iSign Solutions Inc. - Quarter Report: 2009 June (Form 10-Q)

form_10q63009.htm

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, 2009

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

large accelerated filer

accelerated filer

non-accelerated filer

Smaller reporting Company

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

Yes

Number of shares outstanding of the issuer's Common Stock, as of August 14, 2009: 131,378,589.

INDEX

	Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2009 (unaudited) and December 31, 2008	3
Condensed Consolidated Statements of Operations for the Three-Month And Six-Month Periods Ended June 30, 2009 and 2008 (unaudited)	4
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six-Month Period Ended June 30, 2009 (unaudited)	5
Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2009 and 2008 (unaudited)	6
Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	23
Item 4. Controls and Procedures	23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	23
Item 1A. Risk Factors	23
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	24
Item 5. Other Information	24
Item 6. Exhibits
(a) Exhibits	24
Signatures	26

PART I–FINANCIAL INFORMATION

Item 1. Financial Statements.

Communication Intelligence Corporation

and Subsidiary

Condensed Consolidated Balance Sheets

(In thousands)

	June 30			December 31
	2009			2008
Assets	Unaudited
Current assets:
Cash and cash equivalents	$	706		$	929
Accounts receivable, net of allowances of $104 and $104 at June 30, 2009 and December 31, 2008, respectively		245			700
Prepaid expenses and other current assets		84			80

Total current assets		1,035			1,709
Property and equipment, net		34			48
Patents		2,960			3,149
Capitalized software development costs		1,507			1,406
Deferred financing costs (Note 5)		329			301
Other assets		29			30

Total assets	$	5,894		$	6,643

Liabilities and Stockholders' Equity
Current liabilities:
Short-term debt – net of discount of $1 at June 30, 2009 and $5 at December 31, 2008	$	34		$	60
Accounts payable		186			92
Accrued compensation		293			369
Other accrued liabilities		152			236
Deferred revenue		295			343

Total current liabilities		960			1,100

Long-term debt – net of discount of $3,011 and $873 at June 30, 2009 and December 31, 2008, including related party debt of $4,744 and $2,644 net of discount of $2,921 and $834 at June 30, 2009 and December 31, 2008, respectively		1,880			2,765
Derivative liability		4,865			−
Total liabilities		7,705			3,865
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 10,000 shares authorized; 742 shares outstanding at June 30, 2009 and 856 at December 31, 2008		742			856
Common stock, $.01 par value; 275,000 shares authorized; 131,379 and 130,374 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively		1,314			1,304
Additional paid-in capital		92,697			95,174
Accumulated deficit		(96,574	)		(94,569	)
Accumulated other comprehensive income		10			13

Total stockholders' equity		(1,811	)		2,778

Total liabilities and stockholders' equity (deficit)	$	5,894		$	6,643

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

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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,
	2009			2008			2009			2008

Revenues:
Product	$	211		$	218		$	280		$	460
Maintenance		193			189			370			377
Total Revenues		404			407			650			837

Operating costs and expenses:

Cost of sales:
Product		183			157			353			327
Maintenance		48			43			97			73
Research and development		14			43			126			96
Sales and marketing		322			355			697			715
General and administrative		497			552			959			1,019
Total operating costs and expenses		1,064			1,150			2,232			2,230

Loss from operations		(660	)		(743	)		(1,582	)		(1,393	)

Interest and other income (expense), net		−			2			1			5
Interest expense:
Related party		(78	)		(48	)		(147	)		(92	)
Other		(4	)		(18	)		(8	)		(41	)
Amortization of loan discount and deferred financing:
Related party		(312	)		(217	)		(510	)		(308	)
Other		(12	)		(63	)		(20	)		(108	)
Loss on extinguishment of long term debt		(829	)		−			(829	)		−
Loss on derivative liability		(966	)		−			(1,035	)		−
Net loss		(2,861	)		(1,087	)		(4,130	)		(1,937	)
Accretion of beneficial conversion feature, Preferred shares:
Related party		−			(273	)		−			(273	)
Other		−			(98	)		−			(98	)
Preferred stock dividends:
Related party		(11	)		(4	)		(24	)		(4	)
Other		(4	)		(2	)		(8	)		(2	)

Net loss attributable to commonstockholders	$	(2,876	)	$	(1,464	)	$	(4,162	)	$	(2,314	)
Basic and diluted loss per common share	$	(0.02	)	$	(0.01	)	$	(0.03	)	$	(0.02	)
Weighted average common shares outstanding, basic and diluted		131,346			129,057			131,010			129,057

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

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Communication Intelligence Corporation

and Subsidiary

Consolidated Statements of Changes in Stockholders' Equity (Deficit)

Six Months Ended June 30, 2009

Unaudited

(In thousands, except share amounts)

	Preferred Shares Outstanding			Preferred Shares Amount			Common Shares Outstanding		Common Stock Amount		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Income			Total

Balances as of December 31, 2008		856		$	856			130,374	$	1,304	$	95,174		$	(94,569	)	$	13		$	2,778

Cumulative effect of change in accounting principle on January 1, 2009 – Reclassification of equity linked financial instrument to derivative liability												(3,510	)		2,157						(1,353	)
Stock based employee compensation												54									54
Conversion of preferred shares		(146	)		(146	)		1,005		10		136									−
Cancellation of warrants recorded as derivative liability												875									875
Comprehensive loss:
Net loss															(4,162	)					(4,162	)
Foreign currency translation adjustment																		(3	)		(3	)
Total comprehensive loss																					(4,165	)
Preferred share dividends		32			32							(32	)								−
Balances as of June 30, 2009		742			742			131,379	$	1,314	$	92,697		$	(96,574	)	$	10		$	(1,811	)

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

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Communication Intelligence Corporation

and Subsidiary

Condensed Consolidated Statements of Cash Flows

Unaudited

(In thousands)

	Six Months Ended June 30,
	2009			2008
Cash flows from operating activities:
Net loss	$	(4,130	)	$	(1,937	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		551			438
Amortization of debt discount and deferred financing costs		534			416
Loss on extinguishment of long-term debt		829
Stock-based employee compensation		54			40
Loss on derivative liability		1,035			−
Changes in operating assets and liabilities:
Accounts receivable, net		455			208
Prepaid expenses and other assets		(3	)		51
Accounts payable		94			(11	)
Accrued compensation		(76	)		(67	)
Other accrued liabilities		38			138
Deferred revenue		(48	)		(47	)
Net cash used for operating activities		(667	)		(771	)

Cash flows from investing activities: Acquisition of property and equipment		(2	)		(7	)
Capitalized software development costs		(447	)		(492	)
Net cash used for investing activities		(449	)		(499	)

Cash flows from financing activities:
Deferred financing costs		(174	)		(452	)
Proceeds from issuance of short-term debt		−			125
Proceeds from issuance of long-term debt		1,100			3,000
Principal payments on short term debt		(30	)		(125	)
Net cash provided by financing activities		896			2,548

Effect of exchange rate changes on cash and cash equivalents		(3	)		(35	)

Net (decrease) increase in cash and cash equivalents		(223	)		1,243
Cash and cash equivalents at beginning of period		929			1,144
Cash and cash equivalents at end of period	$	706		$	2,387

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

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Communication Intelligence Corporation

and Subsidiary

Condensed Consolidated Statements of Cash Flows (Continued)

Unaudited

(In thousands)

Supplementary disclosure of cash flow information
Interest paid	$	−	$	95

Non-cash financing and investing transactions
Short-term notes and accrued interest exchanged for convertible preferred stock	$	−	$	1,040
Dividends on preferred shares	$	32	$	6
Short-term notes and accrued interest exchanged for long-term notes	$	−	$	638
Accretion of beneficial conversion feature and warrants	$	−	$	371
Conversion of preferred stock to common stock	$	146	$	−
Issuance of long-term debt for payment of interest in kind	$	154	$	−
Reclassification of equity linked instrument to derivative liability	$	1,353	$	−
Debt discount and related liability recorded in connection with long-term debt	$	3,178	$	−
Warrants issued for interest recorded as derivative liability	$	74	$	−

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

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Communication Intelligence Corporation

and Subsidiary

Notes to Unaudited Financial Statements

(In thousands, except share and per share amounts)

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 for the year ended December 31, 2008.

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 reports results in one segment.

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, 2009, the Company’s accumulated deficit was approximately $96,600. At June 30, 2009, the Company had working capital of $75, including cash and cash equivalents of $706. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company has primarily funded losses through the sale of debt and equity securities.

In May 2009 and June 2008, the Company raised additional funds through debt and equity financings and also converted short-term notes payable to equity (see notes 4 and 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

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Communication Intelligence Corporation

and Subsidiary

Notes to Unaudited Financial Statements

(In thousands, except share and per share amounts)

1	Nature of business

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.

Recent Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) approved its Accounting Standards Codification (“Codification”) as the single source of authoritative United States accounting and reporting standards applicable for all non-governmental entities, with the exception of the SEC and its staff. The Codification, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. Therefore, in the third quarter of fiscal year 2009, all references made to US GAAP will use the new Codification numbering system prescribed by the FASB. As the Codification is not intended to change or alter existing US GAAP, it is not expected to have any impact on our consolidated financial position or results of operations.

In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments", or FSP 107-1, which will require that the fair value disclosures required for all financial instruments within the scope of SFAS 107, "Disclosures about Fair Value of Financial Instruments", be included in interim financial statements. This FSP also requires entities to disclose the method and significant assumptions used to estimate the fair value of financial instruments on an interim and annual basis and to highlight any changes from prior periods. FSP 107-1 is effective for interim periods ending after June 15, 2009. The adoption of FSP 107-1 did not have a material impact on the Company’s consolidated financial statements.

On January 1, 2009, the Company adopted EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”), which requires that the Company apply a two-step approach in evaluating whether an equity-linked financial instrument (or embedded feature) is indexed to the Company’s stock, including evaluation the instrument’s contingent exercise and settlement provisions. See Note 6 for the impact of the adoption of EITF 07-5 on our balance sheet and statement of operations.

2. Accounts receivable and revenue concentration

Two customers accounted for 80% of net accounts receivable as of June 30, 2009. American Family Insurance accounted for 53% and eCom Asia Pacific accounted for 27%. Four customers accounted for 82% of accounts receivable at December 31, 2008. Allstate Insurance Company accounted for 37%, SHI Inc. accounted for 18%, Travelers Indemnity Company accounted for 15% and eCom Asia Pacific, Ltd accounted for 12%.

Two customers in the aggregate accounted for 57% of total revenues for the three months ended June 30, 2009: American Family Insurance (43%) and Wells Fargo Bank NA (14%). Three customers in the aggregate accounted for 49% of total revenues for the three months ended June 30, 2008: Fiserv (12%), Wells Fargo Bank, NA (13%), and Travelers Insurance Company (24%).

Two customers in the aggregate accounted for 44% of total revenues for the six months ended June 30, 2009: American Family Insurance (27%) and Wells Fargo Bank NA (17%). Three customers in the aggregate accounted for 50% of total revenue for the six months ended June 30, 2008: Travelers Insurance Company (11%), Wells Fargo Bank, NA (20%) and Access Systems Americas, Inc. (19%).

- 9 -

Communication Intelligence Corporation

and Subsidiary

Notes to Unaudited Financial Statements

(In thousands, except share and per share amounts)

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 the guidance of 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 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 the Company’s Annual Report on Form 10-K.

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, 2008. Based on that analysis, the Company concluded that no impairment of the carrying value of the patents existed. The Company believes that no events or circumstances occurred or changed during the six months ended June 30, 2009, and therefore concluded that no impairment in the carrying values of the patents existed at June 30, 2009.

Amortization of patent costs was $94 and $189 for the three and six month periods ended June 30, 2009 and $95 and $190 in the corresponding periods of the prior year.

4.	Short-term debt

Short-term debt as of June 30, 2009 consists of a principal balance of $35, net of a remaining debt discount of $1. The note agreement, originally entered into in 2004, was modified in October 2007. The modification extended the maturity of the note through October 2009 and terminated the conversion feature of the note. In addition, the note holder received warrants to purchase two shares per one dollar of principal outstanding (234 warrants exercisable at $0.29 per share, the 20 day volume weighted average price of the Company’s Common Stock ending on October 25, 2007).

5. Long-term debt

On May 28, 2009, the Company entered into a financing transaction (“New Financing Transaction”) under which the Company raised capital through the issuance of new secured indebtedness and modified the terms of the June 2008 credit agreement (“Credit Agreement”). Certain parties (Phoenix Venture Fund LLC (“Phoenix”), Michael Engmann and certain entities related to Mr. Engmann) to the New Financing Transaction had a pre-existing relationship with the Company. In the New Financing Transaction, the Company received an aggregate of $1,100, which is due on December 31, 2010, accrues interest at 8% per annum, and which, at the option of the Company, may be paid in cash or in kind. In conjunction with the New Financing Transaction, the Company issued warrants to the lenders to purchase an aggregate of 18,333 shares of common stock (exercisable through June 30, 2012 at $0.06 per share). Additionally, the Company issued a warrant to SG Phoenix LLC, an affiliate of Phoenix, to purchase 3,948 shares of common stock (exercisable through June 30, 2012 at $0.06 per share) and a warrant to purchase 250 shares of common stock (exercisable through June 30, 2012 at $0.06 per share) to an unrelated third party in connection with administrative services provided to the Company.

- 10 -

Communication Intelligence Corporation

and Subsidiary

Notes to Unaudited Financial Statements

(In thousands, except share and per share amounts)

5. Long-term debt (continued)

transaction were cancelled and new warrants to purchase 61,821 shares of common stock were issued. The note and warrants have identical terms to the terms outlined in the New Financing Transaction above The Company recorded a loss on debt extinguishment in the amount of $829 related to the cancellation of the notes, and recorded an increase to additional paid in capital in the amount of $875 related to the cancellation of warrants that had been recorded as a derivative liability.

The Company ascribed the fair value of $3,178 to the new warrants, excluding the warrants issued for administrative services, which is recorded as a discount to Long-term debt in the balance sheet. The fair value of the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 1.64%; expected term of 3 years; expected volatility of 137%; and expected dividend yield of 0%. The Company may use the proceeds from the New Financing Transaction to pay the Company’s indebtedness and accrued interest on that indebtedness, for working capital and general corporate purposes, in each case in the ordinary course of business, and to pay fees and expenses in connection with the New Financing Transaction, which were $347, including $173 attributable to the warrants issued for the administrative services. The fees and expenses are recorded as deferred financing costs and are to be amortized over the life of the loan.

In connection with the New Financing Transaction, the Registration Rights Agreement from the previous financing transaction was amended to provide the lenders certain rights to demand registration of shares issuable upon exercise of the new warrants.

At June 30, 2009, the Company exercised its option to make the second quarter interest payment in kind. The Company issued new notes in the amount of $82 and additional warrants to purchase 1,366 shares of common stock with the same terms as those issued in the New Financing Transaction.

Interest expense associated with the Company’s debt for the three months ended June 30, 2009 and 2008 was $406 and $346, respectively. Included in interest expense for the three months ended June 30, 2009 and 2008 was $324 and $280, respectively, of amortization of the debt discount and deferred financing costs. Interest expense for the six months ended June 30, 2009 and 2008 was $685 and $549, respectively. Included in interest expense for the six months ended June 30, 2009 and 2008 was $530 and $416, respectively, of amortization of the debt discount and deferred financing costs.

6. Derivative liability

In June 2008, the FASB ratified EITF No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”. Paragraph 11(a) of SFAS No. 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception. The Company adopted EITF 07-5 effective January 1, 2009, and determined that certain warrants and the embedded conversion feature on the preferred stock require liability classification because of certain provisions that may result in an adjustment to the number of shares upon settlement and an adjustment to their exercise or conversion price. The fair value of the embedded conversion feature at January 1, 2009 and June 30, 2009 was insignificant. The warrants were retroactively reclassified as liabilities upon the effective date of EITF 07-5 as required by the EITF. The result was a decrease in paid in capital as of January 1, 2009, of $3,510, a decrease in accumulative deficit of $2,157, and the recognition of a liability of $1,353. The liability, including additional liabilities related to the New Financing Transaction, was further adjusted to fair value as of June 30, 2009, resulting in an increase in

- 11 -

Communication Intelligence Corporation

and Subsidiary

Notes to Unaudited Financial Statements

(In thousands, except share and per share amounts)

6. Derivative liability (continued)

the liability and other expense of $1,035 for the six months ended June 30, 2009 and $966 for the three months ended June 30, 2009.

The Company uses the Black-Scholes pricing model to calculate fair value of its warrant liabilities. Key assumptions used to apply these models are as follows:

	June 30, 2009	January 1, 2009
Expected term	.25 to 3.00 years	.75 to 2.5 years
Volatility	137.4% - 199.0%	141.9% - 171.7%
Risk-free interest rate	1.64%	1.14%
Dividend yield	0%	0%

Fair value measurements:

Assets and liabilities measured at fair value as of June 30, 2009, are as follows:

	Value at	Quoted prices in active markets	Significant other observable inputs	Significant unobservable inputs
	June 30, 2009	(Level 1)	(Level 2)	(Level 3)
Derivative liability	$ 4,865	$ −	$ −	$ 4,865

The fair value framework requires a categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets and liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:

Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.

Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.

There were no financial assets or liabilities measured at fair value, with the exception of cash and the above mentioned derivative liability as of June 30, 2009 and December 31, 2008.

7.	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, 2009, 8,913 and 100,867 shares of common stock issuable upon the exercise of outstanding options and warrants, respectively, and 5,296 shares of common stock issuable upon the conversion of the convertible preferred stock were excluded from the calculation of dilutive earnings per share because the exercise of such options and warrants and the conversion of the preferred stock would be anti-dilutive.

- 12 -

Communication Intelligence Corporation

and Subsidiary

Notes to Unaudited Financial Statements

(In thousands, except share and per share amounts)

7.	Net (loss) per share (continued)

For the three and six month periods ended June 30, 2008, 6,002 and 41,131 shares of common stock issuable upon the exercise of outstanding options and warrants, respectively, and 7,429 shares of common stock issuable upon the conversion of the convertible preferred stock were excluded from the calculation of dilutive earnings per share because the exercise of such options and warrants and the conversion of the preferred stock would be anti-dilutive.

Equity

The Company has granted stock options under its 1999 Option Plan which expired in April of 2009 (options outstanding under that plan are not effected by its expiration) and also granted 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 rate for the three and six months ended June 30, 2009 was approximately 19%, and for the comparable three and six months in 2008 was approximately 27%, 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, 2009 and 2008.

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, 2009	Three and Six Months Ended June 30, 2008
Risk free interest rate	1.45% – 5.11%	3.32% - 5.11%
Expected life (years)	3.21 – 6.88	3.21 – 6.86
Expected volatility	80.96% – 131.35%	80.96% – 104.57%
Expected dividends	None	None

The following table summarizes the allocation of stock-based compensation expense related to stock option grants under SFAS 123(R) for the three and six months ended June 30, 2009 and 2008. The Company granted 1,200 stock options during the three and six months ended June 30, 2009 and no stock options were exercised. There were 100 stock options granted during the three and six months ended June 30, 2008 and no options were exercised.

- 13 -

Communication Intelligence Corporation

and Subsidiary

Notes to Unaudited Financial Statements

(In thousands, except share and per share amounts)

8.	Equity (continued)

	Three Months Ended June 30,				Six months Ended June 30,
	2009		2008		2009		2008
Research and development	$	11	$	1	$	15	$	2
Sales and marketing		5		8		13		20
General and administrative		12		1		26		2
Director options		−		15		−		16
Stock-based compensation expense	$	28	$	25	$	54	$	40

A summary of option activity under the Company’s plans as of June 30, 2009 and 2008 is as follows:

	As of June 30,
	2009									2008
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,		7,608		$	0.48						6,036		$	0.59
Granted		1,200		$	0.10						100		$	0.20
Exercised		−									−
Forfeited or expired		(595	)	$	0.77						(134	)	$	0.25
Outstanding at June 30		8,213		$	0.42		4.53	$	−		6,002		$	0.58		4.16	$	−
Vested and expected to vest at June 30		8,213		$	0.42		4.53	$	−		6,002		$	0.58		4.16	$	−
Exercisable at June 30		5,616		$	0.54		3.74	$	−		5,550		$	0.61		4.04	$	−

The following tables summarize significant ranges of outstanding and exercisable options as of June 30, 2009 and 2008:

		As of June 30, 2009
		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
$	0.10 – $0.50		5,184		5.3	$	0.21		2,588	$	0.28
	0.51 – 1.00		2,941		3.3	$	0.72		2,940	$	0.72
	1.01 – 2.00		73		2.7	$	1.66		73	$	1.66
	2.01 – 3.00		−		−	$	−		−	$	−
	3.01 – 7.50		15		1.0	$	3.56		15	$	3.56
			8,213		4.5	$	0.42		5,616	$	0.54

- 14 -

Communication Intelligence Corporation

and Subsidiary

Notes to Unaudited Financial Statements

(In thousands, except share and per share amounts)

8.	Equity (continued)

		As of June 30, 2008
		Options Outstanding						Options Exercisable
Range of Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life(in years)		Weighted Average Exercise Price		Number Outstanding		Weighted Average Exercise Price
$	0.14 – $0.50		2,479		4.80	$	0.32		2,027	$	0.33
	0.51 – 1.00		3,341		3.84	$	0.73		3,341	$	0.73
	1.01 – 2.00		167		1.62	$	1.32		167	$	1.32
	2.01 – 3.00		−		−	$	−		−	$	−
	3.01 – 7.50		15		1.97	$	3.56		15	$	3.56
			6,002		4.16	$	.58		5,550	$

A summary of the status of the Company’s non-vested shares as of June 30, 2009 is as follows:

Nonvested Shares	Shares			Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2009		1,565		$	0.16
Granted		1,200		$	0.00
Forfeited		(168	)	$	0.77
Vested		−		$	−
Nonvested		2,597		$	0.13

As of June 30, 2009, there was $115 of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the plans. The unrecognized compensation expense is expected to be realized over a weighted average period of 2.8 years.

Preferred Shares

In connection with the closing of the June 2008 Financing Transaction (see Note 5, Long-term debt), the Company also entered into a Securities Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) each dated as of June 5, 2008. Under the Purchase Agreement, in exchange for the cancellation of $995 in principal amount and $45 of interest accrued thereon of the Company’s aggregate outstanding $2,071 in existing debt and interest accrued thereon through May 31, 2008, the Company issued to the holders of such debt an aggregate of 1,040 shares of the Company’s Series A Cumulative Convertible Preferred Stock (the “Preferred Shares”), As of June 30, 2009, there are 742 Preferred Shares outstanding. The Preferred Shares carry an eight percent (8%) annual dividend, payable quarterly in arrears in cash or in additional Preferred Shares, have a liquidation preference over Common Stock of one dollar ($1.00) per share and are convertible into shares of Common Stock at the conversion price of fourteen cents ($0.14) per share. If the outstanding “Preferred Shares” are converted in their entirety, the Company would issue 5,300 shares of common stock. The shares of Preferred Stock are convertible any time after June 30, 2008. The preferred stock transaction resulted in a beneficial conversion feature of $371, of which $273 is attributable to Michael Engmann and $98 to the other creditors. The beneficial conversion feature was recorded as a charge to loss applicable to common stockholders for the quarter ended June 30, 2008. The Company has accrued dividends on the preferred shares of $58. As of June 30, 2009, $27 of accrued dividends had been paid in cash.

- 15 -

Communication Intelligence Corporation

and Subsidiary

Notes to Unaudited Financial Statements

(In thousands, except share and per share amounts)

8.	Equity (continued)

During the six months ended June 30, 2009, 146 Preferred Shares were converted into 1,005 shares of the Company’s common stock. The Company paid the first and second quarter dividends due on the Preferred Shares by issuing an additional 32 Preferred Shares which are convertible into 229 shares of common stock, included in the total below. At June 30, 2009 there are 742 preferred shares outstanding, that if converted, the Company would issue 5,296 shares of the Company’s common stock.

9.	Subsequent events

The Company evaluated events through August 14, 2009 for consideration as a subsequent event to be included in its June 30, 2009 financial statements, issued August 14, 2009.

The Company's Board of Directors adopted the 2009 Stock Compensation Plan on July 1, 2009, reserving 7,000,000 shares of Common Stock of the Company for issuance thereunder. The Board has granted 896,992 options pursuant to the plan.

- 16 -

Communication Intelligence Corporation

and Subsidiary

(In thousands, except share and per share amounts)

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, 2008, 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, 2008.

Overview

The Company is a leading supplier of electronic signature solutions for business process automation serving primarily the financial services industry and is the acknowledged leader in biometric signature verification technology. Its products enable companies to achieve secure paperless business transactions with multiple signature technologies across virtually all applications and hardware platforms.

The Company was 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, 2008, net losses aggregated approximately $12,800 and at December 31, 2008, the Company's accumulated deficit was approximately $94,600. At June 30, 2009, its accumulated deficit was approximately $96,600.

Total revenue of $650 for the six months ended June 30, 2009 decreased $187 or 22%, compared to revenues of $837 in the corresponding six months of the prior year. The Company believes that revenues in the first half reflects primarily the freeze in IT spending resulting from the meltdown in the financial market which delayed orders, even beyond the historical delays consistent with companies entering a new year and new budget period, because of the heightened senior management oversights, reviews, and prioritization processes implemented. The Company still anticipates that 2009 revenue will exceed 2008. Fourth quarter of 2008 revenue was up 17% over the third quarter of 2008, revenue for the last half of 2008 was up 25% over the last half of 2007 and based on sales related activity, the Company anticipates delayed orders and deployments will resume in 2009.

Total revenues for the three months ended June 30, 2009 were $404,000 compared to revenues of $407,000 in the corresponding prior year period. Orders for the three month period ended June 30, 2009, however, were $930,000, $526,000 higher than revenue recognizable for that period and 75% of such orders are expected to be recognized as revenue by year end. Revenues were primarily attributable to American Family Insurance, American General Life & Accident, Charles Schwab, Misys healthcare, Prudential Insurance, Snap-On Credit and Wells Fargo Bank.

- 17 -

Communication Intelligence Corporation

and Subsidiary

(In thousands, except share and per share amounts)

FORM 10-Q

With the significant increase in second quarter orders it appears that the momentum we experienced in the last half of last year will resume and continue into the last half of this year. Despite the first quarter financial services IT spending freeze we experienced, and the resultant negative effect on our first quarter revenue, we believe that cash is freeing up for orders that fund mission critical projects. Last month we announced that American Family Insurance, a Fortune 500 firm, chose CIC to fulfill its automation needs. We believe this win evidences the product differentiation of our Signature One Ceremony Server and also the successful track record that our Ceremony Server deployments have established including the two prior successive wins with Travelers and Allstate deployed in the third and fourth quarter last year. We have not received any significant input from customers or prospects suggesting that the adverse conditions have resulted in cancellation of the mission critical projects for this year. Rather, they have been delayed. There is increasing awareness in the financial industry that our technology is the answer to the heightened challenges they are facing and, recognition of the need and desire to purchase sooner rather than later in order to gain the benefits of deployment this year. So, we believe the purchase priority necessary to generate sufficient orders to achieve last half profitability exists. However, realization of that possibility depends on the speed and magnitude of the spending recovery.

The net loss for the six months ended June 30, 2009 was $4,162, compared with a net loss of $2,314 in the prior year period. The increase in net loss for the six months ended June 30, 2009 was primarily the result of expensing the remaining unamortized debt discount and deferred financing cost as a loss on debt extinguishment, aggregating $829, associated with the cancelled notes and warrants which were replaced with new notes and warrants in the New Financing Transaction (see Note 5 to the Condensed Consolidated Financial Statements) and the loss on derivative liability of $1,035. Cost of sales increased 13% or $50 while operating expenses decreased approximately 3%, or $48, for the six months ended June 30, 2009, compared to the prior year period. The increase in cost of sales was due to additional amortization of capitalized software development from projects completed since June of the prior year, pertaining to direct engineering costs related to meeting customer specific requirements associated with integration of our standard products into customer systems. The decrease in Operating expenses is primarily due to reduced spending during the six months ended June 30, 2009 compared to the prior year.

Critical Accounting Policies and Estimates

Derivatives.

The Company follows the provisions of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) along with related interpretations EITF No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”, EITF No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”) and EITF No. 05-2 “The Meaning of ‘Conventional Convertible Debt Instrument” in Issue No. 00-19” (“EITF 05-2”). SFAS No. 133 requires every derivative instrument (including certain derivative instruments embedded in other contracts) to be recorded in the balance sheet as either an asset or liability measured at its fair value, with changes in the derivative’s fair value recognized currently in earnings unless specific hedge accounting criteria are met. The Company values these derivative securities under the fair value method at the end of each reporting period (quarter), and their value is marked to market at the end of each reporting period with the gain or loss recognition recorded against earnings. The Company continues to revalue these instruments each quarter to reflect their current value in light of the current market price of our common stock. The Company utilizes the Black-Scholes option-pricing model to estimate fair value. Key assumptions of the Black-Scholes option-pricing model include applicable volatility rates, risk-free interest rates and the instrument’s expected remaining life. These assumptions require significant management judgment.

Refer to Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2008 Form 10-K.

- 18 -

Communication Intelligence Corporation

and Subsidiary

(In thousands, except share and per share amounts)

FORM 10-Q

Results of Operations

Revenues

Product revenues for the three-month period ended June 30, 2009 decreased 3%, or $7, to $211, compared to revenues of $218 in the prior year period. The decrease in revenue is primarily due to a decrease in royalties from the Company’s natural input/jot product. Maintenance revenue increased 2%, or $4, for the three-month period ended June 30, 2009 to $193, compared to revenues of $189 in the prior year period. This increase is primarily due to maintenance renewals from existing eSignature customers.

Product revenues for the six-month period ended June 30, 2009 decreased 39%, or $180, to $280, compared to revenues of $460 in the prior year period. The decrease in revenue is primarily due to a 97%, or $161 decrease in royalties from the Company’s natural input/jot product to $5, compared to $166 in the prior year period. Royalty from the Company’ natural input products is expected to remain at the lower volume due to changes in OEM product and operating system offerings which do not include the Company’s natural input/jot product. Maintenance revenue decreased 2%, or $7, for the six-month period ended June 30, 2009 to $370, compared to revenues of $377 in the prior year period. This decrease is primarily due to the decline in natural input/jot maintenance.

Cost of Sales

Cost of sales increased $31, or 16%, to $231, for the three-month period ended June 30, 2009, compared to $200 in the prior year period. The increase in cost of sales was due to additional capitalized software development amortization from projects completed since June of the prior year pertaining to direct engineering costs related to meeting customer specific requirements associated with integration of our standard products into customer systems. For the six month period ended June 30, 2009, cost of sales increased $50, or 13% to $450, compared to $400 in the prior year period. The increase was due to the same factors as described for the three-month period. Cost of sales is expected to increase near term as previously capitalized software development costs begin to be amortized once new products and enhancements are completed and released.

Operating expenses

Research and Development Expenses

Research and development expenses decreased approximately 67%, or $29, for the three-month period ended June 30, 2009, compared to the prior year period. Research and development expenses consist primarily of salaries and related costs, outside engineering, maintenance items, and allocated facilities expenses. The most significant factor in the $29 decrease was the higher levels of software development costs capitalized during the three months ended June 30, 2009, as compared to the prior year period. For the six-month period ended June 30, 2009 engineering expenses increased 31%, or $30 to $126, compared to $96 in the prior year period. The increase was primarily due to a lower capitalization of software development costs over the six-month period, compared to the prior year. Total expenses, before capitalization of software development costs and other allocations for the three and six months ended June 30, 2009 was $417 and 867 compared to $394 and $794 in the prior year. The increases in the three and six-month periods were primarily due to the addition of a senior-level engineer compared to the prior year. 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 in the near term.

Sales and Marketing Expenses

Sales and marketing expenses decreased 9%, or $33, for the three months ended June 30, 2009, compared to the prior year period. The decrease was primarily attributable to lower expenditures on marketing programs. Offsetting the above mentioned reductions, engineering sales support costs increased $37, compared to the prior year period, due to an increase in requests for information and product demonstrations from potential customers.

- 19 -

Communication Intelligence Corporation

and Subsidiary

(In thousands, except share and per share amounts)

FORM 10-Q

For the six months ended June 30, 2009, sales and marketing expense decreased 3%, or $18, to $697 compared to $715 in the prior year period. The decrease is due in part to the reasons discussed above. In addition salary and related expenses decreased 19% due to the reduction of two sales persons during the period.

General and Administrative Expenses

General and administrative expenses decreased 10%, or $55, for the three months ended June 30, 2009, compared to the prior year period. For the six month period ended June 30, 2009, general and administrative expenses decreased 6%, or $60, to $959 compared to $1,019 in the prior year. The decrease was primarily due to reductions in general corporate expenses. These decreases were offset by an increase in stock option compensation. The Company anticipates that general and administrative expense will remain relatively consistent with the amounts incurred in the prior year in the near term.

Interest income and other income, net

Interest income and other income, net was $0 and $1 for the three and six months ended June 30, 2009, compared to $2 and $5 in the prior year. The decrease is due to the lower cash balance and lower interest rates during the current period compared to the prior year period.

Interest expense

Interest expense, related party increased 63%, or $30, to $78 for the three months ended June 30, 2009, compared to $48 in the prior year period. The increase was primarily due to the financing in June 2008. Interest expense-other for the three months ended June 30, 2009 decreased $14, to $4, compared to $18 in the prior year period. The decrease was primarily due to the conversion in June 2008 of non-related party debt into Preferred Shares. See Notes 5 and 8 in the Condensed Consolidated Financial Statements of this report on Form 10-Q.

Interest expense, related party increased 60%, or $55, to $147 for the six months ended June 30, 2009, compared to $92 in the prior year period. The increase was primarily due to the financing in June 2008. Interest expense-other for the six months ended June 30, 2009 decreased $33, to $8, compared to $41 in the prior year period. The decrease was due to the same factors discussed for the three month periods above.

Amortization of loan discount and deferred financing expense-related party increased $95, or 44%, to $312 for the three months ended June 30, 2009, compared to $217 in the prior year period. The increase was primarily due to the New Financing Transaction. For the six months ended June 30, 2009 deferred financing expense-related party increased $202, or 66%, to $510 compared to $308 in the prior year period. The increase was primarily due to the same factors discussed above.

For the three and six months ended June 30, 2009, the Company expensed the remaining unamortized debt discount and deferred financing costs, aggregating $829, as the result of the debt extinguishment associated with the cancelled notes and warrants which were replaced with new notes and warrants as a condition of the New Financing Transaction.

The Company expects to amortize an additional $3,011 of debt discount related to the New Financing Transaction to interest expense through December 2010.

Liquidity and Capital Resources

At June 30, 2009, cash and cash equivalents totaled $706 compared to cash and cash equivalents of $929 at December 31, 2008. The decrease in cash was primarily due to cash used by operations of $564, cash used in investing activities of $439, including $437 in capitalization of software development costs, and $2 in the acquisition of property and equipment. The cash used by operations and investing activities were offset by $799 provided by financing activities, net of $30 used to repay a portion of short-term debt. Total current assets were $1,035 at June 30, 2009, compared to $1,709 at December 31, 2008. As of June 30, 2009, the Company's principal sources of funds included its cash and cash equivalents aggregating $706.

- 20 -

Communication Intelligence Corporation

and Subsidiary

(In thousands, except share and per share amounts)

FORM 10-Q

Accounts receivable net decreased $455 for the six months ended June 30, 2009, compared to the December 31, 2008 balance, due primarily to the decrease in sales and billed but unpaid maintenance contracts that are off set against deferred revenue compared to the fourth quarter of 2008. The billed but unpaid maintenance amounts off set against the deferred revenue amount to $377. These amounts are expected to be collected in the third quarter. 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 increased by $4 for the six months ended June 30, 2009, compared to December 31, 2008, due primarily to increases in prepaid insurance and annual fees on maintenance and support costs added to prepaid expenses over the six months ended June 30, 2009.

Accounts payable increased $94 for the six months ended June 30, 2009, compared to December 31, 2008, due primarily to an increase in professional service fees. Accrued compensation decreased $76 during the six months ended June 30, 2009, compared to the December 31, 2008 balance. The balance may fluctuate in the future due to increases or decreases in the number of personnel and utilization of, or increases to, the accrued vacation balance.

Total current liabilities were $960 at June 30, 2009, compared to $1,100 at December 31, 2008. Deferred revenue, totaling $295 at June, 2009, compared to $343 at December 31, 2008, 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 advance payment from its customers.

In connection with the New Financing Transaction, the Company amended the Credit Agreement such that the notes underlying the Credit Agreement were cancelled and new notes were issued (principal amount of $3,709). In addition, warrants to purchase 26,495 shares of common stock included in the June 2008 transaction were cancelled and new warrants to purchase 61,821 shares of common stock were issued. The note and warrants have identical terms to the terms outlined in the New Financing Transaction above The Company recorded a loss on debt extinguishment in the amount of $829 related to the cancellation of the notes, and recorded an increase to additional paid in capital in the amount of $875 related to the cancellation of warrants that had been recorded as a derivative liability.

- 21 -

Communication Intelligence Corporation

and Subsidiary

(In thousands, except share and per share amounts)

FORM 10-Q

0%. The Company may use the proceeds from the New Financing Transaction to pay the Company’s indebtedness and accrued interest on that indebtedness, for working capital and general corporate purposes, in each case in the ordinary course of business, and to pay fees and expenses in connection with the New Financing Transaction, which were $347, including $173 attributable to the warrants issued for the administrative services. The fees and expenses are recorded as deferred financing costs and are to be amortized over the life of the loan.

The Company has the following material commitments as of June 30, 2009:

	Payments due by period
Contractual obligations	Total		2009		2010		2011		2012		2013		Thereafter
Short-term debt (1)	$	35	$	35	$	–	$	–	$	–	$	–	$	–
Long-term debt related party (2)		4,891		–		4,891		–		–		–		–
Operating lease commitments (3)		660		140		280		240		–		–		–
Total contractual cash obligations	$	5,586	$	175	$	5,171	$	240	$	–	$	–	$	–

1.	Short-term debt reported on the balance sheet is net of approximately $1 in discounts representing the fair value of warrants issued in connection with the Company’s debt financings.

2.	Long-term debt reported on the balance sheet is net of approximately $3,011 in discounts representing the fair value of warrants issued to the debt holders.

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

The Company has experienced 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.

- 22 -

Communication Intelligence Corporation

and Subsidiary

(In thousands, except share and per share amounts)

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 fall 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 months ended June 30, 2009.

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 months ended June 30, 2009 and 2008, 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

Not applicable.

Item 2. Unregistered Sale of Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

- 23 -

Communication Intelligence Corporation

and Subsidiary

(In thousands, except share and per share amounts)

FORM 10-Q

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

The Company held its Annual Meeting of Stockholders on June 30, 2009. The number of shares of common stock with voting rights and preferred shares on-as-if converted basis as of the record date represented at the meeting either in person or by proxy was 125,546,842 shares, or 92% of the eligible outstanding Common Stock and outstanding Series A-1 Cumulative Convertible Preferred Stock (voting on-as-if converted basis). Two proposals were voted upon by the stockholders. The proposals and the voting results are as follows:

Proposal 1

The five 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		115,278,788
	Garry Meyer		113,693,099
	Louis P. Panetta		115,687,473
	Chien Bor (C. B.) Sung		118,183,584
	David E. Welch		114,080,464

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 255,000 to 275,000 was as follows:

	FOR	Against	Abstain
Shares voted	110,260,531	14,877,156	409,155
Percent of voted	87.8%	11.9%	0.3%
Percent of total	80.7%	10.9%	0.3%

Item 5. Other Information.

None.

Item 6. Exhibits.

(a) Exhibits.

Exhibit Number	Document
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).

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Communication Intelligence Corporation

and Subsidiary

(In thousands, except share and per share amounts)

FORM 10-Q

Exhibit Number	Document
3.4	By-laws of the Company adopted on October 6, 1986, incorporated herein by reference to Exhibit 3.5 to the Company's Registration Statement on Form 10 (File No. 0-19301).
3.5	Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation dated January 24, 2001, incorporated herein by reference to Exhibit 3.5 to the Company’s Registration Statement on Form S/1, filed December 28, 2007.
3.6	Certificate of Elimination of the Company’s Certificate of Designation of the Series A Preferred Stock dated August 17, 2001, incorporated herein by reference to Exhibit 3.6 to the Company’s Registration Statement on Form S/1, filed December 28, 2007.
3.7	Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State August 17, 2007, incorporated herein by reference to Exhibit 3.7 to the Company’s Registration Statement on Form S/1 filed on December 28, 2007.
3.8	Amended and Restated Certificate of Incorporation of the Company filed with the Delaware Secretary of State on May 18, 1995, incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008.
3.9	Certificate of Designations, Powers, Preferences and Rights of the Series A Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on June 4, 2008, incorporated herein by reference to Exhibit 4.23 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008.
3.10	Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State on June 30, 2008, incorporated herein by reference to Exhibit 3.7 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008.
3.11	Certificate of Designations, Powers, Preferences and Rights of the Series A-1 Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on October 30, 2008., incorporated herein by reference to Exhibit 3.11 to the Company’s Annual Report on Form 10-K filed on March 12, 2009.
3.12	Certificate of Elimination of the Company’s Series A Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on December 30, 2008, incorporated herein by reference to Exhibit 3.12 to the Company’s Annual Report on Form 10-K filed on March 12, 2009..
*3.13	Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State on June 30, 2009.
*4.24	Form of Secured Promissory Note.
*4.25	Form of Additional Secured Promissory Note.
*4.26	Form of Common Stock Purchas Warrant.
*4.27	Form of Additional Common Stock Purchase Warrant.
*10.46	Amendment No. 1 to the Credit Agreement dated May 28, 2009.
*10.47	Amendment No. 1 to the Registration Rights Agreement dated May 28, 2009.
*10.48	Side Letter Regarding Salary Reduction Plan for Executive Officers dated May 28, 2009.
*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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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, 2009		/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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