacturer  ("OEM")
products include electronic  notetaking  (QuickNotes,  and InkSnap) and software
that can predict text input (WordComplete).

     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
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


                                      -3-
<PAGE>

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 to 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
   Handwriter and Jot

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

   SignatureOne              SignatureOne is the server compliment to
                             CIC's Sign-it software which enables the
                             real time capture of electronic and digital
                             signatures in various application
                             environments. All user authentication and
                             transaction tracking in SignatureOne is
                             based on data from the Sign-it client
                             software

   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

   QuickNotes and InkSnap     Electronic handwritten notetaking software

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

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

   WordComplete               Predictive text entry software

                                      -4-
<PAGE>

     Products and upgrades for the  Handwriting  recognition  products that were
introduced and first shipped in 2004 include the following:

WordComplete v3.1
iSign v3.0
iSign v3.1
Sign-it for Acrobat v4.0
Sign-it for Acrobat v4.1
Sign-it for Acrobat v4.2
Sign-it for Acrobat SDK v1.0
Sign-it for Word v4.11
SignatureOne v1.0 (Oracle Support)
Jot for Palm OS v2.05
Jot for Palm OS v2.1

     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 without 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 iSign  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.

                                      -5-
<PAGE>

     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 that have 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 is in development.

     iSign  provides  functionality  similar  to  InkTools  but is  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 is designed to meet the needs of
higher-end server products and a broad base of client systems,  which range from
Windows devices to PDAs.

eSignature  Revenues

     2004 eSignature  revenue of $6.1 million more than  quadrupled  (407%) over
2003 eSignature revenue of $1.5 million. The 2004 eSignature revenue was derived
from well over one hundred  customers but was primarily  attributable to Charles
Schwab, Duncan Management,  IA Systems,  Misys Healthcare,  Symbol Technologies,
State  Farm  Insurance,  Wells  Fargo and TVA.  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 2005.

End users and resellers that have licensed the Company's  technology include the
following:

    Licensee                      Product(s)           Application of Products
                                  licensed
   --------------------------- ----------------        ------------------------

    Accelio                       Inktools             Mobile forms
    Agricultural Bank of China    InkTools             Document automation
    Al-Faris                      Multiple             Reseller and integrator
                                                       in the Middle East
                                                       focused on e-Signatures

    American General Life &       Sign-it              Mobile forms
    Assurance (AGLA)
    Assurant Group                Sign-It              Sales force automation,
                                                       new account openings
    Baptist Health                Inktools             Patient records
    Boston Medical Center         iSign                Patient records
    Cablevision                   Ink Tools            Document automation
    Cellular One                  iSign                Document automation
    Charles Schwab                Sign-It              New account openings
    China Ministry of Railways    InkTools             Document automation
    County of Marin               Sign-It              Document automation
    County of Dade                                     Document automation
    Duncan Management             Ink Tools            Document automation
    E-Com Asia Pacific Pty Ltd.   Multiple             Regional reseller,
                                                       multiple applications

                                      -6-
<PAGE>


   Licensee                      Product(s)           Application of Products
                                  licensed
   --------------------------- ----------------        ------------------------
    EDS                           InkTools             Information assurance
                                                       for network and
                                                       application security
    First American Bank           Sign-It              Various financial and
                                                       internal documents
    First Command Financial       Sign-It              Document automation
    Franklin Mint                 Sign-It              Document automation
    GE Power Systems              Sign-It              Document automation
    IA Systems                    InkTools             Loan organization
    ILI Technologies, (Ltd.)      InkTools & iSign     Various e-Signature
                                                       applications for the
                                                       verticalmarkets in Israel
    Industrial & Commercial       InkTools             Document automation
    Bank of China
    Integrate Online              InkTools             Mortgage closing
    Interlink Electronics         Sign-It              OEM for multiple products
    Missouri State Lottery        Sign-It              Document automation
    Motion Computing              Sign-On              Tablet PC logon
    Nanjing Agricultural Bureau   InkTools             Document automation
    National Healthcare           Sign-It              Document automation
    Nationwide Building Society   InkTools             Document automation
    Naval Surface Warfare         InkTools             Material center receipts
    Old Republic National         Sign-It              Title processing
                                                       applications
    Orange County, CA             Sign-It              Automate building permit
                                                       process
    Prudential Insurance Co.      Sign-It EX           Mobile forms
    RecordsCenter.com             InkTools             Legal contracts and other
                                                       significant documents
    Saytek                        Sign-It              Document automation
    State Farm Insurance Company  Sign-It              Mobile forms
    St. Vincent's Hospital        Multiple             Document automation
    Siebel Systems                Multiple             Sample delivery of
                                                       regulated drugs
    Siemens Medical Solutions     Multiple             Healthcare
    Symbol Technologies           Multiple             Reseller for multiple
                                                       products
    Tennessee Valley Authority    Multiple             Approval of internal
                                                       documents
    Topaz Systems, Inc.           Multiple             OEM for multiple products
    Turner Construction/Oracle    iSign                Document automation
    University of Virginia        iSign                Document automation
    Varity                        InkTools             Reseller of application
                                                       software

                                      -7-
<PAGE>

   Licensee                      Product(s)           Application of Products
                                  licensed
   --------------------------- ----------------        ------------------------
    Washington County Hospital    Sign-It              Patient records
    Wells Fargo Bank              Sign-It              Document automation

Natural Input  Revenue

     Natural  input  revenue  for 2004 of $845  more  than  tripled  (388%),  as
compared to $218 for the prior year and the increase was primarily  attributable
to royalties from PalmSource .

     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,
"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)  has been 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.  The transition to
Jot based  PalmSource  operating  systems  by OEM's was  completed  in the third
quarter of 2004.

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 $130 in 2004,  57% below
the $300 for the prior year,  reflecting  the  continuing  suppressed  levels of
handheld computer  shipments in 2004 as well as the overall decrease in consumer
spending both online and at retail stores on handheld computer (PDA) devices.

     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 , Handango
and PalmGear, leading online suppliers of software enhancements for Palm powered
devices.

China eSignature Revenue

     CIC China ("CICC"),  a joint venture 90% owned by CIC, was established over
nine years ago and is  headquartered  in Nanjing China. The Joint Venture is 10%
owned by the Jiangsu Hongtu Electronics Group.

     Revenue from CICC's eSignature  software of $120 in 2004, declined 62% from
$319 in the prior year.  This  decline  represents  both the impact of delays in
rolling out CICC's channel strategy as well as the passage of China's E-Sign Law
in August of 2004. Achieving  accelerated and sustained sales growth in China by
leveraging  resellers to provide China wide market coverage requires  investment
of both time and resources.  Training resellers' sales forces and committing the
upfront  engineering  resources  required to embed our eSignature  software into
partners'   total   solutions  was  anticipated  and  fundamental  to  achieving
China-wide sales coverage.  The anticipation and final passage of China's E Sign
Law, however,  significantly dampened sales results, especially in the last half
of 2004, as both resellers and end user customers  awaited the  implications  of
the law on  product  functionality.  However,  passage of this Law is an overall
positive event in that it provides the framework for product  functionality  and
standards  required to accelerate  acceptance  and growth for our  technology in
China. It does, however,  require new market validation studies and considerable
engineering  effort to localize our newer  technologies to meet the China market
requirements.  This has led to our current  strategy of identifying and focusing
on fewer strategic  partners/resellers in China. Specifically,  those capable of
both market validation and possessing a high level of engineering competence and
effective selling to target market applications.

                                      -8-
<PAGE>


China System Integration Revenue

     CICC systems integration (SI) revenue of $36 in 2004 declined 95% from $667
in the prior  year.  The  decline in system  integration  revenue  reflects  our
decision  made in late 2003 not to continue in or expand this low margin,  labor
intensive business,  which would require significant  increases in base costs to
provide turn-key  capabilities.  The SI business has become highly  competitive,
with a low barrier to entry. It is increasingly comprised of small Chinese owned
businesses with virtually no  differentiation in service offerings and primarily
competing on price and relationships. Our focus in China is on the emerging high
potential workflow/office automation market leveraging our eSignature technology
and strategic channel partners.

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
                 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  technologies  covered by the  patents  are unique and allow it to
produce  superior  products.  The Company also  believes  these patents are very
broad in their  coverage.  The  technologies  go beyond the  simple  handwritten
signature  and  include  measuring  electronically  the manner in which a 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  products  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
technologies,  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 or
infringing 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.

                                      -9-
<PAGE>

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 46 % and 19% of total segment revenues for the
years ended December 31, 2004 and 2003, respectively.  One customer,  Nationwide
Building Society, accounted for 11% of total segment revenues for the year ended
December 31, 2002.

Systems Integration Segment

     One customer,  Nanjing Minze, accounted for 40% of total system integration
revenue for the year ended  December  31,  2004.  One  customer,  Fujitsu  Ltd.,
accounted for 21% and 30% of total system integration revenue for the year ended
December 31, 2003 and 2002, respectively.

Seasonality of Business

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

Backlog

Handwriting Recognition Segment

     Backlog  approximated  $458 at December  31,  2004,  representing  advanced
payments on service  maintenance  agreements  that are expected to be recognized
over the next twelve months. At December 31, 2003,  backlog  approximated  $165,
representing   advanced   payments  on  service   maintenance   agreements   and
non-recurring engineering projects.

Systems Integration Segment

     There was no backlog at December  31, 2004 and 2003.  At December 31, 2002,
backlog was approximately $34.

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.

                                      -10-
<PAGE>

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.   However,  as  previously  discussed  under  System
Integration  Revenue,  the  Company has shifted its focus in China away from the
system  integration  business to the emerging high  potential  work  flow/office
automation  market  leveraging its eSignature  technology and strategic  channel
partners.

Employees

     As of December 31, 2004, the Company  employed an aggregate of 33 full-time
employees.  The  Company's  handwriting  recognition  segment  consisted  of  33
employees,  19 of which are in the  United  States and 14 of which are in China.
The Company had no  full-time  employees in its systems  integration  segment in
China at  December  31,  2004.  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, 2004,  2003, and 2002, the Company's sales
in  China as a  percentage  of  total  sales  were  less  than 1%,  34% and 38%,
respectively.  For the years  ended  December  31,  2004,  2003,  and 2002,  the
Company's  sales in the United  States as a percentage  of total sales were 99%,
66%, and 62%,  respectively.  For the years ended  December 31, 2004,  2003, and
2002,  the  Company's  export  sales  as a  percentage  of total  revenues  were
approximately 1%, 14%, and 14%, respectively.

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  9,600 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

     In  February of 2005,  Valyd,  Inc.  filed a complaint  against the Company
seeking a  declaratory  judgment  that  Valyd is not  infringing  certain of the
Company's patents, that such patents are invalid or unenforceable,  and that the
Company tortiously  interfered with a contract between Valyd, Inc. and Interlink
Electronics, Inc. by delivering an infringement notice to Interlink Electronics,
Inc. The complaint  also alleged unfair  competition  under  California  law. No
specific monetary claim is set forth in the complaint. The Company believes that
the  complaint is without  merit and intends to  vigorously  defend  against the
claims.  On March 3, 2005, the Company  responded to the  complaint,  denied all
allegations,  and filed  counterclaims  against  Valyd,  Inc.  The  counterclaim

                                      -11-
<PAGE>

asserted  that Valyd,  Inc. is infringing  certain of the Company's  patents and
asked for treble damages, alleging that the infringement is willful,  deliberate
and in  conscious  disregard  of CIC's  rights.  The  ultimate  outcome  of this
litigation cannot presently be determined. However, in management's opinion, the
likelihood of a material  adverse outcome is remote and any liability that might
be incurred would not have a material adverse effect on the Company's  financial
position or its results of  operations.  Accordingly,  adjustments,  if any that
might result from the  resolution of this matter have not been  reflected in the
financial statements.

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
        and issuer Purchases of Equity Securities

     The Company's common stock is listed on the 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

     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...................................   $ 1.10  $ 0.35
             Second Quarter..................................   $ 0.90  $ 0.42
             Third Quarter...................................   $ 0.80  $ 0.31
             Fourth Quarter..................................   $ 0.71  $ 0.35
     2005 First Quarter (through March 15, 2005).............   $ 0.63  $ 0.38

     As of March 28,  2005,  the closing  sale price of the Common  Stock on the
Nasdaq  OTC was $0.46 per share and  there  were  approximately  960  registered
holders of the Common Stock.

     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 2004 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,  2004,  the Company  granted
600,000 stock options to eight employees, with a weighted average exercise price
of $0.53 per share, under the Company's 1999 Stock option Plan. During the years
ended December 31, 2004, 2003, and 2002,  respectively,  the Company granted the
following  options to purchase Common Stock to employees at the prices per share
indicated below.

                                      -12-
<PAGE>
                                                        Approximate Exercise
                 Year             Number of Shares         Price Per Share
         --------------------- ----------------------- ------------------------
                 2004                  1,334                    $0.53
                 2003                   858                     $0.32
                 2002                  1,108                    $0.60

     The  information  required by Item 201(d) of Regulation S-K is incorporated
by  reference  to  Note 7  ("Stockholders  Equity")  of  Notes  to  Consolidated
Financial Statements for the Year Ended December 31, 2004, page F-22.

Item 6. Selected Financial Data

     The selected consolidated financial data presented below as of December 31,
2004,  2003,  2002,  2001,  and 2000 and for each of the years in the  five-year
period  ended  December  31,  2004 are  derived  from the  audited  consolidated
financial statements of the Company. The consolidated financial statements as of
December 31, 2004 and 2003, and for each of the years in the  three-year  period
ended  December 31, 2004, 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,
                                 -----------------------------------------------
                                  2004      2003      2002      2001      2000
                                 -----------------------------------------------
                                      (In thousands, except per share amounts)
Statement of Operations Data:
Revenues.........................$7,284   $ 3,034   $ 3,272   $ 5,947   $ 7,312
Research and development
 expenses(1)..................... 1,187     1,302     1,485     1,808     1,603
Sales and marketing expenses..... 1,306       905     1,543     2,054     2,239
General and administrative
 expenses........................ 2,483     2,219     2,424     2,791     2,181
Income (loss) from operations.... 2,255    (2,157)   (3,337)   (2,946)   (1,607)
Net income (loss) available
 to common stockholders.......... 1,620    (2,345)   (3,561)   (3,215)   (1,799)
Basic and diluted income (loss)
 per share.......................  0.02     (0.02)    (0.04)    (0.04)    (0.02)

                                               As of December 31,
                                 -----------------------------------------------
                                   2004     2003      2002      2001      2000
                                 -----------------------------------------------
                                                (In thousands)
Balance Sheet Data:
Cash, cash equivalents and
 restricted cash...............  $4,736    $1,039    $  711   $ 2,588   $ 2,349
Working capital(2).............   4,068    (2,895)      443     3,017     3,109
Total assets...................  10,819     7,215     7,168    10,072    11,302
Deferred revenue...............     458       165       165        88        61
Long-term obligations..........   1,790        13     3,000     3,000     1,427
Stockholders' equity (3).......   7,531     2,187     2,934     6,060     8,307
-----------

(1)  Excludes   software   development  costs  capitalized  in  accordance  with
     Statement of Financial  Accounting  Standards No. 86 of $32 at December 31,
     2004 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, 2004,
     2003,  2002,  2001, and 2000 include  deferred revenue of $458, $165, $165,
     $88, and $61, respectively.

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

                                      -13-
<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. Except
for the year ended  December  31,  2004,  in each year since its  inception  the
Company has incurred  losses.  For the five-year period ended December 31, 2004,
operating losses aggregated  approximately  $8,000 and at December 31, 2004, the
Company's accumulated deficit was approximately $81,000.

New Accounting Pronouncements

     See note 1, Notes to Consolidated  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,  fair value of financial  instruments,
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 104 ("SAB 104") 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,

                                      -14-
<PAGE>

collectibility  of the  receivable  is  reasonably  assured  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 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
reassesses 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.

     The Company  believes  that as of December 31, 2004 and 2003, no impairment
of the carrying values of the patents existed.

     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 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,  2004,  2003  and  2002,  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"

                                      -15-
<PAGE>

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
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, 2004, 2003 and 2002, 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,
2004 of $28 million based upon the Company's history of losses.

Segments

     The Company  reports in two segments:  handwriting  recognition and systems
integration.   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 a direct sales force to individual or enterprise end users and
by web based application  resellers.  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 operate
on a  new  customer's  hardware  platform  or  within  the  customer's  software
operating system.  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.  However, as previously discussed under System Integration Revenue, the
Company has shifted its focus in China away from the system integration business
to the emerging high potential work flow/office automation market leveraging its
eSignature technology and strategic channel partners.

Results of Operations

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

                                             Years Ended December 31,
                                       2004             2003            2002
                              ----------------- --------------- ---------------
Handwriting recognition
    Online/retail                   $     130         $     300       $     351
    Corporate                           6,997             1,703           1,667
    China                                 120               319             239
                              ----------------- --------------- ----------------
Total Handwriting recognition       $   7,247         $   2,322       $   2,257
Systems integration
 China Total Systems integration    $      37         $     712       $   1,015
                              ----------------- --------------- ----------------

Total revenues                      $   7,284         $   3,034       $   3,272
                              ----------------- --------------- ----------------

Cost of Sales
    Handwriting recognition         $      22         $     141       $     423
    Systems integration                    31               624             734
                              ----------------- --------------- ----------------
Total cost of sales                 $      53         $     765       $   1,157

                                      -16-
<PAGE>

                                             Years Ended December 31,
                                      2004             2003            2002
                              ----------------- --------------- ----------------
Operating cost and expenses
   Research and development         $   1,187         $   1,302       $   1,485
   Sales and Marketing                  1,306               905           1,543
   General and administrative           2,483             2,219           2,424
                               ---------------- --------------- ----------------
Total operating costs and expenses  $   4,976         $   4,426       $   5,452
                              ----------------- --------------- ----------------

Interest and other income
 (expense) net, and Minority
 interest                           $    (635)        $    (188)      $    (224)
                              ----------------- --------------- ----------------
Net income (loss)                   $   1,620         $  (2,345)      $  (3,561)
                              ================= =============== ================

Amortization of intangible assets
   Cost of sales                    $      12         $      14       $      14
   General and administrative             379               379             378
                              ----------------- --------------- ----------------
Total amortization of intangible
 assets (See note 1)                $     391         $     393       $     392
                              ================= =============== ================


Years Ended December 31, 2004 and December 31, 2003

Revenues

Handwriting Recognition

     Handwriting  recognition segment revenues include online/retail,  corporate
and China software sales.  Handwriting  recognition  segment revenues  increased
212%,  or $4,925,  to $7,247 for the twelve  months  ended  December  31,  2004,
compared to $2,322 in the prior year period as discussed below.

     Online/retail  revenues for the Company's natural input products  decreased
57% or $170, to $130 for the twelve months ended December 31, 2004,  compared to
$300 in the prior year period. 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.
The  embedding  of Jot on Palm  related  devices  had a  negative  impact on the
online/retail sales. The transition to Jot based PalmSource operating systems by
OEM's was completed in the third  quarter of 2004 and the Company  believes that
the online/retail revenues have stabilized for the near term.

     Corporate  revenues,  which  includes  eSignature  and natural input sales,
increased  311%, or $5,294,  to $6,997 for the twelve months ended  December 31,
2004, compared to $1,703 in the prior year period. Natural input OEM and channel
partner  sales  increased  53%, or $382,  to $1,104 for the twelve  months ended
December  31, 2004,  compared to $722 in the prior year period.  The increase in
natural input channel  partner and OEM sales was due primarily to royalties from
the shipment by PalmSource of its operating  system  containing the Company' Jot
software.  The Company  expects  natural input channel  partner and OEM sales to
increase in the future as new customers are  identified  and new  agreements are
signed.  eSignature  sales increased  501%, or $4,913,  to $5,894 for the twelve
months ended December 31, 2004,  compared to $981 in the prior year period.  The
increase  in  eSignature  sales  was due  primarily  to sales to large  national
customers in the insurance and banking industries. The Company believes that the
sales of smaller pilot deployments to large national  eSignature  customers will
lead to  greater  sales in  future  periods  as the  customers  roll  out  their
applications on a wider scale.  However the timing of customer  product roll out
is difficult to project due to many factors  beyond the Company's  control.  The
Company  views  eSignature  as a high  potential  revenue  market and intends to
continue to place increasing focus on this market.

     China  software  sales declined 62%, or $199, to $120 for the twelve months
ended December 31, 2004, compared to $319 in the prior year period. This decline
represents  both the impact of delays in rolling out CICC's channel  strategy as

                                      -17-
<PAGE>

well  as the  passage  of  China's  E-Sign  Law in  August  of  2004.  Achieving
accelerated  and  sustained  sales  growth in China by  leveraging  resellers to
provide  China  wide  market  coverage  requires  investment  in both  time  and
resources.   Training   resellers'  sales  forces  and  committing  the  upfront
engineering  resources required to embed our eSignature  software into partners'
total solutions was anticipated  and fundamental to achieving  China-wide  sales
coverage.  The  anticipation  and final passage of China's E Sign Law,  however,
significantly  dampened sales  results,  especially in the last half of 2004, as
both resellers and end user  customers  awaited the  implications  of the law on
product functionality. However, passage of this Law is an overall positive event
in that it provides  the  framework  for  product  functionality  and  standards
required to accelerate  acceptance  and growth for our  technology in China.  It
does,   however,   require  new  market  validation   studies  and  considerable
engineering  effort to localize our newer  technologies to meet the China market
requirements.  This has led to our current  strategy of identifying and focusing
on fewer strategic  partners/resellers in China. Specifically,  those capable of
both market validation and possessing a high level of engineering competence and
effective selling to target market applications.

Systems Integration.

     System  integration  segment revenue  declined 95%, or $675, to $37 for the
twelve  months  ended  December  31,  2004,  compared  to $712 in the prior year
period. The decline in system integration  revenue reflects the decision made in
late  2003 not to  continue  in or  expand  this  low  margin,  labor  intensive
business,  which would  require  significant  increases in base costs to provide
turn-key capabilities. The SI business has become highly competitive, with a low
barrier to entry. It is increasingly comprised of small Chinese owned businesses
with virtually no differentiation  in service offerings and primarily  competing
on price and relationships. Our focus in China is on the emerging high potential
workflow/office  automation  market  leveraging  our  eSignature  technology and
strategic channel partners.

Cost of Sales.

Handwriting recognition.

     Handwriting  recognition  segment  cost of  sales  includes  online/retail,
corporate and China  software  sales costs.  Such costs are comprised of 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 84%, or
$119, to $22 for the twelve months ended December 31, 2004,  compared to $141 in
the prior year period.  The decline was  primarily due to the sale of less third
party hardware  along with the Company's  software  products.  Cost of sales may
increase in the future depending on the customers  decision to purchase from the
Company its  software  solution and third party  hardware as a complete  package
rather than buying individual components from separate vendors.

     Online/retail  cost of sales  decreased  100%, or $16, to $0 for the twelve
months ended  December 31, 2004,  compared to $16 in the prior year period.  The
decrease was due to the use of software  reseller web sites to move its products
rather  than  maintaining  an  internal  online  store.  The  Company  does  not
anticipate a material increase in costs associated with the online/retail sales.

     eSignature  and  natural  input  channel  partner  and OEM  cost  of  sales
decreased  35%, or $11, to $20 for the twelve  months  ended  December 31, 2004,
compared  to $31 in the prior year  period.  The  decrease  was due to the lower
volume of third party hardware sales and engineering  development costs compared
to the prior year.  Increases in  corporate  cost of sales in the future will be
driven by the amount of third  party  hardware  that is sold with the  Company's
software  solutions and increased  amortization  of software  development  costs
capitalized in future periods associated with product development.

     China  software cost of sales  decreased  96%, or $90, to $4 for the twelve
months ended  December 31, 2004,  compared to $94 in the prior year period.  The
decrease  was due to the  reduction  in revenues  over the twelve  months  ended
December 31, 2004,  compared to the prior year periods. It is expected that cost
of sales will remain low for the foreseeable  future as the current focus is the
sale of software  solutions  through  channel  partners  with little third party
hardware costs.

                                      -18-
<PAGE>

Systems Integration.

     China Systems  integration segment cost of sales decreased 95%, or $593, to
$31 for the twelve months ended December 31, 2004, compared to $624 in the prior
year period.  The decrease in costs was due  primarily to the reduction in sales
during the twelve months ended  December 31, 2004 as compared to the prior year.
The Company  expects that system  integration  cost of sales will  decrease over
time as the Company has decided not to pursue system integration revenues beyond
2004 but to  continue  to  increase  its focus on the  emerging  high  potential
eSignature/office automation market in China.

Operating expenses

     Research  and  Development  Expenses.   Research  and  Development  expense
decreased 9%, or $115, to $1,187 for the twelve months ended  December 31, 2004,
as compared to $1,302 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 increased 6%, or
$53, to $881 for the year ended  December 31,  2004,  as compared to $828 in the
prior year period,  due primarily to increases in salaries and related expenses.
Outside  engineering cost and expenses  declined 77%, or $24, to $7 for the year
ended December 31, 2004,  compared to $31 in the prior year period.  The decline
was due  primarily  to a reduction  in the use of outside  engineering  services
compared to the prior year. The Company maintains a relationship with an outside
engineering group familiar with its products and may draw on their services,  as
required,  which  could  have  a  material  effect  on  the  amount  of  outside
engineering expense reported.  Capitalized  software development costs increased
100%,  or $45,  as  compared  to $0 in the prior year  period.  The  increase in
capitalized  software  development  was  due  to  new  product  development  and
significant  upgrades and enhancements being made to the Company's natural input
and  eSignature  products.  Capitalization  of  software  development  costs are
expected  to remain at  increased  amounts  for the  foreseeable  future.  Other
engineering  expenses decreased 22%, or $99, to $344 for the twelve months ended
December 31, 2004 as compared to $443 in the prior year period. The decrease was
primarily due to lower  maintenance  and  depreciation  expense  compared to the
prior year  periods.  The Company  believes that the  reductions in  engineering
expenses  will  not  have an  adverse  effect  on its  product  engineering  and
development efforts due to its ability to call on outside  engineering  services
as required.

     Sales and Marketing  Expenses.  Sales and marketing expenses increased 44%,
or $401, to $1,306 for the year ended December 31, 2004, compared to $905 in the
prior year period. 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
increased 51%, or $175, to $517 for the year ended  December 31, 2004,  compared
to $342 in the prior year period.  The increase in salaries and related  expense
was due primarily to the increase in headcount of one executive  level  employee
and, to a lesser  extent,  increases in employee  salaries.  Commission  expense
increased 214%, or $214, to $314 for the year ended December 31, 2004,  compared
to $100 in the prior year  period.  The increase in  commission  expense was due
primarily  to an  increase in  revenues  compared to the prior year.  Travel and
entertainment  increased  102%,  or $43, to $85 for the year ended  December 31,
2004,  compared to $42 in the prior year  period.  This  increase was due to the
increase in the sales  employee  headcount,  and an increased  amount of travel.
Recruiting expense increased 75%, or $15, to $35 for the year ended December 31,
2004,  compared to $20 in the prior year  period.  The  increase  was due to the
hiring of an executive  level employee  through an executive  level search firm.
Other  expense,  including  general  office and  allocated  facilities  expenses
declined $46, or 11%, to $355 for the year ended December 31, 2004,  compared to
$401 in the prior year period. The Company  anticipates that sales and marketing
expenses will  continue to increase in the near term as we strengthen  our sales
efforts  through  increasing  headcount  to  pursue  new  opportunities  in  the
eSignature  market space. The Company continues to pursue a channel strategy for
its eSignature products.  The Company believes the channel strategy,  along with
its current and potential partners, will produce increasing revenues in the near
term.

     General and Administrative  Expenses.  General and administrative  expenses
increased  12%,  or $264,  to $2,483,  for the year  ended  December  31,  2004,
compared to $2,219 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 5%, or $34, to $744 for the year ended December 31, 2004,  compared to
$710 in the prior year period.  The  increase was due  primarily to increases in
employee salaries. Professional service expense, which include consulting, legal

                                      -19-
<PAGE>

and outside  accounting fees,  increased 16%, or $74, to $542 for the year ended
December 31, 2004,  compared to $468 in the prior year period.  The increase was
due  primarily  to an  increases  in  legal  fees  associated  the  infringement
litigation of Company's patent during the twelve months ended December 31, 2004,
compared to the prior  year.  The  Company  increased  its expense for bad debts
300%, or $111, to $148, for the year ended December 31, 2004, compared to $37 in
the prior year  period.  The  increase  was to cover the slow  payment  cycle of
channel  partner  receivables  of the Joint  Venture.  At this time, the Company
believes  that its  provision  for bad debts is adequate.  Other  administrative
expenses  decreased  3%, or $29, to $975 for the year ended  December  31, 2004,
compared to $1,004 in the prior year period.  The decrease was due  primarily to
spending  reductions.  The Company believes that its General and  Administrative
expenses will remain fairly stable for the near term.

Interest income  and other income (expense), net

     Interest income and other income (expense), net, increased 460%, or $46, to
$47 for the twelve months ended  December 31, 2004,  compared to $1 in the prior
year  period.  The  increase  was due to an increase  in interest  income due to
larger cash  balances and to a refund of value added tax related to the tax year
2003 received by the Joint Venture in 2004.

Interest expense

     Interest  expense  increased  242%,  or $496, to $701 for the twelve months
ended December 31, 2004, compared to $205 in the prior year period. The increase
in  interest  expense  was due to the  amortization  of fees to Cornell  Capital
Partners,  LP associated with the $750 in short-term  debt, the $3,500 loan from
Cornell  Capital  Partners,  LP,  (See  Note  4 of  the  condensed  consolidated
financial  statements)  and  interest  on the long term debt.  In  addition  the
Company is amortizing  through interest expense the deferred financing costs and
debt  discount  associated  with its long term debt (See Note 6 of the condensed
consolidated financial statements).

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 for the Company's  natural input products  declined
15%, or $51 to $300, for the twelve months ended December 31, 2003,  compared to
$351 in the  prior  year  period  . 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 "hallo effect" of the Palm license agreement,
as owners of older Palm operating  systems 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,  which  includes  eSignature  and natural input sales,
increased  2%, or $36, to 1,703 for the twelve  months ended  December 31, 2003,
compared to $1,667 in the prior year period. Natural input OEM revenues included
in corporate  sales  decreased  23%, or $84, to $722 for the twelve months ended
December 31, 2003, compared to $806 in the prior year period.. This decrease was
primarily  due to  decreases  in the  amount of royalty  reported  by two of the
Company's  licensees.  The Company  believes  natural  Input 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  eSignature and natural Input OEM revenues in 2004.  eSignature  sales
included in  corporate  sales  increased  14%,  or $120,  to $981 for the twelve

                                      -20-
<PAGE>

months ended December 31, 2003,  compared to $861 in the prior year period.  The
increase  in  enterprise  revenues  was due to an  increase  in  orders  in 2003
compared to 2002.

     Software sales in China increased 33%, or $80, to 319 for the twelve months
ended December 31, 2003, compared to $239 in the prior year period. 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 for the twelve months ended December 31, 2003, compared to
$1,015 in the prior year  period.  The Company  believes  that the SARS  related
health  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.

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  decreased 93%, or $242, to $17 for the twelve
months ended  December 31, 2003  compared to $259 in the 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.

     eSignature  and natural Input 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 period . 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.

     Cost of sales for eSignature  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 twelve months 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

                                      -21-
<PAGE>

for the twelve months ended December 31, 2003, compared to $98 in the prior year
period.  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.

     Sales and Marketing Expenses.  Sales and marketing expenses declined 41% or
$638, to $905 for the twelve months ended December 31, 2003, compared to $1,543,
in the prior year  period.  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 twelve months ended December 31,
2003, in 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 twelve months
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 twelve months 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 twelve  months ended  December  31,  2003,  compared to $134 in the
prior year period.  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 twelve months 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 twelve months 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 in the twelve  months ended  December 31, 2003,
compared to $596 in the prior year period.  The decrease was due  primarily to a
decrease in legal fees during the twelve months ended December 31, 2003 compared
to the prior year. Other  administrative  expenses decreased 2%, or $18, for the
twelve months 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,  a reduction
to  Minority  Interest  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.

                                      -22-
<PAGE>

Liquidity and Capital Resources

     Cash and cash equivalents at December 31, 2004 totaled $4,736,  compared to
cash and cash  equivalents  of $1,039 at December  31, 2003.  This  increase was
primarily  attributable  to $2,821  provided by operations  and $958 provided by
financing  activities.  These cash  inflows  were  offset by $82 of cash used in
investing  activities.   The  effect  of  exchange  rate  changes  on  cash  was
immaterial.  The cash  provided by  operations  was  primarily  due to income of
$1,620, depreciation and amortization of $425, amortization of the loan discount
of $142,  a decrease in  accounts  receivable  of $238,  an increase in deferred
revenue of $293 and $55 from the  disposal  of fixed  assets and  provision  for
inventory  obsolescence.  These  inflows  were offset by $100 from  increases of
prepaid  expenses and other current  assets and  decreases in accounts  payable,
accrued compensation and other accrued  liabilities.  The cash used in investing
activities of $82 was due to the purchase of computer  equipment and third party
software for internal use and to an increase the amount of capitalized software.
The $958 provided by financing  activities  consisted primarily of $3,885 in net
proceeds  from the  issuance  of  convertible  debt,  $36 in  proceeds  from the
issuance  of  short-term  debt and $53 in proceeds  from the  issuance of common
stock due to the  exercise of stock  options.  These cash inflows were offset by
$3,008 in  payments  on short  term  debt-related  party and $8 in  payments  on
capital lease obligations.

     Accounts  receivable  decreased 52%, or $386, to $356, net of $404 provided
for potentially uncollectable accounts, for the twelve months ended December 31,
2004  compared  to $742 at December  31,  2003.  The  decrease is due to an $148
increase in the Company's bad debt  provision and fewer sales late in the fourth
quarter  compared to the prior year's fourth  quarter.  The Company expects that
the development of the eSignature market will result in more consistent  revenue
on a quarter to quarter  basis and,  therefore,  less  fluctuation  in  accounts
receivable from quarter to quarter.

     Deferred  financing cost increased  1190%, or $714, to $774 at December 31,
2004,  compared to $60 at December 31, 2003.  Deferred  financing costs includes
approximately  $397 in non-cash expenses  associated with the November financing
(See "Financing"  below).  The non-cash deferred  financing costs along with the
cash expenses will be amortized to interest  expense over 36 months or, the life
of the convertible notes, whichever is shorter.

     Prepaid expenses and other current assets decreased 10%, or $12, to $105 at
December  31,  2004,  compared to $117 at December  31,  2003.  The  decrease is
primarily due the timing of the billings of annual maintenance and other prepaid
contracts.  Prepaid  expenses  generally  fluctuate  due to the timing of annual
insurance  premiums  and  maintenance  and  support  fees,  which are prepaid in
December and June of each year.

     Current  liabilities,  which  include  deferred  revenue,  were  $1,401  at
December  31,  2004,  compared to $4,900 at  December  31,  2003,  a declined of
$3,499.  Payment of the Company's  $3,000 note in August 2004 and  conversion of
the $750 note to  Cornell  Capital  Partners  LP is the  primary  reason for the
decline.  Deferred  revenue was $458 at December 31,  2004,  compared to $165 at
December 31, 2003. The increase primarily reflects advance payments for products
and  maintenance  fees  from  the  Company's  licensees,   which  are  generally
recognized  as revenue by the Company when all  obligations  are met or over the
term of the maintenance agreement.

Financing.

     In November  2004,  the Company  entered into a unsecured  Note and Warrant
Purchase  Agreement  (the  "Purchase   Agreement")  and  a  Registration  Rights
Agreement (the "Registration  Rights  Agreement"),  each dated as of October 28,
2004. The financing,  a combination of debt and equity, closed November 2, 2004.
The  proceeds  to  the  Company  were  approximately  $3,885,  net  of  $310  in
commissions  and legal  expenses.  H.C.  Wainwright & Co., Inc.  ("Wainwright"),
acted as  placement  agent.  As  placement  agent for the  Company,  at  closing
Wainwright  received  $731  in  commissions,   legal  fees  and  warrants.   The
commissions of approximately  $285, and legal fees of $25, mentioned above, were
paid in cash. The Company issued warrants to Wainewright to acquire 1,218 shares
of the Company's  common stock. Of the warrants  issued,  870 are exercisable at
$0.46 and 348 are  exercisable  at $0.51.  The Company has ascribed the value of
$421 to the Wainwright warrants which is recorded as deferred financing costs in
the  balance  sheet at  December  31,  2004.  The  fair  value  ascribed  to the

                                      -23-
<PAGE>

Wainwright warrants was estimated on the commitment date using the Black-Scholes
pricing model with the following assumptions:  risk-free interest rate of 3.21%;
expected life of 3 years;  expected  volatility of 100%;  and expected  dividend
yield of 0%.  The  Company  expects to use the  proceeds  of the  financing  for
additional working capital.

     Under the terms of the financing,  the Company issued to certain accredited
investors  convertible  promissory  notes in the aggregate  principal  amount of
$4,195 and warrants to acquire 3,632 shares of the Company's  common stock at an
exercise price of $0.508 per share.  The notes accrue interest at the rate of 7%
per  annum,  payable  semi-annually,  and are  convertible  into  shares  of the
Company's common stock at the rate of $0.462 per share. The Company has ascribed
a value of $982 to the  investor  warrants,  which is  recorded as a discount to
notes payable in the balance sheet at December 31, 2004. The fair value ascribed
to the warrants was  estimated on the  commitment  date using the  Black-Scholes
pricing model with the following assumptions:  risk-free interest rate of 3.21%;
expected life of 3 years;  expected  volatility of 100%;  and expected  dividend
yield of 0%. In addition to the fair value ascribed to the warrants, the Company
has ascribed  $1,569 to the  beneficial  conversion  feature in the  convertible
notes,  which is recorded as a discount to notes payable in the balance sheet at
December 31, 2004. The values ascribe to the warrants and beneficial  conversion
feature  follow  the  guidance  of the EITF  Issue  No.  98-5,  "Accounting  for
Convertible  Securities  with  Beneficial  Conversion  Features or  Contingently
Adjustable  Conversion Ratios", and ETIF Issue No. 00-27,  "Application of Issue
No. 98-5 to Certain Convertible  Instruments" of the FASB's Emerging Issues Task
Force.  The fair value of the  warrants  and  beneficial  conversion  feature is
amortized  to expense  over the life of the  convertible  notes or upon  earlier
conversion  using the effective  interest  method.  As of December 31, 2004, the
Company  had  amortized  to  interest  expense  approximately  $187 of the  loan
discount and deferred  financing  costs.  The balance due under the  convertible
notes is shown net of the  remaining  unamortized  discount on the  accompanying
consolidated  balance sheet. If the aggregate  principal  amount owing under the
notes is converted, the Company will issue 9,080, shares of its common stock. If
the notes are not converted,  all principal and accrued but unpaid interest will
be due October  28,  2007.  The  Company may pay accrued  interest in cash or in
shares of Company common stock,  issued at the market price for the common stock
calculated prior to the interest payment.  The Company does not currently intend
to pay accrued interest with shares of its common stock.

     The above  warrants  expire on October 28,  2009.  The Company may call the
warrants  if the  Company's  common  stock  trades  at  $1.00  or  above  for 20
consecutive  trading  days  after  the  date  that  is  20  days  following  the
effectiveness of a registration statement providing for the resale of the shares
issued upon the conversion of the notes and exercise of the warrants. Wainwright
will be paid  approximately $28 in the aggregate if all of the investor warrants
are exercised.  The Company will receive proceeds of approximately $1,845 if all
of the warrants are exercised.

     The Company also was required to file a  registration  statement  providing
for the resale of the shares that are issuable upon the  conversion of the notes
and the  exercise  of the  warrants.  The  registration  statement  was filed on
December 22, 2004, and was declared effective on January 26, 2005.

     On August 4, 2004,  the  Company,  in  connection  with the equity  line of
credit  discussed  below,  borrowed  $3,500 from Cornell  Capital  Partners,  LP
("Cornell"),  the proceeds of which were used to extinguish short-term debt with
a related  party (See Note 5, to the  Financial  Statements  "Short-term  debt -
Related Party  Transaction").  The Cornell short-term debt was secured by shares
of the Company's common stock held in escrow and accrued interest at the rate of
5% per annum on any unpaid  balance  remaining  after the due date. The loan was
scheduled to be paid in ten equal  installments,  with the first installment due
December 6, 2004 and the last on February 7, 2005. The Company had the option to
repay the note in cash or by issuing shares of the Company's  common stock.  The
Cornell debt was repaid in full,  in cash, on November 8, 2004,  from  proceeded
generated  through  operations.  The Company  expensed  $298 of financing  costs
associated with the $3,500 loan.

     On April 20, 2004, the Joint Venture  borrowed the aggregate  equivalent of
$36,  denominated in Chinese currency,  from a Chinese bank. The proceeds of the
loan are to be used  for  working  capital  purposes  until  the  channel  sales
strategy is fully  implemented  and sales  increase.  The loan bears interest at
5.3% per annum and is due April 20,  2005.  The  borrowing  did not  require the
Joint Venture to deposit a compensating  balance.  The note can be repaid at any
time with out penalty.  The Company expects to pay the loan in full on or before
April 20, 2005 using existing cash resources.

     On December 19, 2003,  the Company,  in connection  with the equity line of
credit  discussed  below,  borrowed $750 from Cornell.  The proceeds of the loan
were used for working  capital  purposes.  The loan was secured by shares of the

                                      -24-
<PAGE>

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
had the option to delay the  commencement  of the  installment  payments  for an
unlimited number of 30 day periods in exchange for payment of an amount equal to
2% of the principal amount owed on or before the beginning of the current option
period. The 2% fee could be made in cash or shares of common stock. Any delay in
the  commencement  date  would  result in an equal  delay in the due date of the
note.  The  Company  exercised  its  right  to  delay  the  commencement  of the
installment  payments by paying the 2% fee discussed above. Such fees aggregated
$38 and were paid in cash and expensed. The Company repaid the $750 loan through
the issuance of 1,133  shares of common  stock in the quarter  ending June 2004.
The Company wrote off approximately $60 in unamortized  deferred financing costs
associated with the $750 loan against equity.

     In  June  2003,  the  Company's  Joint  Venture  borrowed  from  one of its
directors,  Tong Ming Sheng,  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
("Line of  Credit")  (see Note 1, to the  Financial  Statements  "Line of Credit
Agreement").  Under  the  terms  of the  Line of  Credit  and  the  registration
statements,  the Company could  periodically issue and sell shares of its common
stock for a total  purchase  price of  $15,000,  subject to the number of shares
available for issuance and the purchase price of such shares. The maximum amount
of each advance was stated as $1,000 in any 30-day  period.  The Company paid to
Cornell 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 was required to keep the  registration
statement  effective  until the earlier of when the investor had sold all of the
shares  acquired under the Line of Credit or the investor was able to resell the
shares under Rule 144 without regard to the volume limitations set forth in that
rule.  The Company  used the proceeds  from the equity line to repay  short-term
debt and for  working  capital  purposes.  Pursuant to the terms of the Note and
Warrant  Purchase  Agreement  signed on October 28, 2004  discussed  above,  the
Equity line of Credit agreement was terminated in December 2004.

     Since the inception of the Line of Credit the Company has borrowed  $6,250,
less a 6.5%  financing  fee from  Cornell.  As of December 31, 2004,  $2,750 was
repaid  through the sale of the Company's  common stock pursuant to the terms of
the equity line of credit.

     On June 19, 2001,  the Company  consummated a three-year  $3,000  financing
(the  "Loan")  with a  charitable  remainder  annuity  trust  of  which a former
director and officer of the Company is a trustee (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 bore  interest  at the rate of 2% over the
prime rate publicly  announced by Citibank  N.A. from time to time,  and was due
June 18, 2004. The Company received a sixty day extension to pay the $3,000 Loan
to the Trust in  exchange  for thirty days worth of  interest  ($15)  calculated
according  to the terms of the note.  The extended due date was August 18, 2004.
All other  provisions of the Loan  remained  unchanged.  On August 5, 2004,  the
Company  paid the $3,000 note due August 18,  2004,  to the Trust.  The funds to
retire the debt were  obtained  from  Cornell  on August 4, 2004,  (See Note 4 -
"Short-term debt - other").

Contractual Obligations.

     The Company had the following material commitments as of December 31, 2004:

                                                Payments due by periods
 -------------------------------    --------------------------------------------
                                              Less      One to   Four to  After
                                              than      Three     five    five
 Contractual obligations             Total   One year   years     years   years
 -------------------------------    -------- --------  -------- -------- -------
 Long-term debt (1)               $  1,790        -       1,790       -       -
 Short-term debt                         8        8           -       -       -
 Operating lease commitments (2)       738      380         358       -       -
                                    -------  --------  -------- -------- -------
  Total contractual cash
   obligations                    $  2,536   $  388    $  2,148   $   -   $   -
                                    =======   =======   ======== ======  =======

                                      -25-
<PAGE>

1.   Long-term debt is net of approximately $2,410 in discounts representing the
     fair  value  of  warrants  issued  to  the  investors  and  the  beneficial
     conversion feature associated with the convertible notes.

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.

     As of December 31, 2004, the Company leased facilities in the United States
and China  totaling  approximately  11,100  square feet.  The  Company's  rental
expense for the years ended December 31, 2004,  2003 and 2002 was  approximately
$443, $450, and $418,  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 in the
United  States will be  adequate  for the  Company's  needs over the term of the
lease.  The Company  will be reducing  the amount of space  leased in China as a
result of the  elimination  of  employees  associated  with  System  Integration
operations.

     As of December 31, 2004,  the Company's  principal  source of liquidity was
its cash and cash  equivalents  of $4,736.  With the  exception of 2004, in each
year since the Company's  inception the Company has incurred losses. 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 to achieve the Company's plans are
greater than expected the Company may need to obtain  additional funds or reduce
discretionary spending.  There can be no assurance that additional funds will be
available  when needed or, if  available,  will be on favorable  terms or in the
amounts the Company  may  require.  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.


Risks related to our business

Operating losses may continue,  which could adversely  affect financial  results
from operations and stockholder value.

     In each year since our  inception,  except for the year ended  December 31,
2004, we have  incurred  operating  losses,  which were  significant  in certain
periods.  For the  five-year  period  ended  December  31,  2004,  those  losses
aggregated  approximately  $7,792. At December 31, 2004, our accumulated deficit
was  approximately  $  $80,544.  While we  recorded  a profit for the year ended
December 31, 2004 there is no guarantee  that we will  continue to be profitable
and we may incur substantial losses in the future,  which could adversely affect
financial results from operations and stockholder value.

We have experienced significant declines in revenues in recent periods which, if
continued, could adversely affect stockholder value.

     Revenues  increased  140% for the twelve  months  ended  December 30, 2004,
compared  to  twelve  months  ended  December  31,  2003.  However,  there is no
assurance  that the trend in  revenues  and  profits in 2004 will  continue.  If
revenues  decline,  we will be unable to sustain  profitability.  We believe the
declines in prior years  reflected  primarily  the weak economy and  significant
slow down of  information  technology  spending,  both of which  had a  negative
impact on our revenues. We believe that recent increases in revenues and profits
similarly   reflect  a  strengthening   economy  and  increases  in  information
technology  spending as well as improvements in our sales and marketing  efforts
and  cost-cutting  measures that have reduced our expenses.  However,  we cannot
predict  with any degree of  certainty  whether  the  economy  will  continue to
strengthen  or whether  information  technology  spending  will continue to show
signs of strengthening.

                                      -26-
<PAGE>

We may  need  additional  financing  and,  if we are  unable  to get  additional
financing when needed,  we may be required to materially  change our operations,
which could adversely affect our results from operations and shareholder value.


     As of December 31, 2004,our working capital was  approximately  $4,068.  We
have suffered  recurring losses from operations  that, in prior years,  raised a
substantial  doubt about our ability to continue as a going  concern.  We cannot
assure you that,  even with the proceeds  from the Notes,  we will have adequate
capital  resources to fund planned  operations or that any additional funds will
be available to us when needed, or if available,  will be available on favorable
terms or in amounts we  require.  If we are  unable to obtain  adequate  capital
resources  to fund  operations,  we may be  required  to  delay,  scale  back or
eliminate  some or all of our  operations,  which  may have a  material  adverse
effect on our business,  results of operations and ability to operate as a going
concern.

Our  inability  to raise  additional  funds may affect our  ability to  continue
operations as a going concern.

     We need  the  funds  generated  from the  issuance  of the  Notes  and from
operations in order to continue  operations as a going concern.  We believe that
the funds  raised  from the  issuance  of the Notes,  when  combined  with funds
generated  from  operations,  should  be  sufficient  to  allow  us to fund  our
operations for the next twelve months. If all of the Warrants are exercised,  we
will receive approximately $2,500 in additional gross proceeds.  Even with these
funds, if we are unable to generate  substantially greater funds from operations
than we generated in 2004,  we may not be able to continue  operating as a going
concern without  significant changes to our operations.  Such changes,  which we
cannot identify at this time, could adversely affect stockholder value.

Our  competitors  could  develop  products or  technologies  that could make our
products or technologies  non-competitive,  which would adversely  affect sales,
financial results from operations and stockholder value.

     Although we believe that our patent  portfolio  provides a barrier to entry
to the electronic signature  verification market, there can be no assurance that
we will not  face  significant  competition  in this and  other  aspects  of our
business.

     Some of our  competitors,  such as  PenPower  Group,  and Palm  Inc.,  have
developed or are developing  complete  pen-based  hardware and software systems.
Others, such as Microsoft  Corporation,  Silanis Technology,  Inc., and Advanced
Recognition  Technology,  Inc.,  have  focused on  different  elements  of those
systems, such as character recognition  technology,  pen-based operating systems
and environments, and pen-based applications. Some of our competitors, including
more established  companies or those with greater  financial or other resources,
could develop products or technologies that are more effective, easier to use or
less expensive than ours. This could make our products and technologies obsolete
or non-competitive,  which would adversely affect sales,  financial results from
operations and stockholder value.

If we are unable to adequately protect our intellectual property,  third parties
may be able to use our technology,  which could adversely  affect our ability to
compete in the market,  our financial  results from  operations and  stockholder
value.

     We rely on a combination of patents, copyrights,  trademarks, trade secrets
and contractual provisions to protect our proprietary rights in our products and
technologies.  These  protections may not adequately  protect us for a number of
reasons.  First, our competitors may independently develop technologies that are
substantially  equivalent or superior to ours.  Second,  the laws of some of the
countries in which our products are licensed do not protect  those  products and
our intellectual property rights to the same extent as do the laws of the United
States. Third, because of the rapid evolution of technology and uncertainties in
intellectual property law in the United States and internationally,  our current
and future products and technologies could be subject to infringement  claims by

                                      -27-
<PAGE>

others.  Fourth, a substantial  portion of our technology and know-how are trade
secrets and are not protected by patent, trademark or copyright laws. We require
our employees and contractors to execute written agreements that seek to protect
our  proprietary  information.  We also have a policy of  requiring  prospective
business  partners  to enter into  non-disclosure  agreements  before any of our
proprietary  information is revealed to them. However,  the measures taken by us
to protect our  technology,  products  and other  proprietary  rights  might not
adequately protect us against improper use.

     We  may be  required  to  take  legal  action  to  protect  or  defend  our
proprietary  rights.  Litigation or third-party claims of intellectual  property
infringement  could require us to spend substantial time and money and adversely
affect our ability to develop and commercialize  products. If we are required to
defend against  lawsuits  brought by third parties,  or if we sue to protect our
proprietary rights, we may be required to pay substantial  litigation costs, and
our  management  and  technical  personnel's  attention  may  be  diverted  from
operating  our business.  If the results of any  litigation is adverse to us, we
may be  required  to expend  significant  resources  to  develop  non-infringing
technology or obtain  licenses from third  parties.  If we are not successful in
those efforts or if we are required to pay any substantial litigation costs, our
business would be materially and adversely affected.

Fluctuations in the value of currencies could adversely affect our joint venture
in the  People's  Republic  of China  and  adversely  affect  our  results  from
operations and shareholder value.

     We own 90% of Communication Intelligence Computer Corporation,  Ltd., which
is a joint venture between us and the Information  Industries  Bureau of Jiangsu
Province,  a  provincial  agency of the  People's  Republic  of China.  Revenues
provided by the joint venture as a percentage of total sales amounted to 2%, 34%
and 38% for the years ended December31,  2004, 2003 and 2002, respectively.  Our
investment in the joint venture is subject to  fluctuations  in currency  values
between the U.S.  dollar and the Chinese  currency.  Our results from operations
and  shareholder  value could be  adversely  affected  if the  Chinese  currency
increases in value relative to the U.S. dollar.

Longer payment cycles with respect to our joint venture could  adversely  affect
our results from operations and shareholder value.

     Longer  payment  cycles with respect to our joint  venture  could result in
lower  earnings in any  particular  period and in lower cash flows,  which could
result in having to incur additional debt in order to fund operations. Either of
these results could adversely affect our results from operations and shareholder
value.

Increased  difficulty  in  collecting  accounts  receivable of our joint venture
could adversely affect our results from operations and shareholder value.

     It may become more  difficult to collect  accounts  receivable of the joint
venture in the future. Such increased  difficulty could result in lower earnings
to the extent  accounts are deemed to be  uncollectible  and we have to increase
our reserves.  This increased  difficulty also could result in lower cash flows,
which  could  result  in  having  to  incur  additional  debt in  order  to fund
operations.  Additional debt may lead to increased  interest  expenses and lower
profits, which could adversely affect shareholder value.


Complying  with the laws of the  People's  Republic  of China  may  become  more
difficult and expensive in the future,  which could adversely affect our results
from operations and shareholder value.


     The joint venture is subject to the laws of the People's Republic of China.
Compliance  with these laws may become more  difficult and costly in the future.
In addition,  these laws may change and such change may require us to change the
joint  venture's  operations.  Any of these results could  adversely  affect our
results  from  operations  and  shareholder  value by  increasing  expenses  and
reducing revenues, thereby reducing profits.


Political and economic  instability  in the People's  Republic of China may make
doing business through the joint venture more difficult and costly,  which could
adversely affect our results from operations and shareholder value.


     Economic  and  political  instability  may  increase  in the  future in the
People's  Republic of China.  Such  instability may make it more difficult to do
business  through the joint venture and may make it more  expensive to do so. In
addition,  in  extreme  cases,  the joint  venture  may be  nationalized  by the
government, which could cause us to write off the value of the joint venture and
eliminate  revenues  generated by the joint venture.  Any of these results could
result in onetime charges or increased expenses as well as lower revenues, which
could adversely affect our results of operations and harm shareholder value.

                                      -28-
<PAGE>

A  significant  portion  of our  sales  are  derived  from a  limited  number of
customers,   and  results  from  operations  could  be  adversely  affected  and
shareholder value harmed if we lost any of these customers.

     Our  revenues  historically  have been  derived  from a  limited  number of
customers.  Therefore,  the  success of our  business  depends on our ability to
obtain  customers  and  maintain  satisfactory  relationships  with  them in the
future.  We may not be able to continue to maintain  satisfactory  relationships
with our customers in the future.  Our top customer accounted for 46% and 19% of
revenues in the twelve  months  ended  December  31, 2004 and December 31, 2003,
respectively. The loss of any significant customer or other revenue source would
have a material adverse effect on our revenues and profitability.


Risks Related to our Capital Structure


The market price of our stock can be volatile,  which could result in losses for
investors.

     Our common stock is listed on the OTC. Stock prices of technology companies
in  recent  years  have  experienced  significant  volatility,  including  price
fluctuations that are unrelated or not proportional to the operating performance
of  these  companies.  Volatility  on  the  OTC is  typically  higher  than  the
volatility of stocks traded on Nasdaq or the exchanges.  The market price of our
common  stock has been and could be subject  to  significant  fluctuations  as a
result of variations in our operating  results,  announcements  of technological
innovations  or new  products  by us or our  competitors,  announcements  of new
strategic  relationships  by us or our  competitors,  general  conditions in the
technology industry or market conditions unrelated to our business and operating
results.

Statutory  provisions  and  provisions  in our  charter  may delay or  frustrate
transactions that may be beneficial to our stockholders.

     Certain provisions of the Delaware General  Corporation Act and our charter
may  delay or  prevent  a  merger,  tender  offer or proxy  contest  that is not
approved by our Board of Directors, even if such events may be beneficial to the
interests of stockholders. For example, our Board, without shareholder approval,
has the  authority  and power to issue all  authorized  and  unissued  shares of
common stock and  preferred  stock which have not  otherwise  been  reserved for
issuance. In addition,  the Delaware General Corporation Law contains provisions
that may have the effect of making it more  difficult  or  delaying  attempts by
others to obtain  control  of us.  See  "Description  and Price  Range of Common
Stock--Anti-Takeover Provisions."

Resale by the holder of the Notes and Warrants could adversely affect the market
price of our stock.

     The  holders  of the Notes and  Warrants  may  immediately  sell the shares
issued upon  conversion and exercise of the Notes and Warrants.  In light of our
historically  low trading volume,  such sales may adversely  affect the price of
the shares of our stock.

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, 2004.

     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

                                      -29-
<PAGE>

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. Consolidated Financial Statements and Supplementary Data

     The Company's audited consolidated financial statements for the years ended
December 31,  2004,  2003,  and 2002 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 Disclosures

        None

Item 9A. Controls and Procedures

Disclosure Controls

     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,  as of December 31, 2004. Based on
that  evaluation,  the Company's  Chief  Executive  Officer and Chief  Financial
Officer  have  concluded  that these  disclosure  controls  and  procedures  are
effective.

     The Company does not expect that its  disclosure  controls  and  procedures
will prevent all error and all fraud.  A control  procedure,  no matter how well
conceived and operated,  can provide only  reasonable,  not absolute,  assurance
that the  objectives of the control  procedure are met.  Because of the inherent
limitations  in all control  procedures,  no  evaluation of controls can provide
absolute  assurance  that all control  issues and  instances  of fraud,  if any,
within the Company have been detected.  These inherent  limitations  include the
realities that judgments in  decision-making  can be faulty, and that breakdowns
can occur  because of simple  error or mistake.  Additionally,  controls  can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management  override of the control.  The Company considered these
limitations  during the  development of its disclosure  controls and procedures,
and will continually reevaluate them to ensure they provide reasonable assurance
that such controls and procedures are effective.

Internal Controls and Procedures

     There have not been any  changes in the  Company's  internal  control  over
financial  reporting  (as such term is defined in Rules  13a-15(f) and 15d-15(f)
under the Exchange  Act) during the Company's  fourth  fiscal  quarter that have
materially  affected,  or  are  reasonably  likely  to  materially  affect,  the
Company's internal control over financial reporting.

                                      -30-
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

Directors

        The following table sets forth certain information concerning the
Directors:

                               Year First Elected
Name                                     Age                  or Appointed

Guido D. DiGregorio.........             66                       1997
Michael Farese (1), (2), (3), (4)        57                       2002
Louis P. Panetta (1), (2), (3), (4)      55                       2000
C. B. Sung (1), (2), (3), (4)            79                       1986
David E. Welch (1), (4).....             57                       2004

1.      Member of the Audit Committee
2.      Member of the Finance Committee
3.      Member of the Compensation Committee
4.      Member of the Nominating Committee

     The business experience of each of the directors for at least the past five
years includes the following:

     Guido D.  DiGregorio  was elected  Chairman of the Board in February  2002,
Chief  Executive  Officer in June 1999 and  President  in  November  1997.  From
November 1997 to June 1999, he was also the Company's Chief  Operating  Officer.
He was a partner in DH Partners,  Inc. (a management  consultant firm) from 1996
to 1997. Prior to that Mr.  DiGregorio was recruited by a number of companies to
reverse trends of financial losses,  serving as President and CEO of each of the
following companies:  Display  Technologies,  Inc. (a manufacturer of video data
monitors)  from  1994  to  1996,  Superior  Engineering  Corp.  (a  producer  of
factory-built  gas fireplaces) from 1991 to 1993,  Proxim,  Inc.  (wireless data
communications)  from 1989 to 1991,  Maxitron Corp. (a  manufacturer of computer
products)  from 1986 to 1989 and Exide  Electronics  (producer of computer power
conditioning  products) from 1983 to 1986. From 1966 to 1983, Mr. DiGregorio was
employed by General  Electric  in various  management  positions,  rising to the
position of General Manager of an industrial automation business.

     Mike Farese was elected a director  of the  Company in February  2002.  Mr.
Farese  has  over  thirty  years  of  broad  based  telecommunications  industry
experience including an extensive background in cellular and wireless subscriber
equipment.  He has been the  President  & CEO of WJ  Communications,  a  Silicon
Valley-based  manufacturer of innovative broadband  communications  products for
current and next generation wireless  communications networks from March 2002 to
present.  Prior to joining WJ  Communications,  Mr.  Farese was President & CEO,
Tropian Inc. from 1999 to 2002. Prior to that he held numerous senior management
positions including Vice President & General  Manager-Global  Personal Networks,
Motorola,  Vice President & General  Manager-American  Business Group, Ericsson,
Vice President,  Product Planning & Strategy, Nokia, Executive Director-Business
Systems, ITT and Division Manger-Networks Business Systems, AT&T.

     Louis P.  Panetta was  elected a director  of the Company in October  2000.
From  November 2001 to September  2003 Mr.  Panetta was a member of the Board of
Directors  of Active Link.  Mr.  Panetta was Vice  President  of  Marketing  and
Investor Relations with Mobility Concepts, Inc. (a wireless Systems Integrator),
a subsidiary of Active Link Communications from February 2001 to April 2003. Mr.
Panetta  was  President  and  Chief   Operating   Officer  of   PortableLife.com
(e-commerce products provider) from September 1999 to October 2000 and President
and Chief  Executive  Officer of Fujitsu  Personal  Systems (a  manufacturer  of
computer  hardware) from December 1992 to September 1999. From 1995 to 1999, Mr.
Panetta served on the Board of Directors of Fujitsu Personal Systems.

     C.B. Sung was elected a director of the Company in 1986.  Mr. Sung has been
the Chairman and Chief Executive Officer of Unison Group, Inc. (a multi-national
corporation   involved  in  manufacturing,   computer   systems,   international
investment and trade) since 1986 and Unison Pacific  Corporation  since 1979. He

                                      -31-
<PAGE>

also  serves  on the  Board  of  Directors  of  several  private  companies  and
non-profit organizations.

     David E.  Welch was  elected a  director  in March  2004 and  serves as the
financial expert on the Audit Committee.  Mr. Welch is the principal of David E.
Welch Consulting,  a financial  consulting firm, from July 2002 to present.  Mr.
Welch has also been Vice  President  and Chief  Financial  Officer  of  American
Millennium  Corporation,  Inc., a provider of satellite based asset tracking and
reporting  equipment,  from April 2004 to present.  Mr. Welch was Vice President
and Chief  Financial  Officer of Active Link  Communications,  a manufacturer of
telecommunications equipment, from 1999 to 2002. Mr. Welch has held positions as
Director of Management  Information  Systems and Chief information  Officer with
Micromedex,  Inc and Language  Management  International from 1995 through 1998.
Mr.  Welch is a member of the Board of  Directors  of Advanced  Neutraceuticals,
Inc., and AspenBio,  Inc. Mr. Welch is a licensed Certified Public Accountant in
the state of Colorado.

EXECUTIVE OFFICERS

     The following  table sets forth the name and age of each executive  officer
of the Company,  and all positions and offices of the Company  presently held by
each of them.


     Name                      Age       Positions Currently Held

    Guido D. DiGregorio         66        Chairman of the Board,
                                          Chief Executive Officer and President,
    Francis V. Dane             53        Chief Legal Officer,
                                          Secretary and Chief Financial Officer

     The business  experience of each of the executive officers for at least the
past five years includes the following:

     Guido D. DiGregorio - see above.

     Francis V. Dane was appointed the Company's  Secretary in February of 2002,
its Chief Financial  Officer in October 2001, its Human  Resources  Executive in
September 1998 and he assumed the position of Chief Legal Officer in December of
1997.  From 1991 to 1997 he  served as a Vice  President  and  Secretary  of the
Company,  and from 1988 to 1992 as its Chief  Financial  Officer and  Treasurer.
Since  July of 2000,  Mr.  Dane has also been the  Secretary  and  Treasurer  of
Genyous,  Inc. a  biotechnology  venture  capital and incubation  company.  From
October  2000 to April  2004,  Mr.  Dane  served as a director  of  Perceptronix
Medical,  Inc. and SpetraVu  Medial Inc.,  two  companies  focused on developing
improved  methods for the early  detection of cancer.  From October 2000 to June
2003. Mr. Dane was a director of CPC Cancer  Prevention  Centers Inc., a company
that is  developing a  comprehensive  cancer  prevention  program based upon the
detection of early stage, non-invasive cancer. Prior to this Mr. Dane spent over
a decade  with  PricewaterhouseCoopers,  his last  position  was that of  Senior
Manager,  Entrepreneurial  Services Division.  Mr. Dane is a member of the State
Bar  of  California  and  has  earned  a CPA  certificate  from  the  states  of
Connecticut and California.

                       CODE OF BUSINESS CONDUCT AND ETHICS

     We have adopted a written code of business conduct and ethics, known as our
Code of  Business  Conduct and Ethics,  which  applies to all of our  directors,
officers,  and  employees,  including  our principal  executive  officer and our
principal  financial  and  accounting  officer.  A copy of the Code of  Business
Conduct and Ethics is posted on the Company's web site, at www.cic.com.

                                      -32-
<PAGE>

Item 11. Executive Compensation

     The following table sets forth  compensation  awarded to, earned by or paid
to the Company's President,  regardless of the amount of compensation,  and each
executive  officer of the Company  serving as of  December  31, 2004 whose total
annual salary and bonus for 2004  exceeded  $100,000  (collectively,  the "Named
Executive Officers").

                           Summary Compensation Table

                                                                    Long-Term
                                           Annual Compensation     Compensation
                                                                    Securities
                                                      Other Annual  Underlying
Name and Principal Position      Year       Salary    Compensation    Options
---------------------------      ----       ------    ------------    -------
Guido DiGregorio...............  2004     $ 259,371(1)        -            -
   Chairman, President           2003     $ 206,250(1)        -            -
   and Chief Executive Officer   2002     $ 213,500(1)        -       250,000

Francis V. Dane................  2004     $ 138,125           -       100,000
   Chief Legal Officer,          2003       128,500           -       100,000
   Secretary and                 2002     $ 110,083           -       100,000
   Chief Financial Officer

-----------

(1)  Mr.  DiGregorio's  salary was increased in February  2002 to $250,000.  Mr.
     DiGregorio has deferred  approximately  $70,000 in salary  payments to ease
     cash flow  requirements.  Mr.  DiGregorio  may  resume  payment of his full
     salary at any time, and payment of deferred  amounts may be demanded by Mr.
     DiGregorio at any time after December 31, 2002 and 2003, respectively.  Mr.
     DiGregorio was paid his deferred salary from 2002 and 2003 of approximately
     $64, and $70 in January 2003 and 2004, respectively.

                             Option Grants in 2004

     On November  11,  2004,  Mr. Dane was granted  options to purchase  100,000
shares of the Company's  common stock,  at an exercise price of $0.55 per share.
The options granted vest pro rata quarterly over three years.

          Aggregate Option Exercises in 2003 and Year-End Option Values

     The following  table sets forth certain  information  concerning  the Named
Executive  Officers with respect to the exercise of options in 2004,  the number
of shares covered by exercisable and unexercisable stock options at December 31,
2004 and the aggregate  value of exercisable  and  unexercisable  "in-the-money"
options at December 31, 2004.
                                                                    Value of
                                           Number of Securities    Unexercised
                                                Underlying         In-The-Money
                                                Unexercised          Options
                                             Options at Fiscal      at Fiscal
                  Shares                         Year-End           Year-End(1)
                 Acquired                      Exercisable(E)/   Exercisable(E)/
                    On          Value         Unexercisable(U)  Unexercisable(U)
Name             Exercise      Realized

Guido DiGregorio..    -        $ -             1,950,000(E)      $      - (E)(1)

Francis V. Dane...    -        $ -               309,852(E)      $ 19,114 (E)(1)
                                                 134,091(U)         9,886 (U)(1)
-----------
(1)  The value of unexercised  in-the-money  options was determined by using the
     difference between the closing sale price of the common stock on the Nasdaq
     Over the Counter  Market as of December  31, 2004  ($0.62) and the exercise
     price of such options.

                                      -33-
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management

     The following table sets forth  information  with respect to the beneficial
ownership of (i) any person known to be the beneficial  owner of more than 5% of
any class of voting  securities of the Company,  (ii) each director and director
nominee of the  Company,  (iii) each of the  current  executive  officers of the
Company  named in the Summary  Compensation  Table under the heading  "Executive
Compensation" and (iv) all directors and executive  officers of the Company as a
group.
                                                            Common Stock
                                                    ----------------------------
           Name of Beneficial Owner                     Number        Percent
                                                      of Shares      of Class

          Guido DiGregorio (1)......................   1,950,000        1.91%
          C. B. Sung (2)............................   1,762,610        1.72%
          Louis P. Panetta (3)......................     178,125         *
          Michael Farese (4)........................     125,000         *
          Welch, Davie E. (5).......................      50,000         *
          Francis V. Dane (6).......................     325,040         *
          All directors and executive officers
           as a group (6 persons)...................   4,390,775        4.29%
-----------
*        Less than 1%.

(1)  Represents  1,950,000  shares,  issuable upon the exercise of stock options
     exercisable  within 60 days of December 31, 2004.  The business  address of
     Mr.  DiGregorio  is  275  Shoreline  Drive,   Suite  500,  Redwood  Shores,
     California 94065. See "Executive Compensation; Option Grants in 2002."

(2)  Includes (a) 1,568,051  shares held by the Sung Family Trust,  of which Mr.
     Sung is a trustee,  (b) 3,369 shares held by the Sung-Kwok  Foundation,  of
     which Mr.  Sung is the  Chairman,  and (c) 191,190  shares of common  stock
     issuable upon the exercise of stock options , exercisable within 60 days of
     December 31, 2004.  Mr. Sung may be deemed to  beneficially  own the shares
     held by the Sung Family Trust and the  Sung-Kwok  Foundation.  The business
     address of Mr. Sung is,  UNISON  Group,  1001 Bayhill  Dr., 2nd Floor,  San
     Bruno,   California   94066.   See  "Certain   Relationships   and  Related
     Transactions."

(3)  Represents 178,125 shares issuable upon the exercise of options exercisable
     within 60 days of December 31, 2004. Mr. Panetta's  business address is 827
     Via Mirada,  Monterey,  California  93940. See "Certain  Relationships  and
     Related Transactions."

(4)  Represents  125,000  shares  issuable  upon the  exercise of stock  options
     exercisable  within 60 days of December 31, 2004.  The business  address of
     Mr.  Farese is 401 River Oaks  Parkway,  San Jose,  CA 95134.  See "Certain
     Relationships and Related Transactions."

(5)  Represents  50,000  shares  issuable  upon the  exercise  of stock  options
     exercisable  with in 60 days of December 31, 2004. The business  address of
     Mr.  Welch is 1729 East Otero  Avenue,  Littleton,  CO 80122.  See "Certain
     Relationships and Related Transactions."

(6)  Represents (a) 212 shares held by Mr. Dane and (b) 325,040 shares  issuable
     upon the exercise of stock options  exercisable  within 60 days of December
     31, 2004. The business  address of Mr. Dane is 275 Shoreline  Drive,  Suite
     500, Redwood Shores, California 94065. See "Executive Compensation;  Option
     Grants in 2002."

                                      -34-
<PAGE>


SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section  16(a) of the  Securities  Exchange  Act of 1934,  as amended  (the
"Exchange Act"), requires the Company's officers,  directors and persons who own
more than ten percent of a registered class of the Company's  equity  securities
to file certain reports with the Securities and Exchange  Commission (the "SEC")
regarding  ownership of, and  transactions in, the Company's  securities.  These
officers,  directors and  stockholders are also required by SEC rules to furnish
the Company  with copies of all Section  16(a)  reports  that are filed with the
SEC.  Based  solely on a review of copies of such forms  received by the Company
and  written  representations  received by the Company  from  certain  reporting
persons,  the Company  believes  that for the year ended  December  31, 2004 all
Section 16(a) reports required to be filed by the Company's  executive officers,
directors and 10% stockholders were filed on a timely basis.

Item 13. Certain Relationships and Related Transactions

Director Compensation

     For their services as directors of the Company, all non-employee  directors
receive  a fee of $1 for  each  Board  of  Directors  meeting  attended  and all
directors are reimbursed for all reasonable  out-of-pocket  expenses incurred in
connection with attending such meetings.  Directors are also eligible to receive
stock  options.  In March 2004,  Mr. Welch was granted  immediately  exercisable
non-qualified options to purchase 50,000 share upon his appointment to the board
at an exercise  price of $0.76,  which options expire on March 11, 2011. In June
2004, Michael Farese, Louis Panetta and C. B. Sung were each granted immediately
exercisable  non-qualified  options to purchase 25,000 shares of common stock at
an exercise  price of $0.54,  which options expire on June 21, 2011. The Company
retains a declining  balance  repurchase  option on the shares  underlying these
options for one year from the date of grant.

     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.

Item 14. Principal Accounting Fees and Services

     In December,  1999, the Company retained Stonefield Josephson,  Inc. as its
independent  auditors.  Prior to the  retention of Stonefield  Josephson,  Inc.,
neither  the  Company  nor any person on its behalf  consulted  with  Stonefield
Josephson,  Inc.  regarding  the  application  of  accounting  principles to any
transaction  or the  types of  audit  opinion  that  might  be  rendered  on the
Company's financial statements.

     The  aggregate  fees  billed  for   professional   services  by  Stonefield
Josephson,  Inc.  in 2004 were $294,  and in 2003 were $321,  for the  following
services:

     Audit  Fees:  Stonefield  Josephson,  Inc.'s  fees in  connection  with its
quarterly reviews and year end audits for 2004 were $245, and were approximately
$214, in 2003, which represented approximately 83% and 66% of the aggregate fees
billed by Stonefield Josephson, Inc. in 2004 and 2003, respectively.

     Audit-Related Fees. Stonefield Josephson, Inc. did not bill the Company for
any assurance and related work in fiscal year 2004 or 2003.

     Tax  Fees.  Stonefield  Josephson,  Inc  fees in  connection  with the 2003
federal and state tax  returns,  which were billed in 2004,  were  approximately
$5,900,  or 2% of  the  aggregate  fees  billed  for  professional  services  by
Stonefield  Josephson,   Inc.  in  2004.  Stonefield  Josephson,  Inc.  fees  in
connection  with the 2002  federal and state tax  returns,  which were billed in
2003, were approximately $3, or 1% of the aggregate fees billed for professional
services by Stonefield Josephson, Inc. in 2003.

                                      -35-
<PAGE>

     Financial Information Systems Design and Implementation Fees: There were no
fees  incurred in fiscal  year 2004 or 2003 for  financial  information  systems
design and implementation services.

     All other Fees:  Stonefield  Josephson,  Inc's fees for all other  services
provided in 2004 totaled  approximately $43, or 15% of the aggregate fees billed
by Stonefield  Josephson,  Inc. in 2004 and related  primarily to preparation of
the company's  2004 proxy and a Registration  statement on Form S-1.  Stonefield
Josephson,   Inc's  fees  for  all  other  services  provided  in  2003  totaled
approximately $105, or 33% of the aggregate fees billed by Stonefield Josephson,
Inc. in 2003 and related primarily to a Registration statement on Form S-1.

     Pre-Approval  Policies.  It is the policy of the  Company not to enter into
any agreement for Stonefield  Josephson,  Inc. to provide any non-audit services
unless (a) the  agreement  is approved in advance by the Audit  Committee or (b)
(i) the aggregate amount of all such non-audit services constitutes no more than
5% of the total amount we pay to Stonefield  Josephson,  Inc.  during the fiscal
year in which such services are rendered, (ii) such services were not recognized
by the Company as constituting  non-audit services at the time of the engagement
of the non-audit  services and (iii) such  services are promptly  brought to the
attention of the Audit  Committee and prior to the  completion of the audit were
approved by the Audit Committee or by one or more members of the Audit Committee
who are  members  of the Board of  Directors  to whom  authority  to grant  such
approvals has been delegated by the Audit  Committee.  The Audit  Committee will
not  approve any  agreement  in advance for  non-audit  services  unless (x) the
procedures  and policies are  detailed in advance as to such  services,  (y) the
Audit Committee is informed of such services prior to commencement  and (z) such
policies and  procedures do not constitute  delegation of the Audit  Committee's
responsibilities  to management  under the  Securities  Exchange Act of 1934, as
amended.

     The Audit  Committee  has  considered  whether the  provision  of non-audit
services has impaired the  independence  of Stonefield  Josephson,  Inc. and has
concluded that Stonefield  Josephson,  Inc. is independent  under applicable SEC
and Nasdaq rules and regulations.


                                      -36-
<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 Registered
          Public Accounting Firm.......................................     F-1
          Consolidated Balance Sheets at December 31, 2004 and 2003....     F-2
          Consolidated Statements of Operations for the years
          ended December 31, 2004, 2003, and 2002......................     F-3
          Consolidated Statements of Changes in Stockholders'
          Equity for the years ended December 31, 2004, 2003 and 2002..     F-4
          Consolidated Statements of Cash Flows for the years
          ended December 31, 2004, 2003 and 2002.......................     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

1.   Current Report on Form 8-K, Items 7, 9 and 12, dated October 27, 2004, with
     respect to the Company's Third quarter 2004 financial results.

2.   Current Report on Form 8-K, Items 1, 2 and 3, dated November 3, 2004,  with
     respect to the Company's  announcement  of entering into a note and warrant
     purchase agreement with Wainewright, Inc.

3.   Current Report on Form 8-K,  Items 7, and 9, dated  November 9, 2004,  with
     respect  to the  Company's  payment  of its $3.5  million  note to  Cornell
     Capital Partners LC.

4.   Current Report on Form 8-K, Items 7, 8 and 9, dated November 24, 2004, with
     respect to the Company's Settlement Agreement with Topaz Systems, Inc.

(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).

                                      -37-
<PAGE>

          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).
          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.
              .
         4.11 Form of Convertible Promissory Note issued by Communication
              Intelligence Corporation, incorporated herein by reference to
              Exhibit 10.3 to the Company's Form 8-K dated November 3, 2004.
         4.12 Form of Warrant issued by Communication intelligence Corporation,
              incorporated herein by reference to Exhibit 10.4 to the Company's
              Form 8-K dated November 3, 2004.
        +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.

                                      -38-
<PAGE>

         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.
        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)
        10.24 Form of Note and Warrant Purchase Agreement dated October 28,
              2004, among Communication Intelligence Corporation and the
              Purchasers identified there in, incorporated herein by reference
              to Exhibit 10.1 to the Company's Form 8-K dated November 3, 2004.
        10.25 Form of Registration Rights Agreement dated October 28, 2004,
              among Communication Intelligence Corporation and the parties
              identified there in, incorporated herein by reference to Exhibit
              10.2 to the Company's Form 8-K dated November 3, 2004.

                                      -39-
<PAGE>

        14.00 Code of Ethics -Incorporated by reference to the registrant's
              Annual Report on Form 10-K (fileno. 0-19301) filed with the
              Commission on March 30, 2004.
         21.1 Schedule of Subsidiaries.
         23.1 Consent of Stonefield Josephson, Inc, Independent Registered
              Public Accounting Firm.
         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.

                                   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, 2005.

                        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)


                                      -40-
<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, 2005.

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


                                      -41-
<PAGE>




             Report of Independent Registered Public Accounting Firm

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,
2004 and 2003 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, 2004,  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 the standards of the Public  Company
Accounting Oversight Board (United States). 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,
2004, and 2003 and the results of their operations and their cash flows for each
of the three years in the period ended  December 31, 2004,  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 and  accumulated  deficit  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.
San Francisco, California
February 11, 2005, except for Note 14, as to which the date is March 3, 2005


                                      F-1
<PAGE>


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

                                                            December 31,
                                                  ------------------------------
                                                       2004              2003
Assets
Current assets:
  Cash and cash equivalents....................... $    4,736        $    1,039
  Accounts receivable, net of allowances
  of $404 and $256 at December 31, 2004
  and 2003, respectively..........................        356               742
  Inventories.....................................          -                47
  Deferred financing costs - current portion......        272                60
  Prepaid expenses and other current assets.......        105               117
                                                  -------------    -------------
        Total current assets......................      5,469             2,005

Property and equipment, net.......................        123               138
Patents...........................................      4,663             5,042
Capitalized software development costs............         32                 -
Deferred financing costs - long-term..............        502                 -
Other assets......................................         30                30
                                                  -------------    -------------

        Total assets.............................. $   10,819        $    7,215
                                                  =============    =============


Liabilities and Stockholders' Equity
Current liabilities:
  Short-term debt - related party................. $        8        $    3,008
  Short-term debt - other.........................         36               750
  Accounts payable................................        241               243
  Accrued compensation............................        258               259
  Other accrued liabilities.......................        400               475
  Deferred revenue................................        458               165
                                                  -------------    -------------
        Total current liabilities.................      1,401             4,900

Long-term debt - related party....................          5                13

Convertible notes, net of unamortized fair
 value assigned to beneficial
 conversion feature and warrants of $2,410........      1,785                 -

Minority interest.................................         97               115


Commitments and contingencies                               -                 -

Stockholders' equity:
  Common stock, $.01 par value; 125,000 shares
   authorized; 101,412 and 100,102
   shares issued and outstanding at December
   31, 2004 and 2003, respectively.................     1,014             1,001
  Additional paid-in capital.......................    87,231            83,528
  Accumulated deficit..............................   (80,544)          (82,164)
  Accumulated other comprehensive loss.............      (170)             (178)
                                                   ------------    -------------

Total stockholders' equity.........................     7,531             2,187
                                                   ------------    -------------

   Total liabilities and stockholders' equity......$   10,819        $    7,215
                                                   ============    =============




                 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,
                                        ----------------------------------------
                                             2004           2003          2002
                                        ----------------------------------------

Revenues:
  Online..............................  $      130     $      300    $      351
  Corporate...........................       6,997          1,703          1667
  China...............................         157          1,031          1254
                                        -----------    -----------   -----------
                                             7,284          3,034         3,272
                                        -----------    -----------   -----------
Operating costs and expenses:
   Cost of sales:
     Online...........................           -             17           259
     Corporate........................          20             30            96
     China............................          33            718           802
   Research and development...........       1,187          1,302         1,485
   Sales and marketing................       1,306            905         1,543
   General and administrative.........       2,483          2,219         2,424
                                        -----------    -----------   -----------

                                             5,029          5,191         6,609
                                        -----------    -----------   -----------

Income (loss) from operations.........       2,255         (2,157)       (3,337)

Interest income and other income
 (expense), net.......................          47              1           (17)
Interest expense......................        (701)          (205)         (205)
Minority interest.....................          19             16            (2)
                                       ------------    -----------   -----------


Net income (loss).....................  $    1,620     $   (2,345)   $   (3,561)
                                       ============    ===========   ===========

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


Basic weighted average shares.........    100,909         97,436        91,298
                                       ============    ===========   ===========


Diluted weighted average shares.......    107,572         97,436        91,298
                                       ============    ===========   ===========

                 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)
<TABLE>
<CAPTION>

                                                                                           Accumulated
                                                                Additional                    Other
                                        Common       Common      Paid-In    Accumulated   Comprehensive
                                        Shares       Stock       Capital      Deficit         Loss          Total
                                     ---------------------------------------------------------------------------------
<S>                                   <C>           <C>         <C>         <C>           <C>             <C>
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
Comprehensive income (loss):
     Net (loss)...................                                              (3,561)                      (3,561)
     Foreign currency translation
     adjustment...................                                                                  9             9
                                                                                                         -------------
Total comprehensive income (loss).
                                                                                                             (3,552)
                                     --------------------------------------------------------------------=============
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
Comprehensive income (loss):
     Net (loss)...................                                              (2,345)                      (2,345)
     Foreign currency translation
     adjustment...................                                                                  9             9
                                                                                                         -------------
Total comprehensive income (loss).
                                                                                                             (2,336)
                                     --------------------------------------------------------------------=============
Balances as of December 31, 2003..
                                        100,102     $  1,001     $ 83,528     $(82,164)    $     (178)     $  2,187
                                     ---------------------------------------------------------------------------------
Sale of  shares of Common stock
  through Cornell Capital net of
  expenses........................        1,133     $     11     $    680     $            $               $    691
Exercise of options for  shares of
  common stock....................          177            2           51                                        53
Fair value of warrants issued to
 the agent in connection with
 convertible notes................                                    421                                       421
Fair value of warrants issued to
 the investors in connection with
 convertible notes................                                    982                                       982
Fair value of beneficial conversion
 feature associated with the
 convertible notes................                                  1,569                                     1,569
Comprehensive income (loss):
     Net income...................                                               1,620                        1,620
     Foreign currency translation
     adjustment...................                                                                  8             8
                                                                                                         -------------
Total comprehensive income........                                                                            1,628
                                     --------------------------------------------------------------------=============
Balances as of December 31, 2004..
                                       101,412      $  1,014     $ 87,231     $(80,544)    $     (170)     $  7,531
                                     =================================================================================
</TABLE>

                 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,
                                              ----------------------------------
                                                  2004       2003        2002
                                              ----------------------------------

Cash flows from operating activities
Net income (loss)..............................$  1,620   $ (2,345)  $  (3,561)
Adjustments to reconcile net income (loss)
 to net cash provided by(used in) operating
 activities:
  Depreciation and amortization................     425        456         467
  Discount on long term debt...................     142          -           -
  Loss on disposal of property and equipment...       8          8           6
  Provision for inventory obsolescence.........       -         38           -
  Provision for doubtful accounts..............     148         13         129
  Changes in operating assets and liabilities
    Accounts receivable,.......................     238       (278)        437
    Inventories................................      47         28          16
    Prepaid expenses and other current assets...    (12)        67        (105)
    Other assets................................      -         13         156
    Accounts payable............................     (2)        83         (46)
    Accrued compensation........................     (1)         9          42
    Other accrued liabilities...................    (85)       (87)        295
    Deferred revenue............................    293          -          77
                                               ----------   --------   ---------
Net cash provided by (used in)
 operating activities..........................   2,821     (1,995)     (2,087)
                                               ----------   --------   ---------


Cash flows from investing activities
Acquisition of property and equipment..........    (37)        (30)        (30)
Capitalization of software development costs...    (45)          -           -
                                               ----------   --------   ---------
Net cash used in investing activities..........    (82)        (30)        (30)
                                               ----------   --------   ---------


Cash flows from financing activities
Proceeds from issuance of short-term debt......     36         750           -
Proceeds from issuance of long-term debt
 - related party...............................      -          24           -
Proceeds from issuance of convertible
 notes, net....................................  3,885           -           -
Principal payments on short-term debt.......... (3,008)          -        (181)
Principal payments on long-term debt -
 related party.................................      -          (3)          -
Principal payments on capital lease
 obligations...................................     (8)         (7)         (5)
Proceeds from issuance of common stock.........      -       2,000           -
Offering costs.................................      -        (411)          -
Proceeds from exercise of stock options........     53           -         426
                                               ---------   ---------   ---------
Net cash provided by financing activities......    958       2,353         240
                                               ---------   ---------   ---------


Net increase (decrease) in cash
 and cash equivalents..........................  3,697         328      (1,877)
Cash and cash equivalents at beginning
 of year.......................................  1,039         711       2,588
                                               ---------   ---------   ---------


Cash and cash equivalents at end of year.......$ 4,736     $ 1,039     $   711
                                               =========   =========   =========


                 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 markets include all
areas of personal computing, as well as electronic commerce and communications.

     The  Company's  research  and  development  activities  have  given rise to
numerous  technologies  and  products.   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.

Going Concern

     The accompanying  financial statements have been prepared assuming that the
Company  will  continue  as a going  concern.  Except for 2004,  the Company has
incurred  significant  losses since its inception and, at December 31, 2004, the
Company's  accumulated  deficit was approximately  $80,544.  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.

     In November  2004,  the  Company  consummated  a  financing  in the form of
convertible  notes  aggregating  $3,885,  net of expenses (See Note 6). 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
statements are in thousands of dollars except per share amounts.

                                      F-6
<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)

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,  fair value of financial  instruments,  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  periods.  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 relatively short maturities.

Cash and Cash Equivalents

     The Company considers all highly liquid  investments with maturities 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:

                                                      2004        2003
                                                  ----------- ------------

Cash in bank..................................    $  1,734    $    110
Money market funds............................       3,002         929
                                                  ----------- ------------


  Cash and cash equivalents...................    $  4,736    $  1,039
                                                  =========== ============




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, 2004,  the Joint  Venture had  approximately  $132 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 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 (See
Schedule II).

                                      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, 2004 and 2003, the Company recorded a
provision of $8 and $38,  respectively,  to System Integration Cost of Sales for
obsolete  inventory.  At  December  31,  2004 and  2003,  inventories  consisted
primarily of finished goods.

Deferred Financing Costs

     Deferred financing costs are stated at fair value and include costs paid in
cash, such as professional  fees and  commissions,  and warrant costs . The fair
value  ascribed to the warrants was estimated on the  commitment  date using the
Black-Scholes pricing model with the following  assumptions:  risk-free interest
rate of  3.21%;  expected  life of 3 years;  expected  volatility  of 100%;  and
expected  dividend yield of 0% (See Note 6). The costs are amortized to interest
expense over the life of the convertible notes or upon earlier  conversion using
the effective  interest method. The costs amortized to interest expense amounted
to $46,  $0, and $0 for the years  ended  December  31,  2004,  2003,  and 2002,
respectively.  Accumulated  amortization  amounted to $46 and $0 at December 31,
2004 and 2003,  respectively  Amortization expense expected for the years ending
December 31, 2005, 2006, and 2007 is $272, $273 and $229, respectively.

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 and  amortization  expense was
$31,  $63,  and $75 for the  years  ended  December  31,  2004,  2003 and  2002,
respectively.  The Chinese Joint Venture  disposed of certain  assets at cost of
$34, $76 and $36 in 2004, 2003 and 2002, respectively.

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

                                                       2004         2003
                                                  ------------ ------------

Machinery and equipment.........................      $1,283       $1,247
Office furniture and fixtures...................         432          432
Leasehold improvements..........................          84           84
Purchased software..............................         218          218
                                                  ------------ ------------
                                                       2,017        1,981
Less accumulated depreciation and amortization..      (1,894)      (1,843)
                                                  ------------ ------------
                                                     $   123      $   138
                                                  ============ ============


     Included in property and  equipment,  as of December 31, 2004 and 2003, are
$82 and $82, respectively,  of assets acquired under capital leases. Accumulated
depreciation  on such assets  totaled $61 and $52 at December 31, 2004 and 2003,
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,  $379 and $378 for the  years  ended  December  31,  2004,  2003 and 2002,
respectively.

                                      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)

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.

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.

o    Patent numbers 5933514,  6212295,  6381344, and 6487310 involve methods and
     processes related to handwriting  recognition developed by the Company over
     the years.  Legal fees  associated  with these patents was  immaterial  and
     expensed as the fees were incurred.

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

                            Expiration     Life         2004         2003
                             --------     ----     ------------ ------------

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..                         (2,082)      (1,703)
                                                    ------------ ------------
                                                     $   4,663    $   5,042
                                                    ============ ============
     Amortization  expense for the years ending December 31, 2005,  2006,  2007,
2008,  and  2009  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 the  expiration  of which will not be
material to its operations.

     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

                                      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)

Patents (continued)

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  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 additional  factors listed in Critical  Accounting
Policies in Item 7 of this Form 10-K.  The Company  believes that as of December
31, 2004 and 2003, no impairment of the carrying values of the patents existed.

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  charge in the event the net book value of such
assets exceeded the future  undiscounted cash flows attributable to such assets.
No such impairment  charges have been recorded in the three years ended December
31, 2004.

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. At December
31, 2004 the Company had capitalized  approximately $45 of software  development
costs.  As of  December  31,  2003,  and 2002,  such costs  were  insignificant.
Amortization  of  capitalized  software  development  costs for the years  ended
December 31, 2004, 2003 and 2002 was $13, $14 and $14, respectively.

Other Current Liabilities

     The Company records liabilities based on reasonable estimates for expenses,
or  payables  that are  known  but  actual  amounts  must be  estimated  such as
deposits,  taxes, rents and services.  The estimates are for current liabilities
that should extinguished within one year.

                                      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)

Other Current Liabilities (continued)


     The Company had the following accrued liabilities at December 31:

                                                   2004               2003
                                              --------------    ----------------

  Accrued professional services                  $      154        $        164
  Refundable deposits                                   115                 115
  Other                                                 131                 196
                                              --------------    ----------------
   Total                                         $      400        $        475
                                              ==============    ================

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  Bulletin  104,  "Revenue
Recognition" ("SAB 104"), 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
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.

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)

Revenue Recognition

     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 46% and 19% of
total  segment  revenue  for  the  years  ended  December  31,  2004  and  2003,
respectively.  One customer,  Nationwide Building Society,  accounted for 11% of
total segment revenues for the year ended December 31, 2002.

     Systems Integration Segment. One customer,  Nanjing Nimze accounted for 40%
of total system  integration  revenue for the year ended  December 31, 2004. One
customer,  Fujitsu Ltd.,  accounted for 21% of total system integration  revenue
for the year ended  December 31, 2003.  Fujitsu Ltd.  accounted for 30% of total
segment revenues for the year ended December 31, 2002.

     Two  customers  accounted  for 76% of total  revenues  for the  year  ended
December 31, 2004. 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.


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,  2004,  2003,  and 2002 was $0,  $0,  and $112,
respectively.


                                      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)

Net Income (Loss) Per Share

     The Company  calculates net income (loss) 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 net income  (loss) per
share, which is based on the weighted average number of shares outstanding,  and
diluted income (loss) per share,  which is based on the weighted  average number
of shares and dilutive potential shares outstanding. For the year ended December
31, 2004, 3,902 potential  equivalent  shares were excluded from the calculation
of dilutive  earnings  per share due to the  exercise  price of such options was
greater than the average  market price of the Company's  common  stock.  For the
years ended December 31, 2003 and 2002,  potential  equivalent  shares  excluded
from the  calculation  of diluted  earnings  per share,  as their  effect is not
dilutive,  include  stock  options  of 5,911  and  6,452 of  equivalent  shares,
respectively.  At  December  31,  2004,  there were 4,850 in the money  warrants
outstanding  and included in the calculation of diluted income (loss) per share.
There were no warrants outstanding at December 31, 2003 or 2002.
<TABLE>
<CAPTION>

                                           For the Year Ended December 31,
                             2004                        2003                          2002
                        -------------                -------------                 ------------
                           Weighted                     Weighted                      Weighted
                           Average                       Average                      Average
                   Net     Shares    Per-Share   Net     Shares    Per-Share  Net     Shares     Per-Share
                  Income Outstanding  Amount     Loss  Outstanding  Amount   Loss   Outstanding   Amount
<S>              <C>     <C>         <C>        <C>    <C>         <C>       <C>    <C>          <C>
Basic income
(loss):
Income
(loss)available
to stockholders   $1,620   100,909    $0.02    $(2,345) 97,436   $ (0.02) $(3,561)     91,298     $(0.04)


Effect of
dilutive
securities:
Stock options
                             1,813        -                  -                            -
Warrants
                             4,850        -                  -                            -
                 -------- ---------  --------  -------- -------   -------  --------  -------   -------
Diluted income
(loss)            $1,620   107,572    $0.02    $(2,345) 97,436    $(0.02)  $(3,561)  91,298    $(0.04)
                 ======== =========  ========  ======== =======   =======  ========  =======   =======
</TABLE>

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 2004, 2003 and
2002 were insignificant.

                                      F-13
<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)

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.

Line of Credit Agreement

     In July 2002, the Company  negotiated a Line of Credit  ("Line")  agreement
with Cornell Capital Partners, LP, expiring two years from the effective date of
the related registration  statement (i.e. February 14, 2005). Under the terms of
the Line and the registration statement the Company could 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, 2004, the Company had received  $2,750
gross ($2,280 net of related costs) for approximately 9,754 shares.

     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 volume weighted average price of the Company's common stock as
reported  by  Bloomberg,  LP,  calculated  based upon the  trading  price of the
Company's  common stock over the five trading days after the Company requests an
advance.  The maximum amount of each advance was limited to $1,000 in any 30-day
period. In addition,  in no event would 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 paid to Cornell Capital  Partners,  L.P. an advance fee equal to 6.5% of
the amount of each  advance.  Closing was held six (6)  trading  days after such
written notice,  at which time the Company  delivered shares of common stock and
paid  Cornell  Capital  Partners,  L.P.  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.

     Pursuant  to the  terms of the Note and  Warrant  Purchase  Agreement  (the
"Purchase  Agreement" see Note 6) the Line of Credit agreement was terminated in
December 2004.


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.

                                      F-14
<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)

Recent Pronouncements

     In December 2003 the FASB concluded to revise  certain  elements of FIN 46,
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.  In general,  for all entities that were previously  considered special
purpose entities, FIN 46R should be applied in periods ending after December 15,
2003.  Otherwise,  FIN 46R is to be  applied  for  registrants  who  file  under
Regulation SX in periods  ending after March 15, 2004, and for  registrants  who
file under Regulation SB, in periods ending after December 15, 2004. The Company
has adopted FIN 46R and the effect of the adoption  will not have a  significant
impact on the Company's financial position or results of operations.

     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  adoption  of SAB No.  104 did not  significantly  impact the
Company's revenue recognition policies.

     In  November  2004,  the FASB issued SFAS No.  151,  "Inventory  Costs,  an
amendment  of ARB No. 43,  Chapter  4". The  amendments  made by  Statement  151
clarify that abnormal amounts of idle facility expense, freight, handling costs,
and wasted materials  (spoilage)  should be recognized as current period charges
and require the allocation of fixed  production  overheads to inventory based on
the normal capacity of the production facilities.  The guidance is effective for
inventory  costs  incurred  during fiscal years  beginning  after June 15, 2005.
Earlier  application  is permitted for inventory  costs  incurred  during fiscal
years beginning after November 23, 2004. The Company has evaluated the impact of
the adoption of SFAS 151, and does not believe the impact will be significant to
the Company's overall results of operations or financial position.

     In December  2004,  the FASB issued SFAS No.153,  "Exchanges of Nonmonetary
Assets,  an  amendment  of  APB  Opinion  No.  29,  Accounting  for  Nonmonetary
Transactions."  The amendments  made by Statement 153 are based on the principle
that exchanges of nonmonetary  assets should be measured based on the fair value
of the assets exchanged.  Further, the amendments eliminate the narrow exception
for  nonmonetary  exchanges of similar  productive  assets and replace it with a
broader  exception  for  exchanges  of  nonmonetary  assets  that  do  not  have
commercial substance. Previously, Opinion 29 required that the accounting for an
exchange of a productive  asset for a similar  productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded
amount of the asset relinquished.  Opinion 29 provided an exception to its basic
measurement  principle (fair value) for exchanges of similar  productive assets.
The Board  believes that  exception  required that some  nonmonetary  exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack  commercial  substance,  the Board believes
this Statement produces financial reporting that more faithfully  represents the
economics of the transactions.  The Statement is effective for nonmonetary asset
exchanges  occurring in fiscal periods  beginning  after June 15, 2005.  Earlier
application is permitted for  nonmonetary  asset  exchanges  occurring in fiscal
periods  beginning after the date of issuance.  The provisions of this Statement
shall be applied  prospectively.  The  Company has  evaluated  the impact of the
adoption of SFAS 153, and does not believe the impact will be significant to the
Company's overall results of operations or financial position.

     In December 2004, the FASB issued SFAS No.123 (revised 2004),  "Share-Based
Payment".  Statement 123(R) will provide  investors and other users of financial
statements  with more complete and neutral  financial  information  by requiring
that the  compensation  cost relating to  share-based  payment  transactions  be
recognized in financial statements.

                                      F-15
<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)

Recent Pronouncements

     That  cost  will be  measured  based on the fair  value  of the  equity  or
liability   instruments  issued.   Statement  123(R)  covers  a  wide  range  of
share-based compensation arrangements including share options,  restricted share
plans,  performance- based awards, share appreciation rights, and employee share
purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for
Stock-Based  Compensation,  and  supersedes  APB Opinion No. 25,  Accounting for
Stock  Issued  to  Employees.  Statement  123,  as  originally  issued  in 1995,
established   as  preferable  a   fair-value-based   method  of  accounting  for
share-based  payment  transactions  with  employees.   However,  that  Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable  fair-value-based method been used. Public entities
(other than those filing as small  business  issuers)  will be required to apply
Statement  123(R) as of the first interim or annual reporting period that begins
after June 15, 2005. The Company is still  evaluating the transition  provisions
allowed by SFAS 123(R) and the impact of the adoption of the Statement.


     In December 2004 the Financial  Accounting  Standards Board issued two FASB
Staff  Positions  - FSP  FAS  109-1,  Application  of  FASB  Statement  No.  109
"Accounting  for Income  Taxes" to the Tax  Deduction  on  Qualified  Production
Activities  Provided by the  American  Jobs  Creation  Act of 2004,  and FSP FAS
109-2,  Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision  within  the  American  Jobs  Creation  Act of 2004.  Neither of these
affected the Company as it does not participate in the related activities.


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, 2004,  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.

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.

4. Short-term Debt - Other

     On April 20,  2004,  the  Company's  90% owned Joint  Venture  borrowed the
aggregate  equivalent of $36,  denominated in Chinese  currency,  from a Chinese
bank.  The unsecured  loan bears interest at 5.3% per annum and is due April 20,
2005.  The borrowing did not require the Joint Venture to deposit a compensating
balance. The note can be repaid at any time without penalty.

                                      F-16
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

4. Short-term Debt - Other (continued)

     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 was  secured  by 4,621  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 have been
paid in cash or shares of the Company's common stock. The Company  exercised its
option,  provided  in the note,  to delay the  commencement  of the  installment
payments  by paying  the 2% fee,  which was $38 in the  aggregate.  The  Company
repaid the $750 loan through the issuance of 1,133 shares of common stock in the
quarter ended June 2004. The Company wrote off  approximately $60 in unamortized
deferred financing costs associated with the $750 loan against equity.

     On August 4, 2004 the Company  borrowed an additional  $3,500 from Cornell,
the  proceeds of which were used to  extinguish  short-term  debt with a related
party.  See Note 5, "Short-term  debt - related party".  The Cornell  short-term
debt was subject to lock-up fees of 1% and would accrue  interest at the rate of
5% per annum on any unpaid balance  remaining after the due date. The short-term
debt was  scheduled  to be  paid,  in ten  equal  installments  with  the  first
installment  due December 6, 2004 and the last on February 7, 2005.  The Company
had the option to repay the note in cash or by issuing  shares of the  Company's
common stock. The Cornell debt was repaid in full, in cash, on November 8, 2004.

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  of  which a former
director and officer of the Company is a trustee (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 bore  interest  at the rate of 2% over the
prime rate publicly  announced by Citibank  N.A. from time to time,  and was due
June 18, 2004. The Company received a sixty day extension to pay the $3,000 Loan
to the Trust in  exchange  for thirty days worth of  interest  ($15)  calculated
according  to the terms of the note.  The extended due date was August 18, 2004.
All other provisions of the Loan remained unchanged.

     On August 5, 2004,  CIC paid the $3,000  note due August 18,  2004,  to the
Trust.  The funds to retire  the debt were  obtained  from  Cornell on August 4,
2004, (See Note 4 - "Short-term Debt - Other").

Long-term debt - related party

     In  June  2003  the  Company's  Joint  Venture  borrowed  from  one  of its
directors,  Tong Ming Sheng,  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,  and $5 for the years  ending  December  31,
2005, and 2006, respectively.

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

     The weighted  average  interest rate was 6.0%, 6.8%, and 6.8% for the years
ended December 31, 2004, 2003, and 2002, respectively.

     Interest  expense for the years ended December 31, 2004, 2003, and 2002 was
$701,  $205 and $205,  respectively.  Interest  expense  associated with related
party debt was $123,  $183, and $200 for the years ended December 31, 2004, 2003
and 2002, respectively.


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

6. Convertible Notes

     In November  2004,  the Company  entered into a unsecured  Note and Warrant
Purchase  Agreement  (the  "Purchase   Agreement")  and  a  Registration  Rights
Agreement  (the  "Registration  Rights  Agreement,  each dated as of October 28,
2004). The financing, a combination of debt and equity, closed November 2, 2004.
The  proceeds  to  the  Company  were  approximately  $3,885,  net  of  $310  in
commissions and legal expenses. H.C. Wainwright & Co., Inc. ("Wainwright") acted
as placement  agent. As placement agent for the Company,  at closing  Wainwright
received  $731 in  commissions,  legal fees and  warrants.  The  commissions  of
approximately  $285 and legal fees of $25,  mentioned above,  were paid in cash.
The  Company  issued  warrants  to  Wainwright  to acquire  1,218  shares of the
Company's  common stock. Of the warrants  issued,  870 are exercisable at $0.462
and 348 are exercisable at $0.508. The Company has ascribed the value of $421 to
the Wainwright  warrants,  which is recorded as deferred  financing costs in the
balance sheet at December 31, 2004.  The fair value  ascribed to the  Wainwright
warrants was estimated on the commitment  date using the  Black-Scholes  pricing
model with the following assumptions: risk-free interest rate of 3.21%; expected
life of 3 years; expected volatility of 100%; and expected dividend yield of 0%.
The Company expects to use the proceeds of the financing for additional  working
capital.

     Under the terms of the financing,  the Company issued to certain accredited
investors  convertible  promissory  notes in the aggregate  principal  amount of
$4,195 and warrants to acquire 3,632 shares of the Company's  common stock at an
exercise price of $0.508 per share.  The notes accrue interest at the rate of 7%
per  annum,  payable  semi-annually,  and are  convertible  into  shares  of the
Company's common stock at the rate of $0.462 per share. The Company has ascribed
a value of $982 to the  investor  warrants,  which is  recorded as a discount to
notes payable in the balance sheet at December 31, 2004. The fair value ascribed
to the warrants was  estimated on the  commitment  date using the  Black-Scholes
pricing model with the following assumptions:  risk-free interest rate of 3.21%;
expected life of 3 years;  expected  volatility of 100%;  and expected  dividend
yield of 0%. In addition to the fair value ascribed to the warrants, the Company
has ascribed  $1,569 to the  beneficial  conversion  feature in the  convertible
notes,  which is recorded as a discount to notes payable in the balance sheet at
December 31, 2004. The values ascribe to the warrants and beneficial  conversion
feature  follow  the  guidance  of the EITF  Issue  No.  98-5,  "Accounting  for
Convertible  Securities  with  Beneficial  Conversion  Features or  Contingently
Adjustable  Conversion Ratios", and ETIF Issue No. 00-27,  "Application of Issue
No. 98-5 to Certain Convertible  Instruments" of the FASB's Emerging Issues Task
Force.  The fair value of the  warrants  and  beneficial  conversion  feature is
amortized  to expense  over the life of the  convertible  notes or upon  earlier
conversion  using the effective  interest  method.  As of December 31, 2004, the
Company  had  amortized  to  interest  expense  approximately  $187 of the  loan
discount and deferred  financing  costs.  The balance due under the  convertible
notes is shown net of the  remaining  unamortized  discount on the  accompanying
consolidated  balance sheet. If the aggregate  principal  amount owing under the
notes is converted, the Company will issue 9,080, shares of its common stock. If
the notes are not converted,  all principal and accrued but unpaid interest will
be due October  28,  2007.  The  Company may pay accrued  interest in cash or in
shares of Company common stock,  issued at the market price for the common stock
calculated prior to the interest payment.  The Company does not currently intend
to pay accrued interest with shares of its common stock.

     The above  warrants  expire on October 28,  2009.  The Company may call the
warrants  if the  Company's  common  stock  trades  at  $1.00  or  above  for 20
consecutive  trading  days  after  the  date  that  is  20  days  following  the
effectiveness of a registration statement providing for the resale of the shares
issued upon the conversion of the notes and exercise of the warrants. Wainwright
will be paid  approximately $28 in the aggregate if all of the investor warrants
are exercised.  The Company will receive proceeds of approximately $1,845 if all
of the warrants are exercised.

     The Company also was required to file a  registration  statement  providing
for the resale of the shares that are issuable upon the  conversion of the notes
and the  exercise  of the  warrants.  The  registration  statement  was filed on
December 22, 2004 and was declared effective on January 26, 2005.

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

7. Stockholders' Equity

Common Stock Options

     In 1994, the Company  adopted the 1994 Stock Option Plan (the "1994 Plan").
Under the 1994 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, 2004,
there were no options  available  for grant under the 1994 Plan.  As of December
31, 2004,  809 plan options were  outstanding  and  exercisable  with a weighted
average exercise price of $0.83 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, 2004,  2,488 non-plan  options were  outstanding  and
exercisable with a weighted average exercise price of $0.75 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  generally have a seven year life and generally vest quarterly
over three years.  At December 31, 2004,  there were 1,444 shares  available for
future grants.  As of December 31, 2004, 2,418 plan options were outstanding and
1,318 plan options were  exercisable  with a weighted  average exercise price of
$0.71 per share.

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

                                             Year Ended December 31,
                                    --------------------------------------------
                                            2004                   2003
                                    ---------------------  ---------------------
                                              Weighted               Weighted
                                              Average                Average
                                              Exercise               Exercise
                                     Shares   Price        Shares      Price
                                    --------------------------------------------
Outstanding at beginning
 of period........................... 2,796     $0.70        3,337      $1.26
Granted.............................. 1,334     $0.53          858      $0.32
Exercised............................   (70)    $0.33            -      $0.00
Forfeited............................  (833)    $0.36       (1,399)     $1.83
                                     -------               --------
Outstanding at period end............ 3,227     $0.67        2,796      $0.71
                                     =======               ========

Options exercisable at
 period end.......................... 2,127     $0.75        2,083      $0.81
                                     =======               ========

Weighted average grant-date
 fair value ofoptions granted
 during the period.....               $0.29                  $0.27
                                     =======               ========

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

7. Stockholders' Equity (continued)

Common Stock Options

The following table summarizes information about stock options outstanding under
the 1994 Plan and the 1999 Plan at December 31, 2004:

                                                     Weighted Average
                                                --------------------------

                                                  Remaining
                                     Options     Contractual
Range of Exercise Prices           Outstanding   Life (Years)     Exercise Price
-------------------------------------------------------------------------------
$0.00 - $0.50................        1,016           5.4                 $0.39
$0.51 - $2.00................        2,191           3.6                 $0.77
$2.01 - $2.99................            -              -                $   -
$3.00 - $7.50................           20           4.6                 $3.50
                              --------------
                                    3,227
                              ==============

     The following table summarizes  information about stock options exercisable
under the 1994 Plan and the 1999 Plan at December 31, 2004:
                                                                    Weighted
                                                  Options            Average
Range of Exercise Prices                        Exercisable       Exercise Price
--------------------------------------------------------------- ----------------
      $0.00 - $0.50.............................             388         $0.34
      $0.51 - $2.00.............................           1,718         $0.81
      $2.01 - $2.99.............................               -         $   -
      $3.00 - $7.50.............................              21         $3.50
                                                 ---------------
                                                           2,127
                                                 ===============

     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.

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

7. Stockholders' Equity (continued)

Common Stock Options

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 income (loss) available to common  stockholders and basic
and diluted net income  (loss) per share  available to  stockholders  would have
been as follows for the year ended December 31:
                                                2004        2003       2002
                                           -------------------------------------
  Net income (loss) as reported............  $ 1,620     $(2,345)    $(3,561)
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........     (248)       (380)       (795)
                                           -------------------------------------
  Pro forma net income (loss).............. $  1,372    $ (2,725)   $ (4,356)
                                           =====================================

Basic and diluted net income (loss) per
 share available to stockholders:
  As reported.............................. $   0.02    $  (0.02)   $  (0.04)
  Pro forma................................ $   0.01    $  (0.03)   $  (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 3.65% for 2004,  2.37% for 2003, and 2.26% for 2002, an expected life of
5.61  years for 2004,  6.65 years for 2003,  and 8.66  years for 2002;  expected
volatility of 51.6% for 2004 and 100% for 2003 and 2002, and a dividend yield of
0% for all periods.

     The Company expects to make additional option grants.  The Company believes
the above  pro  forma  disclosures  may not be  representative  of the pro forma
effects on reported  results of operations to be expected in future  periods due
to changes in interest rates, expected lives of current and future option grants
and changes in the volatility of the price of the Company's  common stock in the
market.

     As of December  31, 2004,  5,716  shares of Common Stock were  reserved for
issuance upon exercise of outstanding options.

Warrants

     At December  31,  2004,  4,850  shares of Common  stock were  reserved  for
issuance upon exercise of outstanding warrants.

8. Commitments

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 $443, $450, and $418, in 2004, 2003, and 2002, respectively.

                                      F-21
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

8. Commitments (continued)

Lease Commitments


     Future  minimum lease  payments under  noncancelable  operating  leases are
approximately  $380, and $358 for the years ending  December 31, 2005, and 2006,
respectively.

     Future  minimum  payments  required under capital  leases,  which expire in
2007, were insignificant at December 31, 2004.

9. Income Taxes

     As of December  31,  2004,  the Company  had  federal  net  operating  loss
carryforwards  available to reduce taxable income through 2014 of  approximately
$67,133.  The  Company  also had  federal  research  and  investment  tax credit
carryforwards of approximately $315 that expire at various dates through 2012.

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

                                                          2004          2003
                                                    ----------------------------
Deferred tax assets:
Net operating loss carryforwards..................     $ 26,853       $ 27,785
Credit carryforwards..............................          356            315
Deferred income...................................          183             67
Other, net........................................          875            933
                                                    ----------------------------
Total deferred tax assets.........................       28,267         29,100
Valuation allowance...............................      (28,267)       (29,100)
                                                    ----------------------------
Net deferred tax assets...........................     $      -       $      -
                                                    ============================

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

                                               2004         2003          2002
                                           ----------   ----------     ---------

  Expected income tax cost (benefit)       $    668      $   (799)     $ (1,211)
  State   income   tax  net  of  Federal        (89)         (144)         (214)
   benefit
  Loss write off of foreign investment            -             -        (4,357)
  Expired net operating loss                    254
                                           ----------    ---------     ---------
  Change in valuation allowance                (833)          943         5,782
                                           ----------    ---------     ---------

      Income tax expense (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.


                                      F-22
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

10. 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-headquarter  costs charged to
each of the operating segments.

     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
                              ----------------- ---------------- ---------------
  2004 Revenues                  $      7,247      $         37    $      7,284
       Income (loss) from
       operations                $      2,600      $       (345)   $      2,255
       Total assets              $      9,899      $        920    $     10,819
       Depreciation and
       amortization              $        424      $         18    $        442
  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

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

                              Revenues                  Long Lived Assets
                   ----------------------------- ------------------------------
                      2004      2003      2002       2004      2003       2002
                   --------- -------- ---------- ---------- ---------- ---------

     U.S.          $ 7,127    $ 2,003   $ 2,018   $  4,773  $   5109   $  5,549

     China             157      1,031     1,254         45        71         31

                   --------- --------- --------- ---------- ---------- ---------
      Total        $ 7,284    $ 3,034   $ 3,272   $  4,818  $  5,180   $  5,580
                   ========= ========= ========= ========== ========== =========

                                      F-23
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

10. Segment Information (continued)

     Interest expense is related solely to Handwriting  recognition  segment and
was $701, $205, and $205, for the years ended December 31, 2004, 2003, and 2002,
respectively.  Included in interest expense for the year ended December 31, 2004
is approximately  $187 in warrant and beneficial  conversion feature expense and
amortization of deferred financing costs associated with the convertible notes.

     The Company's export sales from U.S.  operations were less than one percent
in 2004. The Company's  export sales from U.S.  operations were 14%, and 12%, of
revenues in 2003, and 2002, respectively.

11. Statement of Cash Flows Data
                                                        December 31,
                                           -------------------------------------
                                                 2004        2003         2002

Schedule of non-cash transactions:

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

Non-cash compensation......................  $     70    $     70     $      -

Common stock issued upon the conversion
 of short term debt net ...................  $    691    $      -     $      -

Deferred financing costs associated
 with convertible notes....................  $    714    $      -     $      -

Loan discount associated with convertible
 notes net of amortization.................  $  2,409    $      -     $      -

Supplemental disclosure of cash flow information:

     Interest  paid  in  2004,   2003,  and  2002  was  $509,  $209,  and  $212,
respectively.

12. 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.

13. 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
                                 --------   -------- --------  --------  -------
2004 Unaudited
   Net sales                     $ 2,429    $  630    $3,669   $    556  $ 7,284
   Gross profit                  $ 2,396    $  619    $3,663   $    553  $ 7,231
   Income (loss) before income
   taxes, and minority interest  $ 1,167    $ (678)   $2,138   $ (1,026) $ 1,601

   Net income (loss)             $ 1,167    $ (678)   $2,145   $ (1,014) $ 1,620

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


                                      F-24
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

13. Quarterly information (Unaudited) (continued)
                                  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, andminority 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)


14. Subsequent Events

Legal Proceedings

     In  February of 2005,  Valyd,  Inc.  filed a complaint  against the Company
seeking a  declaratory  judgment  that  Valyd is not  infringing  certain of the
Company's patents, that such patents are invalid or unenforceable,  and that the
Company tortiously  interfered with a contract between Valyd, Inc. and Interlink
Electronics, Inc. by delivering an infringement notice to Interlink Electronics,
Inc. The complaint  also alleged unfair  competition  under  California  law. No
specific monetary claim is set forth in the complaint. The Company believes that
the  complaint is without  merit and intends to  vigorously  defend  against the
claims.  On March 3, 2005, the Company  responded to the complaint,  denying all
allegations,  and filed  counterclaims  against  Valyd,  Inc.  The  counterclaim
asserted  that Valyd,  Inc. is infringing  certain of the Company's  patents and
asked for treble damages, alleging that the infringement is willful,  deliberate
and in  conscious  disregard  of CIC's  rights.  The  ultimate  outcome  of this
litigation cannot presently be determined. However, in management's opinion, the
likelihood of a material  adverse outcome is remote and any liability that might
be incurred would not have a material adverse effect on the Company's  financial
position or its results of  operations.  Accordingly,  adjustments,  if any that
might result from the  resolution of this matter have not been  reflected in the
financial statements.


                                      F-25
<PAGE>




                                   SCHEDULE II

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

Years Ended December 31, 2002, 2003, and 2004

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


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




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




Year ended December 31, 2004:
Accounts receivable reserves.....  $256          $234 $       (86)         $404



                                      S-1