iSign Solutions (ISGN) 10-Q 2007 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2007

OR

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

For the transition period from to

Commission File Number: 000-19301

COMMUNICATION INTELLIGENCE CORPORATION

(Exact name of registrant as specified in its charter)

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

275 Shoreline Drive, Suite 500, Redwood Shores, CA 94065-1413

(Address of principal executive offices) (Zip Code)

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

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

Yes X No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (Check one).

large accelerated filer accelerated filer X non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Section 12b-2 of the exchange Act)

Yes No X

Number of shares outstanding of the registrant’s Common Stock, as of August 14, 2007: 107,557,161.

INDEX

	Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2007 (unaudited) and December 31, 2006	3
Condensed Consolidated Statements of Operations for the Three and Six-Month Periods Ended June 30, 2007 and 2006 (unaudited)	4
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six-Month Periods Ended June 30, 2007 (unaudited)	5
Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2007 and 2006 (unaudited)	6
Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2. Management's Discussion and Analysis of Financial Condition and              Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	22
Item 4. Controls and Procedures	22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	22
Item 1A. Risk Factors	22
Item 2. Unregistered Sale of Securities and Use of proceeds	23
Item 3. Defaults Upon Senior Securities	23
Item 4. Submission of Matters to a Vote of Security Holders	23
Item 5. Other Information	23
Item 6. Exhibits
(a) Exhibits	24
Signatures	25

- 2 -

Communication Intelligence Corporation

and Subsidiary

Condensed Consolidated Balance Sheets

(In thousands)

	June 30			December 31
	2007			2006
Assets	Unaudited
Current assets:
Cash and cash equivalents	$	867		$	727
Accounts receivable, net of allowances of $413 and $397 at June 30, 2007 and December 31, respectively		467			487
Prepaid expenses and other current assets		76			105
Total current assets		1,410			1,319
Property and equipment, net		89			140
Patents		3,717			3,906
Capitalized software development costs		877			656
Deferred financing costs (Note 5)		30			75
Other assets		30			30
Total assets	$	6,153		$	6,126
Liabilities and Stockholders' Equity
Current liabilities:
Convertible notes, net of unamortized fair value assigned to beneficial conversion feature and warrants of $91 and $228 at June 30, 2007 and December 31, 2006, respectively (Note 4)	$	1,291		$	1,154
Short-term debt - including $450 to a related party, net of unamortized fair value assigned to warrants of $169 at June 30, 2007 (Note 5)		431			-
Accounts payable		85			72
Accrued compensation		274			236
Other accrued liabilities		270			269
Deferred revenue		507			404
Total current liabilities		2,858			2,135
Long-term debt - including $770 and $450 to a related party, net of unamortized fair value assigned to warrants of $446 and $266 at June 30, 2007 and December 31, 2006, respectively (Note 5)		674			334
Minority interest		68			73
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000 shares authorized; 0 outstanding at June 30, 2007 and December 31, 2006, respectively		-			-
Common stock, $.01 par value; 155,000 shares authorized; 107,557 shares issued and outstanding at June 30, 2007 and 125,000 shares authorized; 107,557 shares issued and outstanding at December 31, 2006		1,076			1,076
Additional paid-in capital		91,115			90,497
Accumulated deficit		(89,511	)		(87,861	)
Accumulated other comprehensive loss		(127	)		(128	)
Total stockholders' equity		2,553			3,584
Total liabilities and stockholders' equity	$	6,153		$	6,126

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

- 3 -

Communication Intelligence Corporation

and Subsidiary

Condensed Consolidated Statements of Operations

Unaudited

(In thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Revenues
Product	$	385		$	222		$	543		$	626
Maintenance		170			226			346			523
Total Revenues		555			448			889			1,149
Operating costs and expenses:
Cost of sales
Product		132			6			162			50
Maintenance		30			23			58			46
Research and development		131			143			260			426
Sales and marketing		297			433			557			779
General and administrative		523			655			998			1,158
Total operating costs and expenses		1,113			1,260			2,035			2,459
Loss from operations		(558	)		(812	)		(1,146	)		(1,310	)
Interest and other income (expense), net		4			14			4			30
Interest expense:
Related party (Note 5)		(33	)		−			(49	)		−
Other (Notes 4 and 5)		(43	)		(26	)		(74	)		(56	)
Amortization of loan discount and deferred financing:
Related party (Note 5)		(74	)		−			(147	)		−
Other (Notes 4 and 5)		(141	)		(104	)		(243	)		(405	)
Minority interest		2			3			5			5
Net loss	$	(843	)	$	(925	)	$	(1,650	)	$	(1,736	)
Basic and diluted loss per common share	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)
Weighted average common shares outstanding, basic and diluted		107,557			107,552			107,557			107,199

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

- 4 -

Communication Intelligence Corporation

and Subsidiary

Consolidated Statements of Changes in Stockholders' Equity

Unaudited

(In thousands)

	Shares Outstanding		Common Stock		Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
Balances as of December 31, 2006		107,557	$	1,076	$	90,497	$	(87,861	)	$	(128	)	$	3,584
Fair value of warrants issued in connection with short-term      debt						359								359
Stock based employee compensation						24								24
Comprehensive loss:
Net loss								(807	)					(807	)
Foreign currency translation adjustment											(3	)		(3	)
Total comprehensive loss														(810	)
Balances as of March 31, 2007		107,557		1,076		90,880		(88,668	)		(131	)		3,157
Fair value of warrants issued in connection with short-term debt						187								187
Stock based employee compensation						36								36
Adjustment to the fair value of beneficial conversion feature associated with the convertible notes (Note 5)						12								12
Comprehensive loss:
Net loss								(843	)					(843	)
Foreign currency translation adjustment											4			4
Total comprehensive loss														(839	)
Balances as of June 30, 2007		107,557	$	1,076	$	91,115	$	(89,511	)	$	(127	)	$	2,553

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

- 5 -

Communication Intelligence Corporation

and Subsidiary

Condensed Consolidated Statements of Cash Flows

Unaudited

(In thousands)

	Six Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net loss	$	(1,650	)	$	(1,736	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		391			278
Amortization of discount on convertible notes		149			306
Amortization of discount on related party debt		197
Amortization of deferred financing costs		45			100
Stock based employee compensation		60			105
Stock issued for services		-			6
Minority interest		(5	)		(5	)
Provision for doubtful accounts		16			-
Changes in operating assets and liabilities:
Accounts receivable, net		14			55
Prepaid expenses and other current assets		29			16
Accounts payable		13			73
Accrued compensation		38			8
Other accrued liabilities		-			(24	)
Deferred revenue		103			34
Net cash used for operating activities		(600	)		(784	)
Cash flows from investing activities: Acquisition of property and equipment		(3	)		(85	)
Capitalized software development costs		(373	)		(277	)
Net cash used for investing activities		(376	)		(362	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		1,120			-
Principal payments on capital lease obligations		(4	)		(5	)
Net cash provided by (used for) financing activities		1,116			(5	)
Effect of exchange rate changes on cash		-			-
Net increase (decrease) in cash and cash equivalents		140			(1,151	)
Cash and cash equivalents at beginning of period		727			2,849
Cash and cash equivalents at end of period	$	867		$	1,698

Supplemental Disclosure of Non Cash Financing Activities

Convertible Notes converted to common stock	$	−	$	460
Fair value of beneficial conversion feature and warrants	$	546	$	−
Supplemental disclosure of cash flow information
Interest paid	$	82	$	26

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

- 6 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

Item1.Interim financial statements and basis of presentation

      1.Nature of business

The financial information contained herein should be read in conjunction with the Company's consolidated audited financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2006.

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

The Company's core technologies are classified into two broad categories: "transaction and communication enabling technologies" and "natural input technologies". These technologies include multi-modal electronic signature, handwritten biometric signature verification, cryptography (Sign-it, iSign, and SignatureOne) and multilingual handwriting recognition software (Jot).

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. The Company 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 multi-modal electronic signatures, handwritten biometric signature verification, and data security.

The Company’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. CIC's natural input offering includes multilingual handwriting recognition software for such devices as electronic organizers, pagers and smart cellular phones that do not have a keyboard. For such devices, handwriting recognition offers the most viable solutions for performing text entry and editing.

Going Concern

The accompanying condensed consolidated 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 June 30, 2007, the Company’s accumulated deficit was approximately $89,500. 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 4). The remaining outstanding debt from the November 2004 financing of $1,382 comes due in October 2007 if not earlier converted.

The Company has consummated three financings since November 2006. In November 2006 the Company consummated a financing in the form of a note aggregating $600. In March 2007 the Company consummated a second financing in the form a note aggregating $720, receiving $670 by March 31, 2007 and

- 7 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

Item1.Interim financial statements and basis of presentation

     1.Nature of business (continued)

the remaining $50 on April 1, 2007. In June 2007 the Company consummated a third financing in the form of a note aggregating $400 (See Note 5).

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.

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. The fair value of the long-term debt - related party is not practicable to estimate, due to the related party nature of the underlying transaction.

Recent Pronouncements

The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 ("FIN 48"), on January 1, 2007. There were no unrecognized tax benefits and, accordingly, there was no effect on the Company's financial condition or results of operations as a result of implementing FIN 48.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 2003, and state tax examinations for years before 2002. Management does not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, there was no accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the three and six month periods ended June 30, 2007.

      2.Accounts receivable and revenue concentration

As of June 30, 2007 two customers accounted for 49% of net accounts receivable. Customer A accounted for 20%, and Customer B accounted for 29%. As of December 31, 2006 four customers accounted for 69% of net accounts receivable. Customer A accounted for 11%, Customer B accounted for 14%, Customer C accounted for 17% and Customer D accounted for 27%.

Two customers accounted for 43% of total revenues for the three months ended June 30, 2007. Customer A accounted for 10%, and Customer B accounted for 33%. For the three months ended June 30, 2006, three customers accounted for 54% of total revenues. Customer A accounted for 12%, Customer B accounted for 14%, and Customer C accounted for 28% of total revenue.

For the six months ended June 30, 2007 two customers accounted for 44% of total revenue. Customer A accounted for 12%, and Customer B accounted for 32% of total revenue. For the six months ended June 30,

- 8 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

Item1.Interim financial statements and basis of presentation

       2.Accounts receivable and revenue concentration (continued)

2006, 2 customers accounted for 38% of total revenue. Customer A accounted for 11% and Customer B accounted for 27% of total revenue.

3.   Patents

The Company performs intangible asset impairment analyses at least annually 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 follows SFAS 144 in response to changes in industry and market conditions that affect its patents. The Company then determines if an impairment of its assets has occurred. The Company periodically reassesses the lives of its patents and tests for impairment in order to determine whether the book value of each patent exceeds its fair value. 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.

Management recognizes that revenues have fluctuated based on comparable prior periods and may continue to fluctuate based upon historical experience of the time involved to close large sales transactions. Management completed an analysis of its patents as of December 31, 2006, and concluded that no impairment of the carrying value of the patents existed. The Company believes that no events or circumstances which would affect that conclusion have changed through June 30, 2007 therefore, no impairment in the carrying values of the patents exists at June 30, 2007.

Amortization of patent costs was $95 and $189 for each of the three and six month periods ended June 30, 2007 and 2006, respectively.

4.   Convertible Notes

The Company has convertible notes with an outstanding balance of $1,382 at June 30, 2007. During the six month period ended June 30, 2007, the Company amortized to interest expense approximately $194 of the loan discount and deferred financing costs. The $194 included approximately $12 of additional discount due to the note holders as the result of the exercise price of new warrants issued to a related party causing a reduction in the conversion price (see Note 5). The balance due under the convertible notes is shown net of the remaining $91 of unamortized discount on the accompanying consolidated balance sheet. There were no note conversions during the three and six month periods ended June 30, 2007. If the remaining aggregate principal amount owing under the notes is converted, the Company will issue 3,013 shares of its common stock, which includes an additional 20 shares issuable as the result of the reduction in the conversion price as referenced above. If the notes are not converted, all remaining 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 has not paid and does not intend to pay accrued interest with shares of its common stock.

Warrants to purchase 4,850 shares of common stock were issued in connection with the convertible debt. The placement agent received 1,218 warrants to purchase common stock and the note holders received warrants to purchase 3,632 shares of common stock. The warrants expire on October 28, 2009. At June 30, 2007, there are warrants outstanding to purchase 4,850 shares of common stock at a weighted average exercise price of $0.49 per share, adjusted for the reduction in conversion price discussed above. 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. The placement agent will be

- 9 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

Item1.Interim financial statements and basis of presentation

     4.Convertible Notes (continued)

paid approximately $28 in the aggregate if all of the investor warrants are exercised. The Company will receive additional proceeds of approximately $1,831, adjusted for the change in warrant exercise price, if all of the investor warrants are exercised.

If the Company fails to generate enough revenues and operating profits to increase the value of its shares and thereby prompting conversion or generate enough cash to pay off the notes when due, the Company will need to seek additional financing. If the Company is unable to obtain additional financing when needed, it may be required to materially change its operations, which could adversely affect its results from operations and stockholder value.

Interest expense related to convertible debt, included in interest expense other, for the three and six month periods ended June 30, 2007 was $127 and $242. For the three and six month periods ended June 30, 2006, interest expense related to convertible debt, included in interest expense other, was $130 and $461.

Amortization of loan discount and deferred financing expense related to the convertible debt, for the three and six month periods ended June 30, 2007 was $103 and $194, including $12 for re-pricing. For the three and six month periods ended June 30, 2006, amortization of loan discount and deferred financing expense related to the convertible debt was $130 and $405.

5.   Long-term Debt

Current portion

In November 2006, the Company entered into a $600 long-term debt agreement ( the “2006 Purchase Agreement”), of which $450 was borrowed from a stockholder of the Company owning approximately 7% of the Company’s outstanding shares of common stock(an “Affiliated Stockholder”) and the remaining $150 from an unrelated third party. 

The notes are due May 17, 2008, and bear interest at the rate of 15% per annum payable quarterly in cash. In connection with the notes, the lenders were granted warrants to purchase 3,111 shares of common stock. The warrants have a term of three years, commencing on June 30, 2007, and an exercise price of $0.51. The warrants include piggyback registration rights for the underlying shares to participate in certain future registrations of the Company’s common stock.

Long-term

In February 2007, the Company entered into a Note and Warrant Purchase Agreement (the “February 2007 Purchase Agreement”) and a Registration Rights Agreement (the “February 2007 Registration Rights Agreement”), each dated as of February 5, 2007, with the Affiliated Stockholder. The Company secured the right to borrow up to six hundred thousand dollars ($600). On March 15, 2007 the Company and the Affiliated Stockholder amended the February 2007 Purchase Agreement to increase the maximum amount of borrowing from $600, to $1,000. The terms of the February 2007 Purchase Agreement and 2006 Purchase Agreement are identical with the exception that the maximum number of warrants that may be issued under the February 2007 Purchase Agreement is 5,185 rather than 3,111. The warrants have a three year life, become exercisable on June 30, 2007, and have an exercise price of $0.51. The warrants include piggyback registration rights for the underlying shares to participate in any future registrations of the Company’s common stock.

- 10 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

Item1.Interim financial statements and basis of presentation

      5.Long-term Debt (continued)

Long term (continued)

On March 30, 2007, and April 1, 2007 the Company borrowed $670 and $50 under the February 2007 Purchase Agreement of which $370 was borrowed from the Affiliated Stockholder and the remaining $350 from unrelated third parties. The proceeds were used for working capital purposes. The Company has ascribed a value of $359 to the 3,733 warrants, issued as part of this borrowing, which is recorded as a discount to long-term debt, related party, in the balance sheet and will be amortized to interest expense over the life of the loan. The relative 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 4.68%; life of 3 years; expected volatility of 45%; and expected dividend yield of 0%.The notes bear interest at the rate of fifteen percent (15%) per annum payable quarterly in cash and are due August 30, 2008.

On June 15, 2007, The Company entered into a Note and Warrant Purchase Agreement (the “June 2007 Purchase Agreement”) and a Registration Rights Agreement (the “June 2007 Registration Rights Agreement”), each dated as of June 15, 2007. The Company secured the right to borrow up to one million dollars ($1,000) from an Affiliated Stockholder. As of June 30, 2007, the Company had borrowed $400 under this facility. The Company used such proceeds, and expects to use the remaining proceeds of the financing for additional working capital. Pursuant to the June 2007 Purchase Agreement, upon each draw, the Company is required to issue one or more notes, payable within eighteen months after issuance, bearing interest at the rate of fifteen percent (15%) per annum payable quarterly in cash. The Company will be required to issue warrants to purchase shares of its common stock, the number to be determined by use of a formula known as the Cox-Rubenstein Model, which takes into account the volatility of the underlying stock, the risk free interest rate, dividend yield and exercise price. The exercise price of the warrants will be determined by the volume weighted average price of the common stock for the thirty business days preceding the date of the applicable draw. The warrants will include piggyback registration rights for the underlying shares to participate in certain future registrations of the Company’s common stock.

The June 2007 Purchase Agreement required the Company to draw $400 of the funds upon signing. Applying the formula described above, the Company issued warrants to purchase 3,168 shares of its common stock at an exercise price of $0.25. The Company has ascribed a value of $187 to the warrants, issued as part of this borrowing, which is recorded as a discount to long-term debt, related party, in the balance sheet and will be amortized to interest expense over the life of the loan. The relative 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 4.90%; life of 3 years; expected volatility of 69%; and expected dividend yield of 0%. As described above, the $400 note bears interest at the rate of fifteen percent (15%) per annum payable quarterly in cash and is due December 30, 2008. No commitment fee is required to keep the remaining $600 of funds available.

The Company used a volume weighted average price of the common stock for the thirty business days preceding the date of the applicable draw to determine the $0.25 exercise price of the 3,168 warrants issued with the June 2007 Purchase Agreement. The calculation produces an exercise price less than the exercise price of the warrants associated with the convertible debt and less than the conversion price of such debt. This resulted in the Company having to reset both the conversion price of the convertible debt and the exercise price of the associated warrants. The Company reduced the conversion price of the convertible debt from $0.46 to $0.45. The effect of this re-pricing resulted in the Company incurring $12 of additional interest expense during the three and six month periods ended June 30, 2007. If all of the $1,382 remaining notes are converted to common stock, the Company will issue an additional 20 shares due to this price reset. The weighted average exercise price of the warrants associated with the convertible debt was reduced from $0.50 to $0.49, resulting in a reduction in gross proceeds if all of the warrants are exercised of $18.

- 11 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

Item1.Interim financial statements and basis of presentation

      5.Long-term Debt (continued)

Long term (continued)

Interest expense related to the note and warrant purchase agreements for the three and six month periods ended June 30, 2007, was $164 and $271, respectively, which includes related party interest of $107 and $196, respectively. Amortization of debt discount included in interest expense for the three and six month periods ended June 30, 2007 was $113 and $197, respectively, which includes amortization of related party discount of $74 and $147, respectively.

6.   Net (loss) per share

The Company calculates net 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 loss per share, which is based on the weighted average number of shares outstanding, and when applicable, diluted income per share, which is based on the weighted average number of shares and dilutive potential shares outstanding. For the three and six month periods ended June 30, 2007, 5,641 shares of common stock subject to outstanding options, 3,013 shares issuable upon the conversion of the convertible notes and 14,862 warrants were excluded from the calculation of dilutive earnings per share because the exercise or conversion of such options and warrants would be anti-dilutive. For the three and six month periods ended June 30, 2006, 6,401 shares of common stock subject to outstanding options, 2,993 shares issuable upon the conversion of the convertible notes and 4,850 warrants were excluded from the calculation of dilutive earnings per share because the exercise or conversion of such options and warrants would be anti-dilutive.

7.   Common Stock Options

The Company has one stock-based employee compensation plan, (the "1999 Option Plan") and also grants options to employees, directors and consultants pursuant to Individual Plans. Share-based compensation expense is based on the estimated grant date fair value of the portion of share-based payment awards that are ultimately expected to vest during the period. The grant date fair value of stock-based awards to employees and directors is calculated using the Black-Scholes option pricing model. Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” requires forfeitures of share-based payment awards to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The estimated average forfeiture rates for the six months ended June 30, 2007 and 2006 was approximately 26.68% and 26.77%, respectively, based on historical data.

SFAS No. 123(R) requires the cash flows from tax benefits for deductions in excess of the compensation costs recognized for share-based payment awards to be classified as financing cash flows. Due to the Company’s loss position, there were no such tax benefits during the three and six month periods ending June 30, 2007 and 2006.

- 12 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

Item1.Interim financial statements and basis of presentation

      7.Common Stock Options (continued)

Valuation and Expense Information under SFAS No. 123(R):

The weighted-average fair value of stock-based compensation is based on the single option valuation approach. Forfeitures are estimated and it is assumed no dividends will be declared. The estimated fair value of stock-based compensation awards to employees is amortized using the accrual method over the vesting period of the options. The fair value calculations are based on the following assumptions:

	Three and Six Months Ended June 30, 2007	Three and Six Months Ended June 30, 2006
Risk free interest rate	3.65% - 5.11%	3.65% - 5.11%
Expected life (years)	3.19 -7.00	3.66 -7.00
Expected volatility	51.68% - 104.57%	82.1%
Expected dividends	None	None

The following table summarizes the allocation of stock-based compensation expense related to stock option grants under SFAS 123(R) included in operating expenses for the three and six months ended June 30, 2007 and 2006. There were 325 stock options granted during the three and six months ended June 30, 2007 and no options were exercised. There were 675 and 844 stock options granted during the three and six months ended June 30, 2006, and 19 options were exercised by a consultant that were issued for services rendered.

	Three Months Ended June 30,				Six months Ended June 30,
	2007		2006		2007		2006
Research and development	$	3	$	9	$	6	$	34
Sales and marketing		19		12		37		38
General and administrative		5		7		8		11
Director options		9		21		9		21
Stock-based compensation expense	$	36	$	49	$	60	$	104

- 13 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

Item1.Interim financial statements and basis of presentation

7.Common Stock Options (continued)

A summary of option activity under the Company’s plans as of June 30, 2007 and 2006 is as follows:

	As of June 30,
	2007												2006
Options	Shares (000)			Weighted Average Exercise Price		Weighted average Remaining Contractual Term		Aggregate Intrinsic Value		Shares (000)			Weighted Average Exercise Price		Weighted average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1,		5,893		$	0.69						8,591		$	0.75
Granted		325		$	0.22						844		$	0.58
Exercised		−									(19	)	$	0.42
Forfeited or expired		(577	)	$	0.95						(3,015	)	$	0.77
Outstanding at June 30		5,641		$	0.63		4.79	$	−		6,401		$	0.73		5.59	$−
Vested and expected to vest at June 30		5,641		$	0.63		4.94	$	−		5,537		$	0.77		5.44	$−
Exercisable at June 30		4,978		$	0.68		4.78	$	−		5,537		$	0.77		5.44	$−

The following tables summarize significant ranges of outstanding and exercisable options as of June 30, 2007:

	As of June 30, 2007
	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life(in years)		Weighted Average Exercise Price		Number Outstanding		Weighted Average Exercise Price
$ 0.14 - $0.50		2,059		5.5	$	0.34		1,442	$	0.36
0.51 - 1.00		3,341		4.8	$	0.73		3,295	$	0.73
1.01 - 2.00		176		2.5	$	1.31		176	$	1.31
2.01 - 3.00		50		0.3	$	3.00		50	$	3.00
3.01 - 7.50		15		2.9	$	3.56		15	$	3.56
		5,641		4.8	$	0.63		4,978	$	0.68

- 14 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

Item1.Interim financial statements and basis of presentation

7.Common Stock Options (continued)

The following tables summarize significant ranges of outstanding and exercisable options as of June 30, 2006:

	As of June 30, 2006
	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life(in years)		Weighted Average Exercise Price		Number Outstanding		Weighted Average Exercise Price
$ 0.14 - $0.50		2,111		6.0	$	0.40		1,397	$	0.39
0.51 - 1.00		3,636		5.7	$	0.73		3,486	$	0.74
1.01 - 2.00		562		4.1	$	1.51		562	$	1.51
2.01 - 3.00		50		1.3	$	3.00		50	$	3.00
3.01 - 7.50		42		2.0	$	3.42		42	$	3.42
		6,401		5.6	$	0.73		5,537	$	0.77

There were 325 options granted during the three and six months ended June 30, 2007. The per share weighted average fair value of options granted during the three and six months ended June 30, 2007 was $0.14.

A summary of the status of the Company’s non-vested shares as of June 30, 2007 is as follows:

Non-vested Shares	Shares			Weighted Average Grant-Date Fair Value
Non-vested at January 1, 2007		827		$	0.22
Granted		325		$	0.22
Vested		(489	)	$	0.32
Non-vested at June 30, 2007		663		$	0.29

As of June 30, 2007, there was $54 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. The unrecognized compensation cost is expected to be realized over a weighted average period of 3.2 years.

8.Segment Information

The Company identifies reportable revenue in one segment, handwriting recognition. Handwriting recognition software is an aggregate of two revenue categories; transaction and communication enabling technologies (“eSignature”) and natural input technologies (“natural input”). All handwriting recognition software is developed around the Company’s core technology. All sales represent sales to external customers.

- 15 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

Forward Looking Statements

Certain statements contained in this quarterly report on Form 10-Q, including, without limitation, statements containing the words “believes”, “anticipates”, “hopes”, “intends”, “expects”, and other words of similar import, constitute “forward looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors which may cause actual events to differ materially from expectations. Such factors include those set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, including the following:

·   Technological, engineering, manufacturing, quality control or other circumstances that could delay the sale or shipment of products;

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

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

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

Except as otherwise required by applicable laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, as a result of new information, future events or otherwise.

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

The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and notes thereto included in Part 1, Item 1 of this quarterly report on Form 10-Q and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in the Company’s Annual report on Form 10-K for the fiscal year ended December 31, 2006.

Overview

The Company was incorporated in Delaware in October 1986. Except for 2004, in each year since its inception the Company has incurred losses. For the five-year period ended December 31, 2006, net losses aggregated approximately $11,600 and at December 31, 2006 the Company's accumulated deficit was approximately $87,900. At June 30, 2007, the Company’s accumulated deficit was approximately $89,500.

Total revenues for the quarter ended June 30, 2007 increased 24%, or $107, compared to the prior year period and $221, or 66%, over the first quarter of 2007. Total revenues for the six months ended June 30, 2007, are approximately 23%, or $260 less than total revenues for the corresponding period in the prior year period.

eSignature revenue has developed slower than expected however, the Company anticipates that the substantive sales related progress we have made, with targeted customers, represents the revenue potential to achieve profitability this year. For instance, key early adopter customers have now fully and successfully deployed their initial eSignature installations and are now actively functioning as reference accounts and engaging the Company in follow-on deployments. This is having a positive impact sales activity with other end users. More importantly, it is driving license and teaming agreements with leading enterprise software solutions providers, who afford the Company the market access and sales coverage necessary to accelerate sustained sales growth. The timing of orders remains challenging and is still somewhat unpredictable; however, the Company believes it has built a strong pipeline that continues to grow. The Company believes the fundamentals are in place, the momentum is building and its efforts together with market adoption are reaching the critical mass required to achieve near term and sustained sales growth and profitability.

- 16 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

The loss from operations for the six months ended June 30, 2007 was $1,146, compared with a loss from operations of $1,310 in the prior year period. The Company continues to control its expenses, as evidenced by the 17% reduction in operating costs over the current six months compared to the corresponding six months of the prior year. The reduction in expense is more fully discussed in the results of operations below.

The Company negotiated an additional $1,120 in credit facilities during the current six months ended June 30, 2007 to aid in funding its operations. There is currently $600 in available credit. Interest expense will increase due to the increase in debt financing and the amortization of the fair value assigned to warrants issued with the new debt. (See Note 5 to the Condensed Consolidated Financial Statements in this Form 10-Q).

Critical Accounting Policies and Estimates

Refer to Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2006 Form 10-K. 

Results of Operations

Revenues

Total revenue for the three months ended June 30, 2007 of $555 increased $107, or 24% compared to revenues of $448 in the corresponding prior year period. Product revenue reflects a 63% increase in eSignature and a 37% increase in natural input revenues compared to the prior year period. The increase is primarily due to the relative size of orders between the comparable quarters and higher reported royalties from a major natural input/Jot customer. Maintenance revenue decreased 25%, or $56, for the three months ended June 30, 2007 compared to the prior year period. The decrease was primarily due to the non-renewal of a maintenance contract from an ongoing customer due to financial constraints driven by a severe natural disaster occurring in 2006.

For the six month period ended June 30, 2007, total revenues declined $260, or 23%, compared to total revenues of $1,149 in the corresponding prior year period. Product revenues decreased 13% or $83, and maintenance revenues decreased 34%, or $177, compared to the corresponding prior year period. The reduction in revenue reflects reduced royalties from our Asia Pacific channel partner and lower reported royalties from a major natural input/Jot customer compared to the six month period of the prior year. Maintenance revenue decreased 34% or $177 for the six months ended June 30, 2007 compared to the corresponding six month period of the prior year... The decrease was primarily due to the non-renewal of a maintenance contract discussed above for the three month period.

Cost of Sales

Cost of sales primarily includes amortization of new and previously capitalized software development costs associated with the Company’s product and maintenance revenues. Cost of sales increased $133, or 459%, to $162 for the three months ended June 30, 2007, compared to $29 in the prior year period. The increase is due to third party tablet sales and engineering labor for product development work completed in the second quarter. In addition, amortization of previously capitalized software development costs increased $29 to $94, compared to $65 in the prior year period.

For the six month period ended June 30, 2007, cost of sales increased $124 or 129%, compared to $96 in the prior year period. The increase over the comparable six month period is due to the reasons stated above. Cost of sales is expected to increase near term as capitalized engineering software development for new and existing products is completed and amortization begins.

- 17 -

 Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

Operating expenses

Research and Development Expenses

Research and development expenses consist primarily of salaries and related costs, outside engineering, maintenance, and allocated facilities expenses. Research and development expenses decreased approximately 8%, or $12, for the three month period ended June 30, 2007 compared to the prior year period. There were no significant factors in the $12 decrease compared to the prior year period. Total costs, before capitalization of software development and other allocations, were $367 for the three month period ended June 30, 2007 compared to $405 in the prior year period.

For the six months ended June 30, 2007, research and development expenses decreased $166, or 39%, compared to the prior year period. The decrease is primarily due to reduced salaries and related expenses, resulting from the a cut back of two engineers and an increase in the amount of software development costs capitalized compared to the prior year period.

Research and development expenses before capitalization of software development costs, as well as the amounts to be capitalized on future product development are expected to remain at current levels.

Sales and Marketing Expenses

Sales and marketing expenses decreased 31% or $136, for the three month period ended June 30, 2007 compared to the prior year period. The decrease was attributable to reductions in salary and related expenses, including stock based compensation, resulting from the reduction of two sales persons and decreases in recruiting, advertising and marketing programs.

For the six month period ended June 30, 2007, sales and marketing expense decreased $222, or 28%, compared to the prior year period. The decrease is due primarily to the reasons discussed above for the change in the three month period.

The Company expects sales and marketing expenses will increase above the current levels in the near term due to planned increases in sales personnel.

General and Administrative Expenses

General and administrative expenses decreased 20%, or $132, for the three month period ended June 30, 2007, compared to the prior year period. The decrease was primarily due to reduced professional services expense and reductions in annual insurance premiums compared to the prior year period. These decreases were offset by an increase in the Company’s bad debt provision at June 30, 2007 of $5.

For the six month period ended June 30, 2007, general and administrative expenses decreased $160 or 14%, compared to the prior period. The decrease is primarily due to the reasons discussed above for the change in the three month period.

The Company anticipates that general and administrative expense will remain below the level of expense incurred in the prior year due to lower professional services and insurance expenses.

Interest income and other income, net

Interest income and other income (expense), net, decreased $10 and $26 to $4, for the three and six month periods ended June 30, 2007, from income of $14 and $30, respectively, in the prior year periods. The decrease is due to the reduced cash balance during the current periods compared to the prior year periods.

Interest expense

Interest expense increased 192%, or $50, to $76 for the three months ended June 30, 2007, compared to $26 in the prior year period. The increase was primarily due to the increase in debt financing completed in the first half of the current year and late in the prior year. (See Note 4 and 5 in the Condensed Consolidated Financial Statements of this Form 10-Q).

- 18 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

Amortization of loan discount, which includes warrant and beneficial conversion feature costs, deferred financing costs, associated with the convertible notes and note and warrant purchase agreements increased 107% or $111 for the three month period ended June 30, 2007 compared to $104 in the prior year period and decreased $15 for the six month period ended June 30, 2007 as compared to $405 in the prior year period. The increase was primarily due to the increase in borrowings in 2007 The Company will amortize an additional $121 to interest expense over the remaining life of the convertible notes or sooner if the notes are converted before the due date. In addition the Company will amortize an additional $615 of warrant cost related to the note and warrant purchase agreements to interest expense over the remaining life of the notes.

Liquidity and Capital Resources

At June 30, 2007, cash and cash equivalents totaled $867 compared to cash and cash equivalents of $727 at December 31, 2006. The increase in cash was primarily due to cash provided from financing activities of $1,120. The increase was offset by $600 used for operating activities, capitalization of software development costs of $373, principal payments on capital lease obligations of $4 and the acquisition of property and equipment amounting to $3. Total current assets were $1,410 at June 30, 2007, compared to $1,319 at December 31, 2006. As of June 30, 2007, the Company's principal sources of funds included its cash and cash equivalents aggregating $867.

Accounts receivable decreased $4 over the six month period ended June 30, 2007, compared to the December 31, 2006 balance, due primarily to improved collections during the current three months ended June 30, 2007 of billed receivables. The Company expects the development of the eSignature market ultimately will result in more consistent revenue on a quarter to quarter basis and, therefore, less fluctuation in accounts receivable from quarter to quarter.

Prepaid expenses and other current assets decreased by $29 over the six month period ended June 30, 2007, compared to December 31, 2006, due primarily to expensing the prepayment fees for the Financial Services Technology Summit that was held in April 2007. Annual fees on maintenance and support costs added to prepaid expenses over the six month period ended June 30, 2007 were approximately equal to the quarterly amortization amounts.

Accounts payable increased $13 over the six months ended June 30, 2007, compared to December 31, 2006, due to professional fees related to the printing and mailing expense associated with the Company’s annual shareholders meeting. Accounts payable balances typically increase in the second and fourth quarters when the insurance and annual maintenance and support fees are incurred. Materials used in cost of sales may impact accounts payable depending on the amount of third party hardware sold as part of the software solution. Accrued compensation increased $38 over the six months ended June 30, 2007, compared to the prior December 31, 2006 balance. The increase is due primarily to the salary deferral by employees in an effort to ease the cash constraints on the Company. The accrued compensation balance may fluctuate due to increases or decreases in the number of personnel and utilization of or additional accruals to the accrued vacation balance.

Total current liabilities were $2,858 at June 30, 2007, compared to $2,135 at December 31, 2006. The increase is primarily due to the classification of $600 related party debt, net of the related unamortized fair value assigned to the warrants, due in May 2008 from long to short-term debt.

Deferred revenue, totaling $507 at June 30, 2007, compared to $404 at December 31, 2006, primarily reflects advance payments for maintenance fees from the Company's licensees that are generally recognized as revenue by the Company when all obligations are met or over the term of the maintenance agreement, whichever is longer. Deferred revenue is recorded when the Company receives payment from its customers.

In November 2006, the Company entered into a $600 long-term debt agreement ( the “2006 Purchase Agreement”), of which $450 was borrowed from a stockholder of the Company owning approximately 7% of the Company’s outstanding shares of common stock (an “Affiliated Stockholder”) and the remaining $150 from an unrelated third party.

- 19 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

The notes are due May 17, 2008, and bear interest at the rate of 15% per annum payable quarterly in cash. In connection with the notes, the lenders were granted warrants to purchase 3,111 shares of common stock. The warrants have a term of three years, commencing on June 30, 2007, and an exercise price of $0.51. The warrants include piggyback registration rights for the underlying shares to participate in certain future registrations of the Company’s common stock.

In February 2007, the Company entered into a Note and Warrant Purchase Agreement (the “ February 2007 Purchase Agreement”) and a Registration Rights Agreement (the “February 2007 Registration Rights Agreement”), each dated as of February 5, 2007, with the Affiliated Stockholder. The Company secured the right to borrow up to six hundred thousand dollars ($600). On March 15, 2007 the Company and the Affiliated Stockholder amended the February 2007 Purchase Agreement to increase the maximum amount of borrowing from $600, to $1,000. The terms of the February 2007 Purchase Agreement and 2006 Purchase Agreement are identical with the exception that the maximum number of warrants that may be issued under the February 2007 Purchase Agreement is 5,185 rather than 3,111. The warrants have a three year life commencing June 30, 2007 and become exercisable on that date. The warrants have an exercise price of $0.51. The warrants include piggyback registration rights for the underlying shares to participate in any future registrations of the Company’s common stock.

On March 30, 2007, and April 1, 2007 the Company borrowed $670 and $50 under the February 2007 Purchase Agreement of which $350 was borrowed from the Affiliated Stockholder and the remaining $370 from unrelated third parties. The proceeds were used for working capital purposes. The Company has ascribed a value of $359 to the 3,474 warrants, issued as part of this borrowing, which is recorded as a discount to long-term debt, related party, in the balance sheet and will be amortized to interest expense over the life of the loan. The relative 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 4.68%; life of 3 years; expected volatility of 45%; and expected dividend yield of 0%. The notes bear interest at the rate of fifteen percent (15%) per annum payable quarterly in cash and are due August 30, 2008.

On June 15, 2007, The Company entered into a Note and Warrant Purchase Agreement (the “June 2007 Purchase Agreement”) and a Registration Rights Agreement (the “June 2007 Registration Rights Agreement”), each dated as of June 15, 2007. The Company secured the right to borrow up to one million dollars ($1,000). As of June 30, 2007, $400 had been borrowed under this facility. The Company used such proceeds and expects to use future proceeds of the financing for additional working capital. Pursuant to the June 2007 Purchase Agreement, upon each draw, the Company is required to issue one or more notes, payable within eighteen months after issuance, bearing interest at the rate of fifteen percent (15%) per annum payable quarterly in cash. The Company, upon drawing on the facility, is required to issue warrants to purchase shares of its common stock, the number to be determined by use of a formula known as the Cox-Rubenstein Model, which takes into account the volatility of the underlying stock, the risk free interest rate, dividend yield and exercise price. The exercise price of the warrants will be determined by the volume weighted average price of the common stock for the thirty business days preceding the date of the applicable draw. The warrants will include piggyback registration rights for the underlying shares to participate in certain future registrations of the Company’s common stock.

The June 2007 Purchase Agreement required the Company to draw $400 of the funds upon signing. Applying the formula described above, as of June 30, 2007, the Company has issued warrants to purchase 3,168 shares of its common stock at an exercise price of $0.25. The Company has ascribed a value of $187 to the warrants, issued as part of this borrowing, which is recorded as a discount to long-term debt, related party, in the balance sheet and will be amortized to interest expense over the life of the loan. The relative 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 4.90%; life of 3 years; expected volatility of 69%; and expected dividend yield of 0%. As described above, the $400 note bears interest at the rate of fifteen percent (15%) per annum payable quarterly in cash and is due December 30, 2008. No commitment fee is required to keep the remaining $600 of funds available.

- 20 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

The Company used a volume weighted average price of the common stock for the thirty business days preceding the date of the applicable draw to determine the $0.25 exercise price of the 3,168 warrants issued with the June 2007 Purchase Agreement. The calculation produces an exercise price less than the exercise price of the warrants associated with the convertible debt. This resulted in the Company having to reset both the conversion price of the convertible debt and the exercise price of the associated warrants. The Company reduced the conversion price of the convertible debt from $0.46 to $0.45. The effect of this re-pricing resulted in the Company incurring $12 of additional interest expense during the three and six month periods ended June 30, 2007. If all of the $1,382 remaining notes are converted to common stock, the Company will issue an additional 20 shares due to this price reset. The weighted average exercise price of the warrants associated with the convertible debt was reduced from $0.50 to $0.49, resulting in a reduction in gross proceeds if all of the warrants are exercised of $18.

Interest expense related to the note and warrant purchase agreements for the three and six month periods ended June 30, 2007, was $164 and $271, respectively, which includes related party interest of $107 and $196, respectively. Amortization of debt discount included in interest expense for the three and six month periods ended June 30, 2007 was $113 and $197, respectively, which includes amortization of related party discount of $74 and $147, respectively.

The Company has the following material commitments as of June, 2007:

	Payments due by period
Contractual obligations	Total		2007		2008		2009		2010		2011		Thereafter
Short-term debt (1)	$	1,382	$	1,382	$	-	$	-	$	-	$	-	$	-
Short-term debt related party (2)		600				600
Long-term debt related party (3)		1,120		-		1,120		-		-		-		-
Operating lease commitments (4)		1,184		128		264		272		280		240		-
Total contractual cash obligations	$	4,286	$	1,510	$	1,984	$	272	$	280	$	240	$	-

1.   Short-term debt reported on the balance sheet is net of approximately $91 in discounts representing the fair value of warrants issued to the investors and the beneficial conversion feature associated with the convertible notes.

2.   Short-term debt related party reported on the balance sheet is net of approximately $169 in discounts representing the fair value of warrants issued to the investors.

3.   Long-term debt reported on the balance sheet is net of approximately $446 in discounts representing the fair value of warrants issued to the investors.

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

The Company has suffered recurring losses from operations that raise a substantial doubt about its ability to continue as a going concern. 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 it when needed, or if available, will be available on favorable terms or in amounts required by it. 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 its business, results of operations and ability to operate as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

- 21 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

Item 3.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 decline in value if 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 three and six month periods ended June 30, 2007.

Foreign Currency Risk

From time to time, the Company makes certain capital equipment or other purchases denominated in foreign currencies. As a result, the Company’s cash flows and earnings are exposed to fluctuations in interest rates and foreign currency exchange rates. The Company attempts to limit these exposures through operational strategies and generally has not hedged currency exposures. During the three and six month periods ended June 30, 2007 and 2006, foreign currency translation gains and losses were insignificant.

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, price changes that are unrelated or disproportionate to the operating performance of such companies. The trading price of the Company's common stock could be subject to wide fluctuations in response to, among other factors, quarter-to-quarter variations in operating results, announcements of technological innovations or new products by the Company or its competitors, announcements of new strategic relationships by the Company or its competitors, general conditions in the computer industry or the global economy in general, or market volatility unrelated to the Company's business and operating results.

Item 4. Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c) as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.

Part II-Other Information

Item 1.Legal Proceedings

None

Item 1A.Risk Factors

For the three and six months ended June 30, 2007, there were no material changes in the risk factors discussed in the Company’s annual report on From 10-K.

- 22 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

Item 2.Unregistered Sale of Securities and Use of Proceeds

Information with respect to Item 2 is incorporated by reference to Exhibits 10.36, 10.37, 10.38, 10.39, and 10.40 of this Form 10-Q.

The securities referenced in the above Exhibits were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), for transactions by an issuer not involving any public offering. Each investor was an accredited investor, as such term is defined in 2(a)(15) of the Securities Act.

Item 3.Defaults Upon Senior Securities

None

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

The Company held its Annual Meeting of Stockholders on June 25, 2007. The number of shares of common stock with voting rights as of the record date represented at the meeting either in person or by proxy was 100,831 shares, or 93.7% of the eligible outstanding Common Stock of the Company. Two proposals were voted upon by the stockholders. The proposals and the voting results are as follows:

Proposal 1

The four persons listed below received the most votes in favor of election at the annual meeting and, accordingly were elected as directors to serve until the next Annual Meeting or until his successor is elected or appointed.

Name	For
Guido DiGregorio	96,954
Louis P. Panetta	96,368
C. B. Sung	96,436
David E. Welch	94,530

Proposal 2

The voting on the proposal to amend the Company’s amended and restated certificate of incorporation to increase the number of common shares available for issuance from 125,000 to 155,000 was as follows:

	FOR	Against	Abstain
Shares voted	91,875	8,528	431
Percent of voted	91.1%	8.45%	0.42%
Percent of total	85.4%	7.92%	0.40%

Item 5.Other Information

None

Item 6.Exhibits

(a)Exhibits

- 23 -

Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

Exhibit Number	Document
2.0	Second Amended Plan of Reorganization of the Company, incorporated herein by reference to the Company's Form 8-K filed October 24, 1994.
2.1	Orderly Liquidation Valuation, Exhibit F to the Second Amended Plan of Reorganization, incorporated herein by reference to the Company's Form 8-K filed October 19, 1994.
2.2	Order Confirming Plan of Reorganization, incorporated herein by reference to the Company's Form 8-K filed November 14, 1994.
3.1	Certificate of Incorporation of the Company, as amended, incorporated herein by reference to Exhibits 3.1, 3.2, 3.3 and 3.4 to the Company's Registration Statement on Form 10 (File No. 0-19301).

3.2	Certificate of Amendment to the Company's Certificate of Incorporation (authorizing the reclassification of the Class A Common Stock and Class B Common Stock into one class of Common Stock) as filed with the Delaware Secretary of State's office on November 1, 1991, incorporated herein by reference to Exhibit 3 to Amendment 1 on Form 8 to the Company's Form 8-A (File No. 0-19301).
3.3	By-laws of the Company adopted on October 6, 1986, incorporated herein by reference to Exhibit 3.5 to the Company's Registration Statement on Form 10 (File No. 0-19301).
4.15	Form of Promissory Note issued by Communication Intelligence Corporation, incorporated herein by reference to Exhibit 10.36 to the Company's Form 8-K dated February 5, 2007.
4.16	Form of Warrant issued by Communication intelligence Corporation, incorporated herein by reference to Exhibit 10.37 to the Company's Form 8-K dated February 5, 2007.
4.17	Form of Promissory Note issued by Communication Intelligence Corporation, incorporated herein by reference to Exhibit 10.36 to the Company's Form 8-K dated June 15, 2007.
4.18	Form of Warrant issued by Communication intelligence Corporation, incorporated herein by reference to Exhibit 10.37 to the Company's Form 8-K dated June 15, 2007.
10.36	Form of Note and Warrant Purchase Agreement dated February 5, 2007, among Communication Intelligence Corporation and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.34 to the Company's Form 8-K dated February 5, 2007.
10.37	Form of Registration Rights Agreement dated February 5, 2007, among Communication Intelligence Corporation and the parties identified there in, incorporated herein by reference to Exhibit 10.35 to the Company's Form 8-K dated February 5, 2007.
10.38	Amendment to the Note and Warrant Purchase Agreement dated February 5, 2007, among Communication Intelligence Corporation and the parties identified there in, incorporated herein by reference to Exhibit 99.1 to the Company's Form 8-K dated March 15, 2007.
10.39	Form of Note and Warrant Purchase Agreement dated June 15, 2007, among Communication Intelligence Corporation and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.34 to the Company's Form 8-K dated June 15, 2007.
10.40	Form of Registration Rights Agreement dated June 15, 2007, among Communication Intelligence Corporation and the parties identified there in, incorporated herein by reference to Exhibit 10.35 to the Company's Form 8-K dated June 15, 2007.
*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

* Filed herewith.

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Communication Intelligence Corporation

and Subsidiary

(in thousands, except per share ampunts)

FORM 10-Q

SIGNATURES

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

COMMUNICATION INTELLIGENCE CORPORATION

Registrant

August 14, 2007	/s/ Francis V. Dane
Date	Francis V. Dane
	(Principal Financial Officer and Officer Duly Authorized to Sign on Behalf of the Registrant)

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