S-1

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Filed with the Securities and Exchange Commission on October 31, 2002

Registration No. 333-            

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

COMMUNICATION INTELLIGENCE CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE
(State or other jurisdiction
of incorporation) 7371
(Primary standard industrial
classification code number) 94-2790442
(I.R.S. Employee
Identification Number)

275 Shoreline Drive, Suite 500
Redwood Shores, California 94065
(650) 802-7888
(Address and telephone number of principal executive offices)

Frank Dane
Chief Financial Officer
Communication Intelligence Corporation
275 Shoreline Drive, Suite 500
Redwood Shores, California 94065
(650) 802-7888
(Name, address and telephone number of agent for service of process)

Copies to:
Michael McArthur-Phillips
Davis Wright Tremaine, LLP
1300 SW Fifth Avenue
23^RD Floor
Portland, Oregon 97204
Phone: (503) 778-5214
Facsimile: (503) 778-5299

Approximate date of commencement of sale to the public:
as soon as practicable after the effective date of this registration statement

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. ý

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act Registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

CALCULATION OF REGISTRATION FEE

TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED	AMOUNT TO BE REGISTERED (1)	PROPOSED MAXIMUM OFFERING PRICE PER SHARE (2)	PROPOSED MAXIMUM AGGREGATE OFFERING PRICE	AMOUNT OF REGISTRATION FEE (2)
COMMON STOCK,            PAR VALUE	24,430,623	$.24	$5,863,350	$539.43

(1)

In accordance with Rule 416 under the Securities Act, the number of shares to be registered includes such indeterminate number of additional shares of common stock as may become issuable in accordance with pricing provisions found in the applicable documents.

(2)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933 on the basis of the average of the high and low prices of the Registrant's common stock on October 28, 2002, as reported on the Nasdaq SmallCap Market.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

PROSPECTUS

24,430,623 SHARES

COMMON STOCK

This is a public offering of 24,430,623 shares of our common stock by certain of our stockholders. We will receive none of the proceeds from the sale of these shares of common stock. None of these shares offered are issued and outstanding at this time. The shares will be issued by us under a certain Equity Line of Credit Agreement dated as of July 23, 2002, as amended, (the "Line of Credit"). See "Equity Credit Line Agreement" on page 26.

Our common stock is quoted on the Nasdaq SmallCap Market ("Nasdaq") under the symbol "CICI." As of October 24, 2002, the number of shares outstanding, prior to issuance of any shares under the Line of Credit, was 91,480,777.

Investing in our common stock involves Risks. See "Risk Factors" on page 5.

Neither the Securities Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

THIS PROSPECTUS IS DATED [            ], 2002

TABLE OF CONTENTS

	PAGE
PROSPECTUS SUMMARY	3
FORWARD-LOOKING STATEMENTS	4
RISK FACTORS	5
SELECTED CONSOLIDATED FINANCIAL DATA	9
SELECTED QUARTERLY FINANCIAL DATA	10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	11
EQUITY LINE OF CREDIT AGREEMENT	26
DESCRIPTION AND PRICE RANGE OF COMMON STOCK	29
CAPITALIZATION	34
DILUTION	34
USE OF PROCEEDS	35
SELLING STOCKHOLDERS	35
PLAN OF DISTRIBUTION	36
BUSINESS	38
DIRECTORS	47
EXECUTIVE OFFICERS	50
EXECUTIVE COMPENSATION	50
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	55
SHARES ELIGIBLE FOR FUTURE SALE	55
ELIMINATION OF DIRECTOR LIABILITY	55
INDEMNIFICATION OF OFFICERS AND DIRECTORS	55
WHERE YOU CAN FIND MORE INFORMATION	56
LEGAL MATTERS	56
EXPERTS	56
TRANSFER AGENT AND WARRANT AGENT	56

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PROSPECTUS SUMMARY

ABOUT THIS PROSPECTUS

This summary highlights only selected information contained elsewhere in this prospectus. It does not contain all of the information that is important to you before investing in our common stock. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and financial statements.

This prospectus is part of a registration statement (No. 333-) that we have filed with the Securities and Exchange Commission utilizing a shelf registration process. Under this process, stockholders holding shares of our common stock may sell those shares using this prospectus.

This prospectus provides you with a general description of the shares of common stock that may be resold by the selling stockholders. We may update or supplement this prospectus from time to time to add, update or change information contained in this prospectus.

OUR BUSINESS

Our products are designed to increase the ease of use, functionality and security of smart handheld devices with a primary focus on devices that combine the function of voice, personal digital assistants ("PDAs") and other portable devices that enable the user to connect to the Internet without the need for connecting to a phone line.

We are the global leader in software that can verify handwritten signatures delivered wirelessly and a leading supplier of electronic signature and handwritten data entry software solutions focused on emerging, fast growth, large potential markets such as document automation, corporate security, handheld computers, devices that combine the function of voice, PDAs and access to the Internet without the use of phonelines, and the installed user base of devices from Palm, Inc.

We are headquartered in Redwood Shores, California and have a joint venture, Communication Intelligence Computer Corporation, Ltd. (the "Joint Venture"), in Nanjing, China.

Entities that have chosen to license our products include Charles Schwab & Co., Hewlett-Packard Company, Electronic Data Systems Corp., Ericsson Mobile Communications AB, Fujitsu Limited, International Business Machines Corporation, Legend Ltd., Mitsubishi Electric Corporation, National Semiconductor Corporation, The Prudential Insurance Company of America, Siebel Systems Inc., and The Tennessee Valley Authority. Our products also are available through major retail outlets such as Circuit City, CompUSA, Staples and Office Max, key integration partners such as Florentis, Ltd., Siebel Systems, Inc., Siemens Medical Systems, Inc. and Adobe Systems, Ink., and our website. The information on our website (www.cic.com), however, is not part of this prospectus.

THE EQUITY LINE OF CREDIT AGREEMENT

We are registering for resale shares of our common stock held by certain of our stockholders. These shares of common stock will be issued in accordance with the terms and conditions of the Line of Credit. Under the Line of Credit, we may require Cornell Capital Partners, LP, a Delaware limited partnership (the "Investor") to acquire up to $15,000,000 of our common stock, subject to the number of shares available for issuance and the purchase price of such shares, at a price equal to 100% of the market price of our stock, as such term is defined in the Line of Credit, over a five (5) day period following our notice to the Investor of our intention to require the Investor to acquire shares of our common stock (the "Put Notice"). Assuming we were to sell all $15,000,000 of the common stock pursuant to a Put Notice as of October 24, 2002, we would issue a total of 57,692,308 shares of common stock. The actual number of shares to be issued under the Line of Credit will depend on the number of shares available for issuance and the market price of our stock as calculated under the Line

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of Credit and the aggregate dollar amounts of our Put Notices. See "The Equity Line of Credit Agreement."

PRINCIPAL OFFICES

Our principal executive offices are located at 275 Shoreline Drive, Suite 500, Redwood Shores, California 94065 and our telephone number is (650)802-7888.

FORWARD LOOKING STATEMENTS

Certain statements in this prospectus, regarding, among other things, expected future revenues or earnings, projections, plans, future performance, product development and commercialization, and other estimates relating to our future operations, constitute "forward-looking statements" within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act, as amended by the Private Securities Litigation Reform Act of 1995.

To the extent that such statements are not recitations of historical fact, such statements may constitute forward-looking statements which, by definition, involve risks and uncertainties. Where we express, in any forward-looking statement, an expectation or belief as to future results or events, this expectation or belief is expressed in good faith and on a basis that we believe to be reasonable. There can be no assurance, however, that the statement of expectation or belief will result or be achieved or accomplished.

Forward-looking statements are subject to a number of risks and uncertainties. We caution you not to place undue reliance on our forward-looking statements, which speak only as to the date on which they are made. Our actual results may differ materially from those described in the forward-looking statements as a result of various factors, including those listed below. See "Risk Factors."

Except as otherwise required under applicable law, we disclaim any obligation to revise or update forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks discussed below and the other information in this prospectus before deciding whether to invest in our common stock.

Risks related to our business

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

In each year since our inception, we have incurred operating losses, which were significant in certain periods. For the five-year period ended December 31, 2001, those losses aggregated approximately $21 million, and at December 31, 2001 our accumulated deficit was approximately $76 million. We may incur substantial losses in the future, which could adversely affect financial results from operations and stockholder value.

Failure of our products to gain significant market acceptance could adversely affect sales, which would adversely affect financial results from operations and stockholder value.

We develop, market and license pen-based handwritten data entry, electronic signature, handwriting recognition and data security technologies and products for wireless internet access devices and for e-commerce, document automation, corporate security and other businesses. The markets for our products are relatively new. Because of the emerging nature of these markets we are unable to predict whether we can sufficiently commercialize our products and technology and obtain and retain significant market acceptance. Failure to do so will adversely affect sales, which will adversely affect financial results from operations and stockholder value.

We may need additional financing and, if we are unable to get additional financing when needed, our business will be harmed.

As of September 30, 2002, the Company's working capital was approximately $1.4 million. The Company has suffered recurring losses from operations that raise a 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 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.

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

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

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We depend on our distributors and strategic relationships and the loss of one or more of them could harm our business.

Our ability to continue to commercialize our products and achieve significant market acceptance depends in large part on our ability to continue to develop licensing, marketing and other strategic relationships. Our strategic partners generally do not have contractual commitments with us and any one or more of them could terminate their relationships with us. If this happens, or if we are unable to establish additional strategic relationships, our business, operating results and prospects would be materially adversely affected.

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

We rely on a combination of patents, copyrights, trademarks, trade secrets and contractual provisions to protect our proprietary rights in our products and technologies. These protections may not adequately protect us for a number of reasons. First, our competitors may independently develop technologies that are substantially equivalent or superior to ours. Second, the laws of some of the countries in which our products are licensed do not protect those products and our intellectual property rights to the same extent as do the laws of the United States. Third, because of the rapid evolution of technology and uncertainties in intellectual property law in the United States and internationally, our current and future products and technologies could be subject to infringement claims by others. Fourth, a substantial portion of our technology and know-how are trade secrets and are not protected by patent, trademark or copyright laws. We require our employees and contractors to execute written agreements that seek to protect our proprietary information. We also have a policy of requiring prospective business partners to enter into non-disclosure agreements before any of our proprietary information is revealed to them. However, the measures taken by us to protect our technology, products and other proprietary rights might not adequately protect us against improper use.

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

There are risks associated with our joint venture in the People's Republic of China.

We own 90% of Communication Intelligence Computer Corporation, Ltd., which is a joint venture between the Company and the Information Industries Bureau of Jiangsu Province, a provincial agency of the People's Republic of China. Our investment in the joint venture is subject to the risks of doing business in China, including fluctuations in the value of currencies, export duties, import controls and trade barriers (such as quotas), restrictions on the transfer of funds, longer payment cycles, greater difficulty in accounts receivable collections, burdens of complying with foreign laws and political and economic instability. Any of these risks or other risks arising from doing business outside the United States may have a material adverse effect on us.

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A significant portion of our sales are derived from a limited number of customers, and our business may be harmed if we lost any of these customers.

Our revenues historically have been derived from a limited number of customers. Therefore, the success of our business depends on our ability to obtain customers and maintain satisfactory relationships with them in the future. We may not be able to continue to maintain satisfactory relationships with our customers in the future. One customer accounted for 16% and one customer accounted for 13% of revenues in 2001. One customer accounted for 16% and two customers accounted for 11% of revenues in 2000. The loss of any significant customer or other revenue source would have a material adverse effect on our revenues and profitability.

Risks Related to our Capital Structure

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

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

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

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

We may be de-listed from the Nasdaq SmallCap Market, which could adversely affect the trading market of our stock and, therefore, adversely affect stockholder value.

We have received a letter from the National Association of Securities Dealers, Inc. ("NASD"), informing us that, because the market price of our shares of common stock traded on the Nasdaq SmallCap Market has fallen below $1.00 per share for 30 consecutive trading days, we are in violation of the Nasdaq Small Cap Market continuing listing requirements. We have until December 4, 2002 to meet this pricing requirement. If we do not, NASD will consider whether we meet the initial listing requirements for the Nasdaq SmallCap Market. As of the date of this prospectus, we do not meet these requirements. The failure to meet these requirements likely will result in receiving a determination letter from NASD informing us that our common stock is being de-listed on the Nasdaq SmallCap market, in which case our shares likely would trade in the over-the-counter ("OTC") market. A switch to the OTC market will likely result in more volatility for our stock, less volume, and no analyst coverage and may require institutional investors to sell our shares to the extent they are prohibited from owning stock that is traded on the OTC market. Any of these factors could adversely affect the market price of our common stock and, therefore, adversely affect stockholder value.

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Risks associated with the offering

We may have to register and issue additional shares if the market price of our common stock falls before we issue $15,000,000 of our shares of common stock under the Line of Credit.

The Line of Credit provides that we may sell to the investor up to $15,000,000 of our common stock, subject to the number of shares available for issuance, through a series of advances. The price at which we issue the shares of common stock pursuant to any individual advance is equal to 100% of the market price as calculated in the Line of Credit Agreement over the five trading days following the issuance of the advance. The number of shares of common stock currently covered by this prospectus is based on a market price equal to $0.26. If the market price falls below this price, we will have to issue additional shares of common stock in order to be able to raise the entire $15,000,000. Issuing additional shares as a result in a lower market price will cause further dilution of existing stockholders and may result in an adverse affect on stockholder value.

Our stock is thinly traded and a sale of all or a substantial portion of the shares covered by this prospectus at a single time could significantly depress our stock price.

Our shares are traded on the Nasdaq SmallCap Market and, as discussed above, may soon trade on the OTC. Stock traded on these markets typically are not as actively analyzed, followed or traded, all of which often lead to lower trading volume and more volatility. For the nine months ended September 30, 2002, our average trading volume was 225,033 shares and the price of shares of our stock ranged from a high of $1.18 on March 15, 2002 to a low of $0.21 on October 2, 2002. The Investor under the Line of Credit is precluded from holding shares of stock that are registered. Accordingly, the Investor will be required to sell the shares covered by the advance and such sale may adversely affect the price of the shares of our stock.

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SELECTED CONSOLIDATED FINANCIAL DATA

(in thousands except per share data)

The selected consolidated financial data presented below as of the nine months ended September 30, 2002, and 2001 are derived from the unaudited historical financial statements and related notes which are found elsewhere in this prospectus. The years ended December 31, 2001, 2000, 1999, are derived from the audited condensed consolidated financial statements and related notes found elsewhere in this prospectus. The years ended December 31, 1998, and 1997 are derived from the audited consolidated financial statements of the Company. The selected consolidated financial data should be read in conjunction with the Company's financial statements and the notes thereto, and "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" found elsewhere in this prospectus.

	Nine months ended September 30, (unaudited)						Year ended December 31,
	2002			2001			2001			2000			1999			1998			1997
Net revenue	$	2,793		$	4,436		$	5,947		$	7,312		$	6,518		$	4,581		$	5,516
Research and development expenses (1)		1,145			1,399			1,808			1,603			1,363			1,989			2,360
Sales and marketing expenses		1,181			1,604			2,054			2,239			1,877			2,015			6,257
General and administrative expenses		1,762			2,107			2,791			2,181			1,683			1,889			2,663
Loss from operations		(2,243	)		(2,454	)		(2,946	)		(1,607	)		(1,722	)		(3,285	)		(11,627	)
Net loss available to common stockholders(2)		(2,429	)		(2,663	)		(3,215	)		1,799	)		(1,740	)		(3,592	)		(16,940	)
Basic and diluted loss per share	$	(0.03	)	$	(0.03	)	$	(0.04	)	$	(0.02	)	$	(0.02	)	$	(0.06	)	$	(0.37	)
Cash, cash equivalents and restricted cash		1,246			3,053			2,588			2,349			2,374			1,045		$	5,485
Working capital(3)		1,419			3,259			3,017			3,109			3,054			346			2,721
Total assets		8,147			10,594		$	10,072		$	11,302		$	4,963		$	3,354		$	7,491
Deferred revenue		123			152			88			61			35			651			440
Long term obligations		3,000			3,000			3,000			1,427			1,338			—			8
Stockholders' equity	$	4,061		$	6,466		$	6,060		$	8,307		$	2,349		$	1,332		$	3,989

(1)

Excludes software development costs capitalized in accordance with Statement of Financial Accounting Standards No. 86. For the nine months ended September 30, 2002, no software development costs were capitalized. For the nine months ended September 30, 2001 software capitalization amounted to $20. For the years ended December 31, 2001, 2000, 1999, and 1998 software capitalization amounted to $20, $20, $9 and $17, respectively. No software development costs were capitalized in the year ended December 31, 1997.

(2)

The Company's 1997 net loss applicable to common stockholders includes a one-time, non-cash charge of $4.9 million related to the embedded yield on the Company's Series A Preferred Stock issued in December 1996 due to the discounted conversion provisions of such stock and the cumulative dividends of $1.25 per share, per annum on Series A Preferred Stock. Includes dividends on Series A Preferred Stock and Series B Preferred Stock of $435 and $564 for the years ended December 31, 1998 and 1997, respectively.

(3)

Current liabilities used to calculate working capital for the nine month period ended September 30, 2002 and 2001 include deferred revenues of $123 and $152, respectively. Current liabilities used to calculate working capital at December 31, 2001, 2000, 1999, 1998, and 1997 include deferred revenue of $88, $61, $35, $651, and $440, respectively.

(4)

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

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SELECTED QUARTERLY FINANCIAL DATA

(unaudited)
(in thousands except per share data)

	QUARTER ENDING
	3/31/02			6/30/02			9/30/02			3/31/01			6/30/01			9/30/01			12/31/01			3/31/00			6/30/00			9/30/00		12/31/00
Net sales	$	1,157		$	1,111		$	525		$	1,618		$	1,903		$	915		$	1,511		$	1,377		$	1,250		$	2,346	$	2,339
Gross profit		716			808			321			996			1,201			459			1,051			648			442			1,649		1,677
Income (loss) before extraordinary items and cumulative effect of a change in accounting		(688	)		(671	)		(1,070	)		(741	)		(693	)		(1,229	)		(552	)		(888	)		(1,127	)		106		110
Net Loss		(688	)		(671	)		(1,070	)		(741	)		(693	)		(1,229	)		(552	)		(888	)		(1,227	)		106		110
Basic and diluted loss per share	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	0.00	$	0.00

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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands, except per share data)

The following discussion and analysis should be read in conjunction with the Company's audited condensed consolidated financial statements, the unaudited condensed consolidated financial statements and notes thereto, and the information otherwise set forth in this prospectus.

Overview

History.    The Company was initially incorporated in Delaware in October 1986. In each year since its inception, the Company has incurred losses. For the five-year period ended December 31, 2001, operating losses aggregated approximately $21 million and at December 31, 2001, the Company's accumulated deficit was approximately $76 million.

Significant Accounting Policies:

Revenue Recognition.    In October 1997, the American Institute of Certified Public Accountants (the "AICPA") issued Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), which the Company has adopted for transactions entered into during the fiscal year beginning January 1, 1998. SOP 97-2 provides guidance for recognizing revenue on software transactions and supersedes Statement of Position No. 91-1, "Software Revenue Recognition." In March 1998, the AICPA issued Statement of Position No. 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"). SOP 98-4 defers for one year the application of certain passages in SOP 97-2, which limit what is considered vendor-specific objective evidence ("VSOE") necessary to recognize revenue for software licenses in multiple-element arrangements when undelivered elements exist. In December 1998, the AICPA issued Statement of Position No. 98-9 ("SOP 98-9"), "Modifications of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions." SOP 98-9 extends the effective date of SOP 98-4 and provides additional interpretative guidance. SOP 98-9 is effective for fiscal years beginning after March 15, 2000. The Company also follows the interpretive guidance of SAB 101 issued by the Securities and Exchange Commission and EITF issue 00-21 of the AICPA Emerging Issues Task Force.

Revenue from retail product sales is recognized upon sell through, while revenue from other product sales is recognized upon shipment, provided that no significant obligations remain and that collection of the resulting receivable is likely. The Company provides for estimated sales returns at the time of shipment. License revenues are recognized when the software has been delivered and the criterioa set forth in SOP 97-2 have been met. Royalty revenues are recognized as products are licensed and sold by licensees. Revenues from development contracts are primarily generated from non-recurring engineering fees and research grants. Revenue is recognized in accordance with the terms of the grants and agreements, generally when collection is probable and related costs have been incurred.

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

Software Development Costs.    Software development costs are accounted for in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"). Under SFAS 86, capitalization of software development costs begins upon the establishment of technological feasibility, subject to net realizable

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value considerations. In the Company's case, capitalization commences upon the completion of a working model, and generally ends upon the release of the product. As of September 30, 2002 and 2001 and December 31, 2001, 2000, and 1999, such costs were insignificant.

Significant Customers.    Two customers accounted for 16% and 13%, respectively, of revenues in 2001. One customer accounted for 16% of revenues in 2000. One customer accounted for 27% of the Company's revenues in 1999.

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

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

Net foreign currency transaction gains and losses are included as components of "interest income and other income (expense), net" in the Company's consolidated statements of operations. Due to the stability of the currency in China, net foreign currency transaction gains and losses were not material for the nine months ended September 30, 2002 and 2001 and for the year ended December 31, 2001 and 2000, respectively. The Company recorded a net foreign currency transaction gain of $59 for the year ended December 31, 1999.

Net Operating Loss Carryforwards.    Utilization of the Company's net operating losses may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. As a result, a portion of the Company's net operating loss carryforwards may not be available to offset future taxable income. The Company has provided a full valuation allowance for deferred tax assets at December 31, 2001 of $22 million based upon the Company's history of losses.

The Company reports in two segments, handwriting recognition and systems integration. For purposes of Management Discussion and Analysis, handwriting recognition includes Online/Retail revenues and Corporate sales, including OEM and Enterprise revenues.

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 and 2001
(unaudited)

Results of Operations

Revenues. For the three and nine months ended September 30, 2002, total revenues decreased $390 and $1,643, respectively, or 43% and 37%, respectively, to $525 and $2,793 from $915 and $4,436,

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respectively, for the comparable three and nine month periods ended September 30, 2001 as discussed below:

			Three Months Ended September 30,				Nine Months Ended September 30,
			2002		2001		2002		2001
Revenues:
	Online		$	83	$	237	$	287	$	977
	Corporate			132		222		1,538		1,884
	Nonrecurring Maintenance fees (net)—M10 (previously PenOp)			—		—		—		352
	China			310		456		968		1,223
		Total revenues	$	525	$	915	$	2,793	$	4,436

Online revenues decreased $154 or 65% to $83 for the three months ended September 30, 2002 as compared to $237 in the prior year period. This decrease was primarily due to the curtailment of the direct mail campaign during the three months ended September 30, 2002 due to the reduced availability of new names and poor sales close rate compared to the same period last year. For the nine months ended September 30, 2002, Online revenues decreased $690 or 71% to $287 from $977 in the same nine month period last year. This decrease was due primarily to the reasons discussed above.

Corporate sales, which include enterprise sales, OEM and development contract revenues, decreased for the three and nine month periods ended September 30, 2002, by $90 and $346, respectively, or 41% and 18%, respectively to $132 and $1,538, respectively, from $222 and $1,884, respectively, as compared to the same prior year periods as discussed below.

Enterprise sales, included in corporate sales, increased for the three months ended September 30, 2002, $40 or 44% to $130 as compared to $90 in the prior year. The increase in enterprise sales for the three months ended September 30, 2002 was primarily due to a sale to a major construction company in the current quarter. For the nine months ended September 30, 2002, enterprise sales increased 44% or $367 to $1,199 compared to $832 in the prior year period. This increase was primarily due to the increase in the number of sales of the Company's software signature products over the nine months as compared to the prior year period. OEM revenues, included in corporate sales, for the three months ended September 30, 2002 decreased 98% or $130 to $2 from $132 in the prior period. This decrease was due to a decrease in the amount of royalty reported by one of the Company's licensees located in Japan and reduced development contract revenue recognized compared to the prior year. OEM revenues for the nine months ended September 30, 2002 decreased 68%, or $713, to $339 from $1,052 in the prior period. The decrease in OEM revenues for the nine months ended September 30, 2002 was due primarily to the same factors discussed for the current three month period.

During the nine months ended September 30, 2001, the Company recognized $352 in nonrecurring maintenance fees net of expenses of $48. The Company engaged in a transaction with PenOp to provide nonrecurring maintenance services from pre-existing PenOp contracts in the aggregate amount of $1.5 million, of which $877 was recorded (net) in the fourth quarter of 2000. As stated earlier, on October 6, 2000 the Company completed a separate transaction to acquire the intellectual property rights from PenOp.

China sales for the three months ended September 30, 2002 decreased $146, or 32%, to $310 from $456 in the same prior year period. For the nine months ended September 30, 2002, China revenues decreased 21% or $255 to $968 from $1,223 in the same prior year period. This decrease was due to a large sale to a single customer in the comparable period in the prior year.

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Cost of Sales.    Cost of sales decreased for the three and nine months ended September 30, 2002 $252 and $832, respectively, or 55% and 47%, respectively, to $204 and $948, respectively compared to $456 and $1,780, respectively, in the same prior year periods as discussed below.

Online cost of sales for the three and nine months ended September 30, 2002 decreased $119 and $509, respectively, or 90% and 72%, respectively, to $13 and $198, respectively, compared to $132 and $707, respectively, in the same prior year periods. The decrease during the three and nine month periods ended September 30, 2002 was due to the elimination of direct mailing costs as a result of reductions in the number of names available and a poor sales close rate experienced early in the current nine months as compared to the same periods in the prior year.

Corporate sales costs for the three months ended September 30, 2002 increased $3 to $15 from $12 in the comparable period of the prior year The increase was due to an increase in third party hardware sold with the Company's signature software solution products. For the nine months ended September 30, 2002, corporate cost of sales decreased $96, or 39%, to $148 from $244 in the comparable prior year period. The decrease was due to the lower sales volumes of products requiring third party hardware and a reduction in OEM and development contract revenues and the associated technology import tax and engineering costs as compared to the same period of the prior year.

China cost of sales for the three and nine months ended September 30, 2002 decreased $136 and $227, respectively, or 44% and 27%, to $176 and $602, respectively, compared to $312 and $829, respectively, in the same prior year periods. The decrease in cost of sales for the three and nine months ended September 30, 2002 was due to an increase in higher margin software products sales from system integration sales and lower sales overall and.

Gross Margin.    Gross margin for the three and nine months ended September 30, 2002 decreased $138 and $459, respectively, or 30% and 20%, respectively, to $321 and $1,845, respectively, from $459 and $2,304, respectively, in the same prior year periods.

Online gross margin for the three and nine months ended September 30, 2002 decreased $35 and $181, respectively, or 33% and 67%, respectively, to $70 and $89, respectively, from $105 and $270, respectively, in the same prior year periods. This decrease was due to lower sales during the comparable three and nine month periods offset by the elimination of the mailer program and the associated costs. Online gross margins were 84% and 31%, respectively, of sales for the three and nine months ended September 30, 2002 compared to 44% and 28%, respectively, in the same prior year periods.

Corporate sales gross margin for the three and nine months ended September 30, 2002 decreased $93 and $250, respectively, or 44% and 15%, respectively, to $117 and $1,390, respectively, compared to $210 and $1,640, respectively, in the same prior year periods. This decrease was primarily due to the decrease in corporate sales. Corporate sales gross margin as a percentage of sales was 89% and 90% for the three and nine month periods ended September 30, 2002 compared to 94% and 87%, respectively, for the same three and nine month periods of the prior year.

Gross margins related to nonrecurring maintenance fees from M10 decreased for the nine months ended September 30, 2002 to $0, compared to $352 in the prior year period. This decrease was due to the Company not recognizing nonrecurring maintenance fees during the current three and nine month ended September 30, 2002, compared to the same periods in the prior year.

China sales gross margin for the three month period ended September 30, 2002 decreased $10, or 7% to $134 from $144 in the same prior year period on a 32% decrease in revenues. This decrease in gross margin for the three months ended September 30, 2002, resulted from a change in the sales mix from lower margin system integration sales to higher margin software sales. For the nine months ended September 30, 2002 gross margin decreased $28, or 7% to $366 from $394 in the same prior year period on a 37% decrease in revenues. This decrease in gross margin for the nine months ended

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September 30, 2002 resulted from a change in the sales mix from lower margin system integration sales to higher margin software sales. As a percentage of sales, China gross margins were 43% and 38% for the three and nine months ended September 30, 2002, respectively, compared to 32% and 31%, respectively, for the comparable three and nine month periods in the prior year periods.

Research and development expenses.    Research and development expenses for the three and nine months ended September 30, 2002 decreased by $61 and $254, respectively, to $367 and $1,145, respectively, as compared to $428 and $1,399, respectively, in the comparable three and nine month periods of the prior year. The decrease was due primarily to the reduction of approximately $12 and $224, respectively, in outside engineering costs associated with the assimilation of the PenOp intellectual property into the Company's products. In addition, payroll and related costs decreased approximately $44 and $110, respectively, for the three and nine months ended September 30, 2002, compared to the prior year. The reduction in payroll and related expenses was due to actions taken in the fourth quarter of last year to trim expenses in response to a weakening economy. Other costs including facilities and shared engineering costs with the Joint Venture decreased $5 for the three months ended September 30, 2002 compared to the prior year and increased $80 over the nine months ended September 30, 2002. The increase over the nine month period was due to increases in facility expenses. Expenses transferred to cost of sales for the nine months ended September 30 2002 decreased $40 compared to the prior year. The fluctuations in expenses for the three and nine month periods are due to the changes in the number of revenue generating nonrecouring engineering projects being worked on during a given period. The Company capitalized $20 in software development costs associated with new products and enhancements during the nine months ended September, 2001. The Company did not capitalize any new product software development costs in the nine month period ending September 30, 2002.

Sales and marketing expenses.    Sales and marketing expenses for the three and nine months ended September 30, 2002 decreased $103 and $423, respectively, to $367 and $1,181, respectively, as compared to $470 and $1,604, respectively, in the comparable periods of the prior year. Professional services and advertising expenses decreased $50 to $42 from $92 for the three month ended September 30, 2002, as compared with the same period last year. For the nine month period ended September 30, 2002, professional services and advertising fees decreased $160 to $149 from $309, as compared with the same period last year. This decrease was due primarily to the reduction in resource guide advertisements included in the box that accompanies the hand held devices. Other costs, including salaries and related expenses and travel and recruiting expenses, decreased $53 for the three months ended September 30, 2002, compared to the same period in the prior year. For the nine months ended September 30, 2002, other costs, including salaries and related expenses and travel and recruiting expenses decreased $263 as compared to the same nine month period last year. The reduction in other expenses was due to actions taken in the fourth quarter of last year and again in the third quarter of the current year to trim expenses in response to a weakening economy.

General and administrative expenses.    General and administrative expenses for the three and nine months ended September 30, 2002 decreased $145 and $345 to $583 and $1,762, respectively, from $728 and $2,107, respectively, in the comparable periods of the prior year. Professional services decreased $64 and $243, respectively, due to the reduction in legal fees and in financial service fees paid to the former chairman of the Company. Payroll and related costs decreased approximately $12 due to reductions in head count in the three months ended September 30, 2002. Salaries and related expense increased approximately $8 over the nine months ended September 30, 2002, due to salary increases. Other costs, including investor relations and facilities and related costs, decreased $63 and $96, respectively, over the comparable three and nine month periods of the prior year. The reduction in other expenses was due to actions taken in the fourth quarter of last year and again in the third quarter of the current year to trim expenses in response to a weakening economy.

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Interest and other income (expense), net.    Interest and other income (expense), net for the three and nine months ended September 30, 2002 decreased $24 and $47, respectively, to an expense of $19 and $28, respectively, compared to income of $5 and $19, respectively, in the comparable periods of the prior year. Interest income from cash and cash equivalents decreased $15 and $31, respectively, to $2 and $9 for the three and nine months ended September 30, 2002 compared to $17 and $40 in the same periods of the prior year. This decrease was due to lower cash balances and reduction in interest rates during the three and nine month periods ended September 30, 2002. The interest income was offset by $3 and $15, respectively, of credit card processing fees related to Online sales and other expenses for the three and nine month periods ended September 30, 2002, compared to $9 and $30, respectively, in the same periods of the prior year.

Interest expense.    Interest expense decreased $13 to $53 for the three month period ended September 30, 2002, compared to $66 in the same prior year period. The decrease was due to the reduction in the prime rate as compared to the prior year. For the nine months ended September 30, 2002, interest expense decreased $70 to $155, compared to $225 in the same prior year period. The decrease was primarily due to the write off in June 2001 of the loan discount as a result of the payment of the $1,500 note.

Liquidity and Capital Resources

At September 30, 2002, cash and cash equivalents totaled $1,246 compared to cash and cash equivalents of $2,588 at December 31, 2001. The decrease was due primarily to cash used in operating activities of $1,569, cash used in investing activities of $54. Cash provided by financing activities was $281, net. The $281 provided by financing activities consists of $426 in proceeds from the exercise of stock options by the Company's employees and former chairman, the acquisition of capital equipment under capital lease of $40, reduced by the repayment of the note by the Joint Venture of $181, and by payments of capital lease obligations of $4. Total current assets were $2,372 at September 30, 2002, compared to $3,899 at December 31, 2001. As of September 30, 2002, the Company's principal source of funds was its cash and cash equivalents aggregating $1,246.

The Company was incorporated in Delaware in 1986 and the accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations that raise a doubt about its ability to continue as a going concern. 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 financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Current liabilities, which include deferred revenue, were $953 at September 30, 2002. Deferred revenue, totaling $123 at September 30, 2002, primarily reflects advance payments for products and maintenance fees from the Company's licensees which are generally recognized as revenue by the Company when all obligations are met or over the term of the maintenance agreement.

The Company currently owns 90% of a joint venture with the Information Industry Bureau of the Jiangsu Province, a provincial agency of the People's Republic of China (the "Agency"). The Company's investment in the Joint Venture is subject to risks of doing business abroad, including fluctuations in the value of currencies, export duties, import controls and trade barriers (including quotas), restrictions on the transfer of funds, longer payment cycles, greater difficulty in accounts receivable collections, burdens of complying with foreign laws and political and economic instability.

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On October 2, 2001, the Company entered a new five year lease for its existing principal offices at 275 Shoreline Drive, Suite 500, Redwood Shores California for approximately 9,634 square feet. The lease commenced November 1, 2001 with a first year lease cost of approximately $347,000. The cost of the lease will increase approximately 3% per annum over the term of the lease which expires October 31, 2006. In addition to the base rent the Company will pay a percentage of the increase, if any, in operating cost incurred by the landlord in such year over the operating expenses incurred by the landlord in the base year. The Company believes the offices will be adequate for its needs over the term of the lease.

On August 23, 2001, the Company's 90% owned Joint Venture borrowed the aggregate equivalent of $181, denominated in Chinese currency, from a Chinese bank. The loan bears interest at 5.37% per annum and is due August 23, 2002. The borrowing did not require the Joint Venture to deposit a compensating balance. In February 2002, the Joint Venture repaid $121, and in June 2002 repaid the remaining balance of $60 denominated in Chinese currency.

On June 19, 2001, the Company consummated a three-year $3 million financing (the "Loan") with a charitable remainder annuity trust of which the former chairman of the Company is a trustee (the "Trust"). The proceeds of the Loan were used to refinance $1,500 of indebtedness outstanding to the Trust pursuant to a loan made by the Trust to the Company in October 1999 and for working capital purposes. The Loan bears interest at the rate of 2% over the prime rate publicly announced by Citibank N. A. from time to time, which was 6.75% per annum at September 30, 2002, and is due June 18, 2004. The Loan may be pre-paid by the Company in whole or in part at any time without penalty, subject to the right of the Trust to convert the outstanding principal amount of the Loan into shares of common stock. Pursuant to the terms of the Loan, the Trust has the option, at any time prior to maturity, to convert all or any portion of the outstanding principal amount of the Loan into shares of common stock of the Company at a conversion price of $2.00 per share, subject to adjustment upon the occurrence of certain events. If, prior to maturity of the Loan, the Company consummates one or more financings providing $5 million or more in gross proceeds, the Company is required to apply 50% of the proceeds in excess of $5 million to the then outstanding principal amount of the Loan. The Loan is secured by a first priority security interest in and lien on all of the Company's assets as now owned or hereafter acquired by the Company.

In connection with the Loan, the Company entered into a registration rights agreement with the Trust which obligates the Company to file a registration statement with the Securities and Exchange Commission covering the sale of the shares of the Company's common stock issuable upon conversion of the Loan if it receives a demand by the holder of the Loan to do so, and to use its reasonable best efforts to cause such registration statement to become effective.

For the years ended December 31, 2001, 2000 and 1999

Results of Operations

Years Ended December 31, 2001 and December 31, 2000

Revenues.    Revenues decreased $1,365, or 19%, to $5,947 for the year ended December 31, 2001, as compared to $7,312 in the prior year.

Online revenues declined $285, or 24%, to $913 in 2001, as compared to $1,198 in the prior year period. The number of names available for use in the Company's direct mail campaign has been reduced to newly registered Palm users, and was the primary reason for the decline in revenues. In the prior years the Company's direct mail campaigns also targeted the installed base of Palm users.

Corporate sales, which includes enterprise sales and OEM revenues, decreased $893 or 21%, to $3,310 (including the nonrecurring maintenance fees from M10, previously PenOp) for the year ended December 31, 2001, compared to $4,203 in the prior year period. Sales of the Company's software

17

solutions and maintenance to end users increased $155 to $2,076 in 2001 compared to $1,921 in the prior year period. The decrease was due primarily to a $524 decrease in the nonrecurring maintenance fees, from M10 in 2001 compared to the prior year. This decrease was offset by sales to Prudential and TVA. During the fourth quarter of 2000, the Company engaged in a transaction with PenOp to provide nonrecurring maintenance services from pre-existing PenOp contracts in the aggregate amount of $1.5 million, of which $352 and $877 was recorded (net) in 2001 and 2000, respectively. The Company previously entered into a separate transaction to acquire the intellectual property rights from PenOp (see note 1 to the audited condensed consolidated financial statements). OEM revenues included in corporate sales decreased $989 or 48% to $1,078 from $2,067 in the prior year period. This decrease was due to a reduction in the amount of revenues recognized from Ericsson and other OEM's compared to the prior year. Revenues from development contracts included in corporate sales decreased $59 or 27% to $156 from $215 for the prior year due primarily to decreases in non-recurring engineering revenues. Revenues from development contracts in 2001 and 2000 were primarily attributable to porting of the Company's software to third party products such as smartphones and web browsers.

China sales decreased $187, or 10%, to $1,724 for the year ended December 31, 2001, as compared to $1,911 in the prior year. The decrease was due to a decrease in system integration sales of $202, or 13%, to $1,401 in 2001, as compared to $1,603 in the prior year. The decrease in system integration sales was offset by an increase in software sales of $15, or 5%, to $323 in 2001 as compared to $308 in the prior year. The changes in revenues are not related to any single customer.

Cost of Sales.    Cost of sales decreased $656, or 23%, to $2,240 for the year ended December 31, 2001, as compared to $2,896 in the prior year period.

Online cost of sales decreased $282, or 26%, to $805 in 2001, as compared to $1,087 in the prior year. This decrease was due to lower mailing costs brought about by the reduced number of new names available in 2001 as compared to 2000.

Corporate sales costs decreased $126, or 30%, to $290 from $416 in the prior year. Costs associated with the Company's signature software solutions decreased $36, or 21%, to $135, compared to $171 in the prior year period. The decrease in the cost of software solutions was due to a decrease in amount of third party hardware costs sold with the Company's corporate signature software products during 2001 as compared to 2000.

Amortization of capitalized software costs was approximately $12 in 2001 and 2000, respectively. Costs of development contract revenues included in corporate sales decreased $85, or 45%, to $105 in 2001, as compared to $190 in the prior year. The decrease in development contract cost was due to the reduction in non-recurring engineering projects during 2001 as compared to the prior year period. OEM costs decreased $5, or 37%, to $38 as compared to $43 in the prior year. The decrease was due to a decrease in revenues and the associated technology import tax from the Company's Japanese OEM customers.

China cost of sales decreased $247, or 18%, to $1,145 in 2001 as compared to $1,393 in the prior year period. The decrease was due to the decrease in systems integration sales in 2001 as compared to the prior year.

Gross Margin.    Gross margin decreased $709, or 16%, to $3,707 in 2001, as compared to $4,416 in the prior year.

Online gross margin decreased $3, or 3%, to $108 in 2001, as compared to gross margins of $111 in the prior year period. The decrease was due to the lower sales volumes as compared to the prior year offset by the elimination of the follow-up mailer costs, which were primarily used to convert long-time users of PDA's to the Company's more natural input products. Online gross margins were 12% of sales for the year ended December 31, 2001.

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Corporate sales gross margin decreased $767, or 20%, to $3,020 in 2001, from $3,787 in the prior year period. This decrease was primarily due to the 21% decrease in Corporate sales as discussed above. Corporate sales gross margin as a percentage of sales was 91% and 90% of revenues for the years ended December 31, 2001 and 2000, respectively.

China sales gross margin increased $61, or 12%, to $579 in 2001, from $518 in the prior year. This increase was primarily due to the increase in software sales in 2001 as discussed above. China sales gross margin as a percentage of sales increased 7% to 34% as compared to 27% in the prior year.

Research and Development Expenses.    Research and development expenses increased $205, or 11%, to $1,808 for the twelve months ended December 31, 2001, as compared to $1,603 for the prior year. Salaries and related costs decreased $104, or 9%, to $1,077 in 2001, compared to $1,181 in 2000. This decrease was due to reductions in headcount during 2001 as compared to 2000. Other costs, including shared development costs with the Joint Venture, facility and other costs increased $255 to $342 in 2001, compared to $87 in the prior year. The increase was due primarily to outside engineering costs associated with the assimilation of the PenOp intellectual property into the Company's products and continued support for new engineering projects. Other expenses including travel and related expenses and depreciation decreased 6%, or $30, as compared to the prior year period. In addition, costs associated with development contracts and charged to cost of sales decreased $84 or 44% to $106 from $190 in the comparable prior year period. This decrease was due to a lower number of revenue generating nonrecurring engineering projects in 2001 compared to the prior year.

Sales and Marketing Expenses.    Sales and marketing expenses for the year ended December 31, 2001 decreased $185, or 10%, to $2,054, as compared to $2,239 in the prior year. Payroll and related costs decreased 12%, or $93, to $2,054 in 2001 from $2,239 due primarily to a decrease in headcount during the year. Travel and related expenses decreased $58, or 29%, to $140 in 2001, compared to $198 in the prior year. The decrease was due to decreases in travel related to the reduction in headcount from the comparable prior year. Advertising and promotion expense decreased $195, or 49%, to $203 in 2001, from $398 in the prior year. The decrease was due primarily to the one-time cost of the development of a media campaign in the prior year related to the Company's Online sales via CIC's website. Professional services expense increased $128, or 129%, to $227 from $99 in the comparable prior year period. The increase was due to marketing studies undertaken by the Company to assess the markets with the greatest potential for the Company's products. Other costs, such as facilities and miscellaneous expenses, increased $33, or 5%, in 2001 as compared to the prior year.

General and Administrative Expenses.    General and administrative expenses increased 34%, or $610, to $2,791 for the year ended December 31, 2001, from $2,181 for the prior year. The increase was primarily due to a increase in patent amortization expense of $393, or 914%, to $436 in 2001 from $43 in the prior year. In addition, professional fees increased $274, or 105%, to $535 from $261 in the comparable prior year period. Investor relations expenses decreased $66, or 15%, to $366 in 2001, as compared to $432 in the comparable prior year. The decrease was due primarily to a reduction in costs associated with information disseminated through the wire services. Other expenses including travel, facilities cost and provision for uncollectible accounts increased $9 in 2001 as compared to the prior year.

Interest Income and Other Income (Expense), Net.    Interest income and other income (expense) net, decreased $60, or 79%, to $16 in 2001, from $76 in the prior year. This decrease resulted from a decrease in cash balances and interest rates during the year. The interest income was offset by fees associated with credit card sales from the Company's website of approximately $37 in 2001, compared to $49 in the prior year.

Interest Expense.    Interest expense increased $16, or 6%, in 2001, to $282 from $266 in the prior year. This increase was due to the increase in long-term debt outstanding since June of 2001.

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Years Ended December 31, 2000 and December 31, 1999

Revenues.    Revenues increased $794, or 12%, to $7,312 for the year ended December 31, 2000, as compared to $6,518 in the prior year.

Online revenues declined $477, or 28%, to $1,198 in 2000, as compared to $1,675 in the prior year period. In 1999, the Company was able to draw on a large number of previously unsolicited names during the first year of the direct mail campaign. In 2000, the number of names was reduced to newly registered Palm users, and was the primary reason for the decline in revenues.

Sales of the Company's Handwriter products for the years ended December 31, 2000 and 1999, respectively, were insignificant. The Company discontinued the Handwriter products in 1998, and sold the remaining inventory over the web through the second quarter of 1999.

Corporate sales, which includes Enterprise and OEM revenue increased $980, or 30%, to $4,203 (including the nonrecurring maintenance fees from M10, previously PenOp) for the year ended December 31, 2000 compared to $3,223 in the prior year period. Sales of the Company's software solutions and maintenance to end users increased $1,805 to $1,921 in 2000, compared to $116 in the prior year period. The increase was due primarily to nonrecurring maintenance fees, from M10, and the sale of software solutions and maintenance revenues to Charles Schwab, Assurant, Orange County, E-Com, and others in 2000. During the fourth quarter of 2000, the Company engaged in a transaction with PenOp to provide nonrecurring maintenance services from pre-existing PenOp contracts in the aggregate amount of $1.5 million, of which $877 was recorded (net). The Company previously entered into a separate transaction, to acquire the intellectual property rights from PenOp (see note 1 to the audited condensed consolidated financial statements). OEM revenues included in corporate sales decreased $574, or 22%, to $2,067, from $2,641 in the prior year period. This decrease was due to a reduction in the amount of revenues recognized from Ericsson and other OEM's compared to the prior year. Revenues from development contracts included in corporate sales decreased $251, or 54%, to $215, from $466 for the prior year due primarily to decreases in non-recurring engineering ("NRE") revenues. Revenues from development contracts in 2000 and 1999 were primarily attributable to porting of the Company's software to third party products such as smartphones and web browsers.

China sales increased $291, or 18%, to $1,911 for the year ended December 31, 2000, as compared to $1,620 in the prior year. The increase is due to increased sales activity in 2000, and not related to any one-time large sale to a single customer.

Cost of Sales.    Cost of sales decreased $421, or 13%, to $2,896 for the year ended December 31, 2000, as compared to $3,317 in the prior year period.

Online cost of sales decreased $745, or 41%, to $1,087 in 2000, as compared to $1,832 in the prior year. This decrease is due to the reduced number of new names available in 2000, as compared to 1999, and the elimination of mailing costs associated with follow-up mailers sent after initial contact.

Corporate sales costs increased $91, or 28%, to $416 from $325 in the prior year. Costs associated with the Company's signature software solutions increased to $167, and was due to $155 in third party hardware costs sold with the Company's corporate signature software solution products, and $12 in amortization of capitalized software costs. The Company had no significant costs associated with its off-the-shelf signature solution products sold in 1999, due to the low volume of revenues generated compared to 2000.

Costs of development contract revenues included in corporate sales decreased $71, or 27%, to $190 in 2000, as compared to $261 in the prior year. The decrease in development contract costs is due to the reduction in non-recurring engineering projects during 2000 as compared to the prior year period. OEM costs decreased $5, or 8%, to $59, as compared to $64 in the prior year. The decrease is due to a

20

decrease in revenues and the associated technology import tax from the Company's Japanese OEM customers.

China cost of sales increased $233, or 20%, to $1,393 in 2000, as compared to $1,160 in the prior year period. The increase was due to the increase in sales activity in 2000 as compared to the prior year.

Gross Margin.    Gross margin increased $1,215, or 38%, to $4,416 in 2000, as compared to $3,201 in the prior year.

Online gross margin increased $268 to $111 in 2000, as compared to a gross margin loss of $157 in the prior year period. The increase was due to the change in the mix of names from new and long time users of Palm products to newly registered Palm users. The change in the mix of names has allowed the Company to eliminate the follow-up mailers, primarily used to attempt to convert long time users of PDA's to the Company's more natural input products. Online gross margins were 91% of sales for the year ended December 31, 2000.

Corporate sales gross margin increased $889, or 31%, to $3,787 in 2000, from $2,898 in the prior year period. This increase is primarily due to the 30% increase in Corporate sales discussed above. Corporate sales gross margin as a percentage of sales was 90% for the years ended 2000 and 1999, respectively.

China sales gross margin increased $58, or 13%, to $518 in 2000, from $460 in the prior year. This increase is primarily due to the 18% increase in sales in 2000 as discussed above. China gross margin as a percentage of sales declined 1% to 27% as compared to 28% in the prior year.

Research and Development Expenses.    Research and development expenses increased $240, or 18%, to $1,603 for the twelve months ended December 31, 2000, as compared to $1,363 for the prior year. Salaries and related costs increased $46, or 4%, to $1,181 in 2000, compared to $1,135 in 1999. This increase is due to additional headcount during 2000 compared 1999. Other costs, including shared development costs with the Joint Venture, facility and other costs increased $122 in 2000 compared to the prior year. In addition, costs associated with development contracts and charged to cost of sales decreased $72. This decrease was due to reduced revenue from non-recurring engineering projects in 2000 as compared to the prior year.

Sales and Marketing Expenses.    Sales and marketing expenses for the year ended December 31, 2000, increased $362, or 19%, compared to the prior year.

Payroll and related costs in 2000 increased 16%, or $110, due primarily to increased headcount during the year. Travel and related expenses increased $77, or 64%, in 2000 compared to the prior year. The increase was due to increases in travel related to sales and marketing activities compared to the prior year. Advertising and promotion expense increased $210, or 112%, to $398 in 2000, from $188 in the prior year. The increase was due to a $76, or 90%, increase in media placement costs and $134 or 107% increase in trade show and printed marketing materials expenses compared to the prior year. Other costs, such as facilities and miscellaneous expenses, decreased $35, or 4%, in 2000 to $866 from $901 in the prior year.

General and Administrative Expenses.    General and administrative expenses increased 30%, or $498, to $2,181 for the year ended December 31, 2000, from $1,683 for the prior year. Payroll and related costs in 2000 increased 13%, or $132, due to the addition of key management in late 1999 and the third quarter of 2000. Investor relations expenses increased $218, or 102%, to $432 in 2000, as compared to $214 in the prior year. This increase was due to additional NASDAQ listing fees, and the increased costs of disseminating information due to the increased interest in the Company in the fourth quarter of 1999 and the first quarter of 2000. Director and officers insurance expense increased $44 in 2000, due to the increased activity in the Company's stock. Patent amortization due to the capitalization of the intellectual property from the PenOp acquisition increased $28 over the prior year. Other

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expenses including travel, professional services, facilities cost and provision for uncollectible accounts increased $76 in 2000 as compared to the prior year.

Interest Income and Other Income (Expense), Net.    Interest income and other income (expense) net, increased $21, or 38%, to $76 in 2000, from $55 in the prior year. This increase resulted from an increase in interest income due to higher cash balances during the year. The increase in interest income was offset by fees associated with credit card sales from the Company's website of approximately $49 in 2000, compared to $59 in the prior year.

Interest Expense.    Interest expense increased $193, or 264%, in 2000, to $266 compared to $73 in the prior year. This increase is due to long-term debt outstanding for the full year and the amortization of the loan discount associated with warrants issued in connection with the long term debt.

Liquidity and Capital Resources

Cash and cash equivalents at December 31, 2001 totaled $2,588, compared to cash and cash equivalents of $2,349 at December 31, 2000. This increase was primarily attributable to $2,456 of cash provided by financing activities, offset by $2,159 used in operations and $58 of cash used in investing activities in 2001. In 2001, the effect of exchange rate changes on cash was immaterial.

At December 31, 2001, current liabilities, which include deferred revenue, were $882. Deferred revenue, totaling $88 at December 31, 2001, primarily reflects advance service contract fees received from the Company's licensees, which are generally recognized as revenue by the Company in the period in which the service work is completed.

As of December 31, 2001, the Company's principal source of liquidity was its cash and cash equivalents of $2,588. In each year since its inception, the Company has incurred losses. Although there can be no assurance, the Company believes that its current cash and resources, together with the expected revenue levels, will provide sufficient funds for planned operations for at least the next twelve months. However, if the Company is unable to generate adequate cash flow from sales, or if expenditures required to achieve the Company's plans are greater than expected, the Company may need to obtain additional funds or reduce discretionary spending. There can be no assurance that additional funds will be available when needed, or if available will be on favorable terms or in the amounts required by the Company. If adequate funds are not available when needed, the Company may be required to delay, scale back or eliminate some or all of its marketing and development efforts or other operations, which could have a material adverse effect on the Company's business, results of operations and prospects.

Financing.    On August 23, 2001, the Company's 90% owned Joint Venture borrowed the aggregate equivalent of $181 denominated in Chinese currency, from a Chinese bank. The loan bears interest at 5.37% per annum and is due August 23, 2002. The borrowing did not require the Joint Venture to deposit a compensating balance.

On September 1, and September 19, 2000, respectively, the Company's 90% owned Joint Venture borrowed, in two transactions the aggregate equivalent of $120, denominated in Chinese currency, from a Chinese bank. The loans bore interest at 5.12% and were due on March 2, and March 19, 2001, respectively. The borrowings did not require a compensating balance. The notes were paid in March 2001.

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On June 19, 2001, the Company consummated a three-year $3 million financing (the "Loan") with a charitable remainder annuity trust of which the trustee was a former director and officer of the Company (the "Trust"). The proceeds of the Loan were used to refinance $1,500 of indebtedness outstanding to the Trust pursuant to a loan made by the Trust to the Company in October 1999 (see below), and for working capital purposes. The Loan bears interest at the rate of 2% over the prime rate publicly announced by Citibank N. A. from time to time, which was 8.00% per annum at September 30, 2001, and is due June 18, 2004. The Loan may be pre-paid by the Company in whole or in part at any time without penalty, subject to the right of the Trust to convert the outstanding principal amount of the Loan into shares of common stock. Pursuant to the terms of the Loan, the Trust has the option, at any time prior to maturity, to convert all or any portion of the outstanding principal amount of the Loan into shares of common stock of the Company at a conversion price of $2.00 per share, subject to adjustment upon the occurrence of certain events. If, prior to maturity of the Loan, the Company consummates one or more financings providing $5 million or more in gross proceeds, the Company is required to apply 50% of the proceeds in excess of $5 million to the then outstanding principal amount of the Loan. The Loan is secured by a first priority security interest in and lien on all of the Company's assets as now owned or thereafter acquired by the Company.

In connection with the Loan, the Company entered into a registration rights agreement with the Trust, which obligates the Company to file a registration statement with the Securities and Exchange Commission covering the re-sale of the shares of the Company's common stock issuable upon conversion of the Loan if it receives a demand by the holder of the Loan to do so, and to use its reasonable best efforts to cause such registration statement to become effective.

In June 1999, the Company obtained a bridge loan (the "Bridge Loan") in the amount of $500 from a charitable remainder annuity trust, of which a director and officer of the Company is a trustee. The Bridge Loan was increased by $150 and $100 in August and September 1999, respectively. Amounts outstanding under the Bridge Loan bore interest at the prime rate plus 2%. The Bridge Loan was secured by the Company's cash, accounts receivable and other receivables as then owned or thereafter acquired by the Company. The Bridge Loan plus accrued interest was due December 31, 1999.

In October 1999, the Company entered into a loan agreement with the same charitable remainder annuity trust, whereby the then existing Bridge Loan of $750 was converted into a long-term loan in the amount of $1,500 (the "1999 Loan"). The 1999 Loan was secured by a first priority security interest in all of the Company's assets as now owned or thereafter acquired by the Company. The 1999 Loan bore interest at the rate of 2% over the prime rate as published by Citibank from time to time. In connection with the 1999 Loan, the Company issued to the charitable remainder annuity trust warrants to purchase 300 shares of the Company's common stock. The Company ascribed a value of $179 to these warrants, which was amortized to the Company's results of operations over the life of the warrant. The fair value ascribed to the warrants was estimated on the date of issuance using the Black- Scholes pricing model with the following assumptions: risk-free interest rate of 5.50%; expected life of 2 years; expected volatility of 99%; and expected dividend yield of 0%. The warrants had an exercise price of $1.09 per share. On January 20, 2000, the charitable remainder trust, of which a director and officer of the Company is a trustee, exercised all 300 warrants issued in connection with the $1,500 long-term debt. The warrants were exercised under the cashless exercise provision in the warrant agreement. The Company issued approximately 255 shares of common stock in exchange for the 300 warrants.

Operating Lease Commitments.    The Company leases facilities in the United States and China. The Company's rental expense for the years ended December 31, 2001, and 2000 was approximately $443 and $390, respectively. Sublease income was approximately $35 and $105 for the years ended December 31, 2001 and 2000, respectively. Future minimum lease payments under non-cancelable operating leases are expected to be approximately $397 for the years ending December 31, 2002.

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On October 3, 2001, the Company entered a new five year lease for its existing principal offices at 275 Shoreline Drive, Suite 500, Redwood Shores California, for approximately 9,634 square feet. The lease commenced on November 1, 2001, with first year lease costs of approximately $347. The cost of the lease will increase approximately 3% per annum over the term of the lease, which expires on October 31, 2006. In addition to the base rent the Company will pay a percentage of the increase, if any, in operating cost incurred by the landlord in such year over the operating expenses incurred by the landlord in the base year. The Company believes the offices will be adequate for its needs over the term of the lease.

Volatility of stock price

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

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 operations strategies and generally has not hedged currency exposures.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk. The Company has an investment portfolio of fixed income securities that are classified as cash equivalents. These securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if the market interest rates increase. The Company attempts to limit this exposure by investing primarily in short term securities. The Company has not entered into any short-term security investments during the three months ended September 30, 2002.

Foreign Currency Risk. The Company operates a subsidiary in China and from time to time makes certain capital equipment or other purchases denominated in foreign currencies. As a result, the Company's cash flows and earnings are exposed to fluctuations in interest rates and foreign currency exchange rates. The Company attempts to limit these exposures through operational strategies and generally has not hedged currency exposures.

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

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Recent Pronouncements

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. EITF 94-3 allowed for an exit cost liability to be recognized at the date of an entity's commitment to an exit plan. SFAS 146 also requires that liabilities recorded in connection with exit plans be initially measured at fair value. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged.

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EQUITY LINE OF CREDIT AGREEMENT

OVERVIEW

Pursuant to the Line of Credit, as Amended, we may periodically issue and sell shares of our common stock for a total purchase price of $15 million. If we request an advance under the Line of Credit, Cornell Capital Partners, L.P. will purchase shares of common stock of our Company for 100% of the "Market Price" of our stock. Market Price is defined as the lowest volume weighted average price of our common stock as reported by Bloomberg, LP, calculated over four of the five trading days after we request an advance. On each advance date, we must pay to Cornell Capital Partners, L.P. an Advance fee equal to 6.5% of the amount of each advance. At our option, Cornell Capital Partners, L.P. may withhold from the advance the fee described above. A closing will be held six (6) trading days after such written notice, at which time we will deliver shares of common stock and Cornell Capital Partners, L.P. will pay the advance amount. Cornell Capital Partners, L.P. intends to sell any shares purchased under the Equity Line of Credit at the market price. Cornell Capital Partners, L.P. cannot transfer its interest in the Equity Line of Credit to any other person and cannot engage in sales of shares of common stock acquired under the Line of Credit.

The effectiveness of the sale of the shares under the Equity Line of Credit is conditioned upon us registering the shares of common stock with the Securities and Exchange Commission.

COMMITMENT PERIOD

We may request an advance at any time during the commitment period. The commitment period begins on the date the Securities and Exchange Commission first declares the registration statement effective. The commitment period expires on the earliest to occur of (i) the date on which Cornell Capital Partners, L.P. has made advances totaling $15 million or (ii) two years after the effective date of the registration statement.

MAXIMUM ADVANCE AMOUNT

We may not request advances in excess of a total of $15 million. The maximum amount of each advance is equal to $1 million in any 30-day period. In addition, in no event shall the number of shares issuable to Cornell Capital Partners, LP cause Cornell to own in excess of 9.9% of the then outstanding shares of our common stock.

NUMBER OF SHARES TO BE ISSUED

We cannot predict the actual number of shares of common stock that will be issued under the Line of Credit, in part, because the purchase price of the shares will fluctuate based on prevailing market conditions and we have not determined the total amount of advances we intend to draw. Nonetheless, we can estimate the number of shares of common stock that will be issued using certain assumptions. Assuming we drew down the entire $15 million available under the Equity Line of Credit in a single advance (which is not permitted under the terms of the Equity Line of Credit) and the purchase price was equal to $0.26 per share, then we would issue a total of 57,692,308 shares of common stock to Cornell Capital Partners, L.P. These shares would represent 38.7% of our outstanding capital stock upon issuance.

You should be aware that (a) we have registered only 24,430,623 shares as we do not have sufficient number of authorized but unissued shares of common stock available to raise the entire $15 million at today's market price for our stock and (b) there is an inverse relationship between our stock price and the number of shares to be issued under the Line of Credit. That is, as our stock price declines, we would be required to issue a greater number of shares under the Line of Credit for a given advance. This inverse relationship is demonstrated by the following table, which shows the number of shares of

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our common stock to be issued to Cornell Capital Partners, LP, under the Line of Credit, at various prices.

Purchase Price	$	.21	$	.26	$	.66
Number of Shares required to draw full draw down equity line of credit (1)		71,428,571		57,692,308		22,727,273
Total Outstanding(2)		162,909,348		149,173,085		114,208,050
Percent Outstanding(3)		43.8%		38.7%		19.9%

(1)

Represents the number of shares of common stock to be issued to Cornell Capital Partners, LP under each scenario.

(2)

Represents the total number of shares of common stock outstanding after the issuance of the shares to Cornell Capital Partners, LP under each scenario.

(3)

Represents the shares of common stock to be issued as a percentage of the total number shares outstanding under each scenario.

In addition to showing the inverse relationship, the above table also shows that the issuance of shares under the Line of Credit may result in a change of control. If all or a significant block of these shares are held by one or more shareholders working together, then such shareholder or shareholders would have enough shares to assume control of the Company by electing its or their own directors.

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REGISTRATION RIGHTS

We granted to Cornell Capital Partners, L.P. certain registration rights. The registration statement accompanying this prospectus will register such shares upon effectiveness. The cost of this registration will be borne by us. See "Description and Price Range of Capital Stock—Registration Rights."

NET PROCEEDS AND USE

We cannot predict the total amount of proceeds to be raised in this transaction, in part, because we have not determined the total amount of the advances we intend to draw. However, we expect to incur expenses of approximately $180,000, consisting primarily of professional fees incurred in connection with registering shares in this offering.

We intend to use the net proceeds received under the Equity Line of Credit for general corporate purposes. Please see "Use of Proceeds."

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DESCRIPTION AND PRICE RANGE OF CAPITAL STOCK

AUTHORIZED CAPITAL STOCK

Our authorized capital stock consists of 125,000,000 shares of common stock, $0.01 par value, and 10,000,000 shares of preferred stock, $0.01 par value.

COMMON STOCK

This prospectus covers the resale by certain of our stockholders of shares of our common stock, $0.01 par value, which are to be issued under the Line of Credit. As of October 24, 2002, we have 91,480,777 shares of common stock issued and outstanding, 24,430,623 shares reserved for issuance under the Line of Credit (excluding additional shares of common stock that are issuable upon a decline in the market price for our common stock), 9,088,600 shares reserved for issuance upon exercise of 6,687,707 outstanding options and upon exercise of 2,400,893 options that may be granted in the future under our four stock option/purchase plans.

The holders of shares of common stock are entitled to one vote for each share held of record on all matters on which stockholders are entitled or permitted to vote. Members of the board of directors are elected for one-year terms. There is no cumulative voting for the election of directors. After recognition of any applicable preferences to any outstanding preferred stock, holders of common stock are entitled to share pro rata in any liquidation proceeds, receive dividends as the board of directors may lawfully declare out of funds legally available, and share pro rata in any other distribution to the holders of common stock. We have never paid any dividends on our common stock and we do not anticipate doing so in the future. Holders of common stock have no preemptive or subscription rights. There are no conversion rights, redemption rights, sinking fund provisions, fixed dividend rights, liabilities to further calls, assessment for liabilities under state statute, restriction on alienability, or any discriminating provision against existing or prospective stock with respect to the common stock.

PREFERRED STOCK

Our board of directors is authorized to establish by resolution different classes or series of preferred stock and to fix the rights, preferences, and privileges, including dividend rights, dividend rates, conversion rights, terms of redemption, redemption prices, liquidation preferences, and the number of shares constituting any class or series or the designation of such class or series without any further shareholder vote or action. The issuance of a class or series of preferred stock with special rights or privileges could have the effect of delaying, deferring, or preventing a change in our control, which may adversely affect the voting and other rights of the holders of common stock. See "Description of Securities—Anti-Takeover Provisions." As of the date of this prospectus, there are no series of preferred stock designated and no shares of preferred stock outstanding.

STOCK OPTIONS

1999 Stock Option Plan

The Company's 1999 Stock Option Plan provides for the granting to the Company's directors and employees of non-transferable incentive stock options ("Incentive Options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and non-transferable non-statutory stock options ("Non-Qualified Options"). A total of 4,000,000 shares of common stock are authorized for issuance under the 1999 Plan. As of October 24, 2002, options to purchase an aggregate of 2,353,332 shares of common stock were outstanding and 1,578,871 shares remain available for future grants. Unless terminated sooner, the 1999 Plan will terminate in June 2009.

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The 1999 Plan may be administered by the Board of Directors or a stock option committee of the Board. The Board or such Committee has the authority to determine the terms of the options granted, including the exercise price, number of shares subject to each option, vesting provisions, if any, and the form of consideration payable upon exercise. The exercise price of Incentive Options must be at least the fair market value of the common stock valued at the date of grant, and the exercise price on Non-Qualified Options must be at least 85% of the fair market value of the common stock valued at the date of grant. The expiration date of Options is determined by the Board or a stock option committee of the Board, but options cannot expire later than ten years from the date of grant, and in the case of Incentive Options granted to 10% stockholders, cannot expire later than five years from the date of grant. Options have typically been granted with an expiration date seven years after the date of grant.

If an employee to whom an award has been granted under the 1999 Plan dies while employed by the Company, retires from employment with the Company after attaining his retirement date, or terminates employment with the Company as a result of permanent and total disability, the restrictions then applicable to such award shall continue as if the employee had not terminated employment and such award shall thereafter be exercisable, in whole or in part by the person to whom it was granted (or by the employee's duly appointed, qualified, and acting personal representative, the employee's estate, or by a person who acquired the right to exercise such option by bequest or inheritance from the employee), in the manner set forth in the award, at any time within the remaining term of such award. Except as provided in the preceding paragraph, generally if a person to whom an option has been granted under the 1999 Plan ceases to be an employee of the Company, such option shall continue to be exercisable to the same extent that it was exercisable on the last day on which such person was an employee for a period of 90 days thereafter, or for such longer period as may be determined by the Committee, whereupon such option shall terminate and shall not thereafter be exercisable.

The Board has the authority to amend or terminate the 1999 Plan, provided that such action does not impair the rights of any optionee under any option previously granted under the 1999 Plan, without the consent of such optionee.

1994 Stock Option Plan

The Company's 1994 Stock Option Plan (the "1994 Plan") provides for the granting to the Company's directors and employees of Incentive Stock Options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended and Non-Qualified Options. A total of 6,000,000 shares of common stock are authorized for issuance under the 1994 Plan. As of October 24, 2002, options to purchase an aggregate 1,030,777 shares of common stock were outstanding and 652,763 shares remain available for future grants. Unless terminated sooner, the 1994 Plan will terminate in November 2004.

The 1994 Plan may be administered by the Board of Directors or a stock option committee of the Board. The Board or such stock option committee of the Board has the authority to determine the terms of the options granted, including the exercise price, number of shares subject to each option, vesting provisions, if any, and the form of consideration payable upon exercise. The exercise price of Incentive Options must be not less than the fair market value of the common stock valued at the date of grant, and the exercise price on Non-Qualified Options must be at least 85% of the fair market value of the common stock valued at the date of grant. The expiration date of Options is determined by the Board or such stock option committee of the Board, but options cannot expire later than ten years from the date of grant, and in the case of Incentive Options granted to 10% stockholders, cannot expire later than five years from the date of grant. Options have typically been granted with an expiration date seven years after the date of grant.

If an employee to whom an award has been granted under the 1994 Plan dies while employed by the Company, retires from employment with the Company after attaining his retirement date, or terminates

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employment with the Company as a result of permanent and total disability, the restrictions then applicable to such award shall continue as if the employee had not terminated employment and such award shall thereafter be exercisable, in whole or in part by the person to whom it was granted (or by his duly appointed, qualified and acting personal representative, his estate, or by a person who acquired the right to exercise such option by bequest or inheritance from the grantee), in the manner set forth in the award, at any time within the remaining term of such award. Except as provided in the preceding paragraph, generally if a person to whom an option has been granted under the 1994 Plan ceases to be an employee of the Company, such option shall continue to be exercisable to the same extent that it was exercisable on the last day on which such person was an employee for a period of thirty (30) days thereafter, or for such longer period as may be determined by the Committee, whereupon such option shall terminate and shall not thereafter be exercisable.

The Board has the authority to amend or terminate the 1994 Plan, provided that such action does not impair the rights of any optionee under any option previously granted under the 1994 Plan, without the consent of such optionee.

1991 Option Plans

The Company has two other stock option plans: the 1991 Stock Option Plan and the 1991 Nondiscretionary Plan (collectively, the "1991 Options Plans"). Incentive and nonqualified options under the 1991 Option Plans may be granted to employees, officers and consultants of the Company. As amended, there are 2,050,000 shares of common stock authorized for issuance under these plans. As of October 24, 2002, options to purchase 118,449 shares of common stock under the 1991 Stock Option Plan were outstanding and 169,259 shares were available for grant.

The 1991 Options Plans may be administered by the Board of Directors or a stock option committee of the Board. The Board or such stock option committee of the Board has the authority to determine the terms of the options granted, including the exercise price, number of shares subject to each option, vesting provisions, if any, and the form of consideration payable upon exercise. The exercise price of Incentive Options must be not less than the fair market value of the common stock valued at the date of grant, and the exercise price on Non-Qualified Options must be at least eighty-five percent (85%) of the fair market value of the common stock valued at the date of grant. The expiration date of Options is determined by the Board or such stock option committee of the Board, but options cannot expire later than ten years from the date of grant, and in the case of Incentive Options granted to ten percent (10%) stockholders, cannot expire later than five years from the date of grant. Options have typically been granted with an expiration date seven years after the date of grant.

If an employee to whom an award has been granted under the 1991 Options Plans dies while employed by the Company, retires from employment with the Company after attaining his retirement date, or terminates employment with the Company as a result of permanent and total disability, the restrictions then applicable to such award shall continue as if the employee had not terminated employment and such award shall thereafter be exercisable, in whole or in part by the person to whom it was granted (or by his duly appointed, qualified and acting personal representative, his estate, or by a person who acquired the right to exercise such option by bequest or inheritance from the grantee), in the manner set forth in the award, at any time within the remaining term of such award. Except as provided in the preceding paragraph, generally if a person to whom an option has been granted under the 1991 Options Plans ceases to be an employee of the Company, such option shall continue to be exercisable to the same extent that it was exercisable on the last day on which such person was an employee for a period of 30 days thereafter, or for such longer period as may be determined by the Committee, whereupon such option shall terminate and shall not thereafter be exercisable.

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Dividend Policy

Stockholders holding common stock are entitled to dividends only if declared by our Board of Directors. To date, we have not declared any dividends on shares of our common stock and we do not anticipate doing so in the foreseeable future.

Anti-takeover Provisions

The Company is subject to or otherwise has available to it a number of statutory provisions and authority that, if taken advantage of or exercised, could have the effect to making more difficult or perhaps completely thwarting any takeover of the Company that is not approved by the Board of Directors, including the following:

•

Business combinations.    Section 203 of the Delaware General Corporation Law ("DGCL") prohibits a "business combination" between the Company and an "interested stockholder" within three years of the stockholder becoming an "interested stockholder." Generally, an "interested stockholder" is a person or group that directly or indirectly controls or has the right to acquire or control the voting or disposition of fifteen percent (15%) or more of the outstanding voting stock of or is an affiliate or associate of the corporation and became the owner of fifteen percent (15%) or more of such voting stock at any time within the previous three years. A "business combination" is defined broadly to include, among other things, (i) mergers and sales or other dispositions of 10% or more of the assets of a corporation with or to an interested stockholder; (ii) certain transactions resulting in the issuance or transfer to the interested stockholder of any stock of the corporation or its subsidiaries; (iii) certain transactions which would result in increasing the proportionate share of the stock of a corporation or its subsidiaries owned by the interested stockholder; and (iv) receipt by the interested stockholder of the benefit (except proportionately as a stockholder) of any loans, advances, guarantees, pledges or other financial benefits. Under Section 203 of the DGCL, business combinations between a corporation and an interested stockholder may occur in certain circumstances, including approval by the Board of Directors.



•

Rights and preferences of preferred stock.    The board of directors is authorized to create a new series of preferred stock and to determine the rights and limitations of this preferred stock. Stockholder approval will not be required for the issuance of such shares. Such shares of preferred stock could have rights that are senior to the rights of the holders of shares of common stock, e.g., preferred liquidation rights, cumulative dividends, or voting and conversion rights that could adversely affect the voting power or dividend rights of the holders of common stock and delay, defer, or prevent a change in control of us.

Registration Rights Agreements

We have entered into a Registration Rights Agreement with Cornell Capital Partners, LP, the investor in the Line of Credit. We cannot sell any shares of our common stock under the Line of Credit until a registration statement, of which this prospectus is a part, is declared effective by the Securities and Exchange Commission. We are required to keep the registration statement effective until the earlier of when the investor has sold all of the shares acquired under the Line of Credit or the investor is able to resell the shares under Rule 144 without regard to the volume limitations set forth in that rule. At all times, the registration statement must cover, at a minimum, the number of shares issued under the Line of Credit. We are required to fulfill our reporting obligations under the Securities Exchange Act of 1934, as amended, and otherwise take whatever steps are necessary to enable the investor to resell the shares acquired under the Line of Credit without restriction. Finally, we have agreed to indemnify the investor for any damages the investor may suffer as a result of misstatements or omissions in this prospectus, other than misstatements or omissions attributable to the investor.

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We have entered into a Registration Rights Agreement with The Philip S. Sassower 1996 Charitable Remainder Trust with respect to shares of our common stock that may be issued upon conversion of a convertible promissory note in the principal amount of $3 million held by the trust. The conversion price is $2.00 per share. Until June 2004, upon notice from the trust, we are required to file and keep current a registration statement covering the number of shares specified in the notice. In the registration rights agreement, we also agreed to indemnify the trust from damages it suffers from misstatements or omissions in the registration statement attributable to the Company.

Price Range of Common Stock

Our shares of common stock are traded on the Nasdaq SmallCap Market ("Nasdaq"). As indicated above, however, our stock may be de-listed from Nasdaq, in which case our stock likely would trade on the OTC market. Set forth below are the high and low sale prices for our stock on Nasdaq from January 1, 2000 through October 24, 2002.

		Sale Price Per Share
Year
	Period	High		Low
2000	First Quarter	$	12.03	$	5.31
	Second Quarter	$	5.22	$	1.84
	Third Quarter	$	4.25	$	2.25
	Fourth Quarter	$	3.06	$	1.00
2001	First Quarter	$	2.28	$	0.97
	Second Quarter	$	1.63	$	0.76
	Third Quarter	$	1.13	$	0.64
	Fourth Quarter	$	0.91	$	0.60
2002	First Quarter	$	1.18	$	0.56
	Second Quarter	$	1.15	$	0.63
	Third Quarter	$	0.66	$	0.24
	Fourth Quarter (October 1 to October 24, 2002)	$	0.28	$	0.21

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CAPITALIZATION

				As of September 30, 2002
				Historical			Adjusted
				(Unaudited)			(Unaudited)
Long term debt(1)				$	3,000		$	2,324
Shareholders' equity
	Preferred shares 10,000,000 shares authorized, none issued or outstanding, actual and adjusted				—			—
	Common stock par value $0.01 per share, 125,000,000 shares authorized, 91,480,777 issued and outstanding as of 09/30/02, 115,911,400 shares as adjusted(1)				914			1,158
	Additional paid in capital				82,026			87,954
Retained deficit					(78,687	)		(78,687	)
Accumulative other comprehensive loss					(192	)		(192	)
		Total shareholders' equity		$	4,061		$	10,233
			Total capitalization	$	7,061		$	12,557

(1)

We will not receive any proceeds from the sale of the shares of common stock covered by this prospectus. We will receive proceeds from the issuance of the shares of common stock under the Line of Credit. The maximum proceeds we may receive under the Line of Credit is $15,000,000, before deducting expenses and fees associated with the offering. To the extent we issue shares of common stock under the Line of Credit, we will use the proceeds to repay short and long term debt and for working capital purposes. Fifty percent of any funds in excess of $5 million under the Line of Credit must be used to repay outstanding principal of our long term debt.

DILUTION

Our net tangible book value as of September 30, 2002 was approximately negative $1.8 million, or negative $.02 per share of outstanding common stock. Net tangible book value per share is equal to our total tangible assets less our total liabilities, divided by the number of outstanding shares of common stock. Dilution per share represents the difference between the price per share paid by the investors under the Line of Credit and the as-adjusted net tangible book value per share immediately after all shares are sold under the Line of Credit.

After giving effect to the sale of 24,430,623 shares of common stock sold under the Line of Credit, at an assumed offering price of $0.26 per share (after deducting the estimated offering expenses payable by us), our as adjusted net tangible book value at September 30, 2002, would have been approximately $4.5 million, or $.04 per share. This represents an immediate dilution of $.22 per share to the investors under the Line of Credit. The following table illustrates this per share dilution:

Assumed offering price per share	$	.26
Net tangible book value per share as of September 30, 2002	$	(.02	)
Increase per share attributable to investors	$	.06
As adjusted net tangible book per share value after this offering	$	.04
Dilution per share to investors under the Line of Credit	$	.22

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USE OF PROCEEDS

We will not receive any proceeds from the sale of the shares of common stock covered by this prospectus. We will receive proceeds from the issuance of the shares of common stock under the Line of Credit. The maximum proceeds we may receive under the Line of Credit is $15,000,000, before deducting expenses and fees associated with the offering. To the extent we issue shares of common stock under the Line of Credit, we will use the proceeds to repay short and long term debt and for working capital purposes. Fifty percent of any funds in excess of $5 million under the Line of Credit must be used to repay outstanding principal of our long term debt.

SELLING STOCKHOLDERS

The shares of common stock registered for sale under this prospectus are comprised of an aggregate of 24,430,623 shares of common stock issuable to the investor under the Line of Credit. These shares, if issued, would represent approximately 21 percent of our issued and outstanding common stock as of October 24, 2002. However, the investor need not acquire shares of common stock under the Line of Credit if the acquisition would cause the investor to own more than 9.9% of our outstanding shares of common stock.

The following list provides:

•

the names of the selling stockholders;



•

the number of shares beneficially owned by each selling stockholder prior to the offering (assuming $15,000,000 is raised under the Line off Credit at a market price of $0.26 per share); and



•

the total number of shares being offered under this offering for each selling stockholder's account.

Assuming that each selling stockholder sells all of the shares listed in this prospectus for such stockholder, each selling stockholder will hold no shares of our common stock.

Name Of Selling Stockholder	Number Of Shares Of Common Stock Beneficially Owned (1)	Total Number Of Shares Being Offered (1)
Cornell Capital Partners, LP, a Delaware limited partnership	—	24,430,623
Total	—	24,430,623

(1)

Excludes such indeterminate number of additional shares of common stock as may become issuable in accordance with the pricing provisions of the Line of Credit

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PLAN OF DISTRIBUTION

The selling stockholders, or their pledgees, donees, transferees, or any of their successors in interest, may sell the shares listed in this prospectus from time to time on any stock exchange or automated interdealer quotation system on which the shares are listed, in the over-the-counter market, in privately negotiated transactions or otherwise, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to prevailing market prices, or at prices otherwise negotiated. The selling stockholders may sell the shares by the following methods:

•

block trades in which a broker or dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;



•

to a broker or dealer as principal, for resale by the broker or dealer for its own account;



•

an exchange distribution in accordance with the rules of any stock exchange on which the shares are listed;



•

ordinary brokerage transactions and transactions in which the broker solicits purchases;



•

privately negotiated transactions;



•

short sales;



•

through the writing of options on the shares, whether or not the options are listed on an options exchange;



•

one or more underwritten offerings on a firm commitment or best efforts basis; or



•

any combination of any of these methods of sale.

We do not know of any arrangements by the selling stockholders for the sale of any of the shares.

The selling stockholders may also transfer the shares by gift or sell the shares in accordance with Rule 144 under the Securities Act rather than under this prospectus, regardless of whether the shares are covered by this prospectus. The selling stockholders may pledge, hypothecate or grant a security interest in some or all of the shares owned by them. The pledgees, secured parties or persons to whom the shares have been hypothecated will, upon foreclosure if there is a default, be deemed to be selling stockholders. The number of a selling stockholder's shares offered under this prospectus will decrease as and when the shares are sold.

To the extent required under the Securities Act, the aggregate amount of selling stockholders' shares being offered and the terms of the offering, the names of any agents, brokers, dealers, or underwriters, and any applicable commission with respect to a particular offer will be provided in an accompanying prospectus supplement. Any underwriters, dealers, brokers, or agents participating in the distribution of the shares may receive compensation in the form of underwriting discounts, concessions, commissions, or fees from a selling shareholder and/or purchasers of selling stockholders' shares for whom they may act (which compensation as to a particular broker-dealer might be in excess of customary commission).

The selling stockholders and any underwriters, brokers, dealers, or agents who participate in the distribution of the shares may be deemed to be "underwriters" within the meaning of the Securities Act, and any discounts, concessions, commissions, or fees received by them and any profit on the resale of the shares sold by them may be deemed to be underwriting discounts and commissions.

The selling stockholders and other persons participating in the sale or distribution of the shares will be governed under applicable provisions of the Securities Exchange Act and the rules and regulations thereunder, including Regulation M. This regulation may limit the timing of purchases and sales of any of the shares by the selling stockholders and any other person. The anti-manipulation rules under the Securities Exchange Act may apply to sales of shares in the market and to the activities of the selling

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stockholders and their affiliates. Furthermore, Regulation M may restrict the ability of any person engaged in the distribution of the shares to engage in market-making activities with respect to the particular shares being distributed for a period of up to five business days before the distribution. These restrictions may affect the marketability of the shares and the ability of any person or entity to engage in market-making activities with respect to the shares.

We have agreed to indemnify in the selling stockholders against some liabilities, including liabilities under the Securities Act. The selling stockholders have agreed to indemnify us in some circumstances against some liabilities, including liabilities under the Securities Act.

The shares offered in this prospectus were originally issued to the selling stockholders under exemptions from the registration requirements of the Securities Act, and we agreed to register the shares held by or issuable to the selling stockholders under the Securities Act. We intend to keep the registration statement of which this prospectus is a part effective until the later of (i) the date on which the selling stockholders have sold all of the shares under the registration statement, or (ii) the expiration of the time when a prospectus relating to such registration is required to be delivered under the Securities Act. We have agreed to pay all expenses in connection with this offering, not including underwriting discounts, commissions, or transfer taxes relating to the sale of the shares by the selling stockholders.

We will not receive any proceeds from sales of any shares by the selling stockholder.

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BUSINESS
(dollars in thousands)

General

The Company was initially incorporated in Delaware in October 1986 as a wholly owned subsidiary of a predecessor corporation with the same name. The Company has a 90%-owned Joint Venture, Communication Intelligence Computer Corporation, Ltd., with the Jiangsu Hongtu Electronics Group, LTD. The Joint Venture was formed in September 1993.

We are the global leader in handwritten signature verification and a leading supplier of electronic signature and handwritten data entry software solutions focused on emerging, fast growth, large potential markets such as document automation, corporate security, handheld computers, smartphones, and the Palm OS aftermarket. We are headquartered in Redwood Shores, California. Our clients include Charles Schwab & Co., Hewlett-Packard Company, Electronic Data Systems Corp., Ericsson Mobile Communications AB, Fujitsu Limited, International Business Machines Corporation, Legend Ltd., Microsoft Corporation, Mitsubishi Electric Corporation, National Semiconductor Corporation, The Prudential Insurance Company of America, Siebel Systems Inc., and The Tennessee Valley Authority, among others.

Core Technologies

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

The Company offers a wide range of multi-platform software products that enable or enhance pen-based computing.

Natural Input Technologies. CIC's natural input technologies are designed to allow users to interact with a computer or handheld device by using an electronic pen or "stylus" as the primary input device or in conjunction with a keyboard. CIC's natural input offerings include multilingual handwriting recognition systems, software keyboards, predictive text entry, and electronic ink capture technologies. Many small handheld devices such as electronic organizers, pagers and smart cellular phones do not have a keyboard. For such devices, handwriting recognition and software keyboards offer the most viable solutions for performing text entry and editing. CIC's predictive text entry technology simplifies data entry even further by reducing the number of actual letters required to be entered. The Company's ink capture technologies facilitate the capture of electronic ink for notetaking, drawings or short handwritten messages.

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

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Products

Key CIC products include the following:

Handwriter and Jot	Handwriting recognition software
Inktools	A suite of application development tools for electronic signatures, biometric signature verification and cryptography
iSign	Web based development tools for electronic signature and biometric signature verification
PenX	Operating systems extensions for the Windows recognition environment that enables pen-based functionality and handwriting
QuickNotes and InkSnap	Electronic handwritten notetaking software
Sign-it and Sign-it Server	Electronic signatures for the enterprise market
Sign-On	Biometric Signature verification software for device access
WordComplete	Predictive text entry software

Products and upgrades that were introduced and first shipped in 2001 include the following:

Sign-it for Word 3.2
Sign-it for Acrobat v 3.2
Sign-it Server 2.0
Sign-it EX v 1.14
Sign-On for Windows 1.0
Sign-On for Pocket PC 2.01
WordComplete for Palm v 2.01
WordComplete v 2.0 UK English Dictionary
WordComplete v 2.0 Spanish Dictionary
WordComplete v 2.0 French Dictionary
WordComplete v 2.0 Italian Dictionary
WordComplete v 2.0 German Dictionary
iSign for Windows v 2.0
iSign for Java v 1.1
PenX v 2.02
Jot for Windows CE v 2.2
Handwriter for CE v2.2
InkTools for CE v 1.6
InkTools for Windows v 2.52

Handwriting recognition software analyzes the individual strokes of characters written with a pen/stylus and converts these stokes into machine readable text characters. This software is especially useful for portable electronic devices that are too small to employ a keyboard, and for the input of ideographic script characters such as those used in written Chinese and Japanese. The Company currently has two recognition system offerings, Handwriter and Jot.

CIC's Handwriter Recognition System ("HRS(TM)") recognizes handwritten input on Windows and Windows CE based pen computers and desktop PCs. HRS accurately recognizes handwritten characters with no recognizer training required, so the user can write naturally. HRS is a full-context recognizer

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that offers some unique features such as automatic spacing between words and automatic capitalization of the first letter of new sentences. HRS is also an integral component of our PenX software that is currently shipping on many of the leading Windows based pen computers. Key vertical market licensees of HRS include such companies as Fujitsu Limited, Intermec Corporation, Xplore Technologies, Inc., Mitsubishi Electric Corporation and Walkabout Computers, Inc.

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

InkTools is an electronic signature and handwritten signature verification software developers' kit that captures and analyzes the image, speed, stroke sequence and acceleration of a person's handwritten electronic signature. InkTools provides an effective and inexpensive handwriting security check for immediate authentication. It also stores certain forensic elements of a signature for use resolving whether a person actually emectronically signed a document. Commercial applications for this type of software include document approval, verification of the identity of users participating in electronic transactions and securing log-in access to computer systems or protected networks. This software toolkit is used internally by CIC as the underlying technology in its Sign-On and Sign-it products and has been licensed to numerous key development partners, including EDS, Bionetrix, Siebel and Topaz Systems.

Sign-On is a product offering that utilizes the Company's handwritten signature verification technology to provide access security on portable devices. This provides the additional level of security needed for devices that are increasingly being used in business and generally contain sensitive data. Currently available for the Palm 3.x or later and Windows CE 3.x operating systems, the product is also being ported to other platforms to meet the specifications of new licensees and customers.

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

iSign provides functionality similar to InkTools but was specifically designed for web based architectures. The current product supports either a Windows implementation with Internet Information Server and Internet Explorer or Java. The Java implementation was designed to meet the needs of the higher-end server products that support Java 2 and a broad base of client systems, which can range from Windows devices to PDAs.

Business Enterprise Revenues

With the passage of legislation making electronic signatures legally binding in virtually every major economy in the world, the transition began toward automating transactions in industries dependent on signatures in order to complete transactions. CIC's handwritten electronic signature solutions and electronic forms provide the basis for significant expense reduction through document automation by

40

eliminating paper documents and related labor, mailing and storage expense. The billions of signed original documents created in today's global economy demand the utmost in user identification and document integrity. The inherent risks, logistical difficulties and staggering financial costs associated with creating, processing, storing and retrieving paper records are driving the demand for legally binding and secure electronic documents.

The Company's revenue from business end-users increased 21% over the prior year, to $1.7 million from $1.4 million. We believe that this growth reflects increasing awareness and demand for our electronic signature technology despite, the economic environment that negatively impacted last year's IT expenditures.

Countless paper documents were lost or destroyed in the September 11th tragedy and the Company believe many of the resulting business failures and disruptions could have been avoided if electronic documents had been utilized. CIC's biometrics handwritten signature technology provides the benefits of the paperless environment with the social acceptance of a non-intrusive handwritten signature (versus a finger print, iris/facial scan, or DNA) and a much higher level of security than the traditional "wet ink" signature. We believe that combining our technology with electronic documents will reduce dependency on mail and business travel while enabling business transactions at Internet speed.

Enterprises that chose to license our technology include the following:

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

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IA Systems	InkTools	E-signature for loan organization
ILI Technologies (P,Ltd.)	InkTools & iSign	Various e-signature applications for the vertical markets in Israel
Integrate Online	InkTools	Mortgage closing
Naval Surface Warfare	InkTools	E-signature for material center receipts
Novabase	Sign-It	Systems integrator for various vertical market applications
Old Republic National	Sign-It	Title processing applications
Orange County, CA	Sign-It	Automate building permit process
PHT Corporation	Sign-It	Clinical trial documents
Physician WebLink	Sign-It	Automate patent enrollment / records / billing
Proware	InkTools	E-signature for judicial orders
PSC Communications	Multiple	Reseller and OEM partner in the UK focused on e-signature
PureEdge	Sign-It	E-signature for financial documents
RecordsCenter.com	InkTools	Legal contracts and other significant documents
Siebel	Multiple	Sample delivery of regulated drugs
Siemens Medical Solutions	Multiple	E-signature for healthcare
Symbol Technologies	Multiple	Reseller for all major products
Tennessee Valley Authority	Multiple	E-signature for approval of internal documents
Wisconsin Electric Power	Sign-On	Biometric mobile device; access company security

A 2001 IDC study projects the handwritten signature verification market, for network authentication alone, will grow from $14 million in 2002 to approximately $32 million by 2005. A 2001 QDI Strategies, Inc. market analysis estimated the signature verification software market, in document automation and mobile device security applications, will grow from $15 million in 2002 to over $82 million by 2005. The total market potential reflected in the IDC and QDI studies, for electronic signature software is in excess of $110 million by 2005. IDC further identified CIC as the undisputed global leader in handwritten signature verification with 82% market share.

We are optimistic that CIC's installed base and pilot programs, which are nearing rollout, some of which are included above, will provide the basis for increasing revenue growth in both the near term and beyond.

OEM Business

We derive a significant portion of our revenues from sales to orginal equipment manufacturers ("OEMs") (i.e., manufacturers of devices or equipment where third party software comes standard with such devices)

For example, in 1999, CIC entered into a license agreement with Ericsson for both natural input and electronic signature solutions for its R380 smartphone. R380 shipments, however, have been significantly behind expectations because of the economic environment as well as Ericsson's own

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market related difficulties, which ultimately led to a mobile communications merger last year with Sony. The combined strength of Ericsson's mobile technology and Sony's consumer electronics and retail distribution know-how has resulted in rave reviews for both their potential competitiveness and for their new multi-media smartphone, the P800. The P800 debuted at the European consumer electronics show in March of 2002 and we are optimistic that the planned introduction of this new smartphone, together with other Sony-Ericsson related activity, affords CIC the opportunity to participate in Sony-Ericsson smartphone shipments consistent with our initial expectations.

Despite the fact that industry forecasts for smartphones have been reduced, by as much as 75% from previous estimates, we believe that current forecasts still provide the Company with solid revenue growth potential in the future. In addition to smartphones, CIC's current licensees include manaufacturers of PDAs, webpad and handwriting and data capture devices. We expect sales of these smart handheld devices to grow significantly over the next two years.

Market activity since the events of September 11th reflects growing awareness and demand for both CIC's handwriting recognition products and for biometric handwritten signature verification, utilized as a security utility, across the entire smart handheld device market. The Company believes that significant royalty potential exists for 2002 and beyond based on its present and potential OEM agreements.

Key OEM Licensees include:

Licensee	Product(s) licensed	Application of Products
AirSpeak	Jot	Handheld PC Pro
Sony Ericsson	Jot, QuickNotes, Sign-On & WordComplete	Smart cellular phone
Fujitsu	HRS, PenX, Sign-On Plus & InkTools	Windows and Windows CE pen computers
GSC Mobile Solutions	Inktools	Windows pen computers
HP	Jot	Linux based PDA
IA Systems	Jot	Wireless Internet access device
IBM	Sign-It	Windows pen notebook
Inteliworxx	HRS & PenX	Windows pen computers
Interlink	Sign-It	E-signature retail bundle
Intermec/Norand	HRS & PenX	Windows pen computers
Mathsoft	Math Recognizer	Handwriting recognition for mathematical notation
National Semiconductor	Jot	Wireless Internet access device
Pacific Star	PenX	Windows pen computers
Telos Corp.	PenX	Windows pen computers
Topaz	InkTools	E-signature bundle
Vtech	Jot	Electronic organizer
Wacom	Chinese Handwriter & Sign-It	Digitizer tablet and e-signature
Walkabout	HRS & PenX	Windows pen computers
Xplore	HRS & PenX	Ruggedized mobile computers
Xybernaut	HRS, PenX & Jot	Wearable computers

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Online Sales

The Company also sells its products through its website. Online sales are generated primarily through direct mail sent to owners of products manufactured by Palm, Inc., whose names and addresses are acquired from Palm. Most of CIC's software products are available for the Palm operating system, including products manufactured by Handspring, IBM, Symbol, Kyocera, Samsung and Sony. Handheld computers based on the Palm operating system remain the global leader with almost 63% of the handheld computer market worldwide. The 2001 year end installed base is estimated at 13 million in the US alone and is estimated to grow to over 47 million domestically by 2005 acording to the IDC Smart Handheld Device Studt 2000-2005, Report Number 24859. The Company believes that positioning its Palm aftermarket products directly at the point of sale, together with CIC's direct mail programs, which direct product information to existing users of devices manufactured and/or distributed by Palm, Inc. (or using an operting system licensed by Palm, Inc.) and encourage such users to acquire our products through our various distribution channels, will optimize online revenue growth in the near term and generate meaningful sales growth longer term.

Retail Sales

In the third quarter of 2001, CIC entered into an agreement with Elibrium, a division of ClickAction, Inc. that positions the Company's Palm operating system-based products directly at the retail point of sale next to devises that use the Palm operating system. This provides a significant increase in exposure through retail stores of Comp USA, Staples, Office Max and other leading retailers. We believe that this retail distribution will expose CIC's software upgrade products to a much larger base of potential buyers than through direct mail only.

China

We believe that our joint venture in the People's Republic of China represents a major opportunity for the Company. China is the world's third largest economy and we believe that its recent accession into the World Trade Organization is fueling economic growth and individual buying power in China. The joint venture was established almost nine years ago and the Company believes that the 10% ownership position by the Jiangsu Hongtu Electronics Group provides considerable stability and credibility. The Company believes that its electronic signature and Chinese handwriting recognition software applications, including automating signature dependent document processes and corporate security, will be in increasing demand as China prepares to compete on a world wide basis through its WTO membership. The China Ministry of Railways, Hu Nan Mobile Communications, Agricultural Bank of China, and the Nanjing Civic Bureau are among the Chinese companies and government agencies who chose and implemented CICC software solutions in 2001. This adds to an installed base including Panda Information Corp. Ltd,, Neu Soft Corporation, Jiangsu Hongtu Hi-Tech Corp. Ltd., Ministry of Agriculture, P.R. China, and the No. 1 Group of Aviation Industry.

Last year, we emerged as the leading supplier in Jiangsu Province of a fast growing mobile industry application for regulated goods with an estimated 70% market share. This turn-key offering provides hardware and software systems for the receipt and delivery of taxed, measured and monitored goods using handheld devices from companies including Symbol Technologies, Palm and Handspring. Our offerings include the integration of enterprise software solutions for the server side or back-end management of these mobile systems and captured data. This offering further affords us the opportunity to integrate electronic signature and Chinese handwriting recognition technology into its turn-key solutions.

The Company believes that the emerging markets for electronic signature based applications and handheld receipt/input based systems, acceptance of our products by leading Chinese enterprises and

44

government agencies, the legitimacy and credibility afforded us by the joint venture and the growth potential of the China market, provide us significant growth potential in the future.

Segments

The Company's information has been stratified into two segments—handwriting recognition software and systems integration. Handwriting recognition software is an aggregate of three revenue categories, OEM, Enterprise and Online sales. All handwriting recognition software is developed around the Company's core technology. System integration represents the sale and installation of third party computer equipment and systems that utilize the Company's products. For further information see Notes to the Company's audited consolidated financial statements and to the interim unaudited condensed consolidated financial statements.

Marketing

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

OEM Licensed Products.    CIC currently licenses software products for Windows(R)3.x, Windows(R)'95, Windows'98, WindowsNT, WindowsCE, EPOC, QNX, VT-OS, Palm and Linux. CIC also ports its products to other platforms to meet the specifications of licensees. The Company's PenX, Sign-it, and Handwriter Recognition System are licensed for portable PCs utilizing the Windows(R)'95, Windows(R)'98, Windows(R)NT, and WindowsCE operating systems and are primarily used for field force automation and in pen-input PC peripherals for desktop use. Jot, QuickNotes, Sign-On, WordComplete and the CIC software keyboard are licensed primarily for the new, smaller classes of personal computers that utilize the Windows(R)CE operating systems and handheld communicators such as smartphones and PDAs that use the Palm or Symbian operating system.

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

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

Copyrights, Patents and Trademarks

The Company relies on a combination of patents, copyrights, trademarks, trade secrecy and contractual provisions to protect its software offerings and technologies. The Company has a policy of requiring its employees and contractors to respect proprietary information through written agreements. The

45

Company also has a policy of requiring prospective business partners to enter into non-disclosure agreements before any of the Company's proprietary information is revealed to them.

Certain technological processes originally implemented in the Company's software offerings were developed and patented by Stanford Research Institute ("SRI") and SRI assigned those patents, which subsequently expired, to the Company. The Company has made significant improvements to the original technologies and additional patents relating to such technological improvements have been applied for by or issued to the Company. In addition, in October 2000 the Company acquired the assets of PenOp, Inc. and its subsidiary, which included a signficant patent portfolio relevant to the markets in which we sell our products. Therefore, the Company does not believe that the expiration of the SRI patents has had or will have a significant effect on its operations. Other major elements of the Company's software offerings and technologies were developed by the Company and have been patented. Certain of the Company's existing patents expire between the years 2002 and 2017. The Company is unable to predict at this time the impact to its business, if any, from such expiration.

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

Material Customers

Historically, the Company's handwriting recognition segment revenues have been derived from a limited number of customers. One customer accounted for 10% of total revenues for the first nine months of 2002 and 16% of total revenue for the first nine months of 2001. One customer accounted for 16% of total revenues for the year ended 2001. One customer accounted for 16% of total revenues for the year ended 2000. One customer accounted for 27% of total revenues for the year ended 1999.

In the Company's system integration segment one customer, Fujitsu Ltd. accounted for 28% of total revenue for the first nine months of 2002 and 37% for the first nine months of 2001. This same customer accounted for 16%, 16% and 27% of total revenues in 2001, 2002 and 1999.

Backlog

At September 30, 2002, backlog approximated $123, representing advanced payments on service maintenance agreements and non recurring engineering projects that are expected to be recognized over the next twelve months. At December 31, 2001, backlog approximated $88,000, representing advanced payments on service maintenance agreements and non recurring engineering projects that are expected to be recognized over the next twelve months. At December 31, 2000, backlog approximated $61,000, representing advanced royalty and service maintenance agreements. At December 31, 1999, backlog approximated $35,000.

Competition

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

46

Employees

As of September 30, 2002, the Company and the Joint Venture employed an aggregate of 57 full-time employees, 20 of which are in the United States and 37 of which are in China. From time to time, the Company also engages additional personnel on an as needed basis. The Company believes it has good relations with its employees. None of the Company's employees is a party to a collective bargaining agreement.

Geographic Areas

For the nine months ended September 30, 2002 and the years ended December 31, 2001, 2000, and 1999, the Company's sales in China as a percentage of total sales were 34%, 30%, 26% and 25%, respectively. For the nine months ended September 30, 2002 and the years ended December 31, 2001, 2000, and 1999, the Company's sales in the United States as a percentage of total sales were 66%, 70%, 74% and 75%. Included in the U.S. sales are export sales. For the nine months ended September 30, 2002 and the years ended December 31, 2001, 2000, and 1999, the Company's export sales as a percentage of total revenues were approximately 9%, 17%, 24%, and 36%, respectively.

Legal Proceedings

The Company was named as a defendant in a suit brought in U.S. District Court for the Southern District of New York, filed on August 5, 2002. The plaintiffs brought claims for breach of contract, conversion, negligence and statutory violations, alleging that the Company provided incorrect or false information to their stock broker, thereby delaying the sale of plaintiffs' shares in the Company and causing a loss in excess of $500,000 due to a drop in the value of the shares. While the litigation is in an early stage, based on the available information, we believe that the action is without merit and, even if plaintiffs success, we believe their damages will not have a material financial impact on the Company. We intend to vigorously defend them.

Properties

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

DIRECTORS

The following table sets forth certain information concerning the Company's directors:

Name	Age	Year First Elected or Appointed
Guido D. DiGregorio	63	1997
Michael Farese	55	2002
Louis P. Panetta	52	2000
C. B. Sung	76	1986

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

Guido D. DiGregorio was appointed Chairman of the Board in February 2002, Chief Executive Officer in June 1999 and President in November 1997. From November 1997 to June 1999, he was also the Company's Chief Operating Officer. He was a partner in DH Partners, Inc. (a management consultant firm) from 1996 to 1997. Prior to 1996, Mr. DiGregorio was recruited by a number of companies to reverse trends of financial losses, serving as President and CEO of each of the following companies: Display Technologies, Inc. (a manufacturer of video data monitors) from 1994 to 1996, Superior

47

Engineering Corp. (a producer of factory-built gas fireplaces) from 1991 to 1993, Proxim, Inc. (wireless data communications) from 1989 to 1991, Maxitron Corp. (a manufacturer of computer products) from 1986 to 1989 and Exide Electronics (producer of computer power conditioning products) from 1983 to 1986. From 1966 to 1983, Mr. DiGregorio was employed by General Electric in various management positions, rising to the position of General Manager of an industrial automation business.

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

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

C.B. Sung became a director of the Company in 1986. Mr. Sung has been the Chairman and Chief Executive Officer of Unison Group, Inc. (a multi-national corporation involved in manufacturing, computer systems, international investment and trade) since 1986 and Unison Pacific Corporation since 1979. He also serves on the Board of Directors of several private companies and non-profit organizations.

Other Director Information

The Company's affairs are managed under the direction of the Board of Directors. Members of the Board receive information concerning the Company's affairs through oral and written reports by management, Board and committee meetings and other means. The Company's directors generally attend Board of Directors meetings, committee meetings and informal meetings with management and others, participate in telephone conversations and have other communications with management and others regarding the Company's affairs.

Directors of the Company serve until their successors are duly elected and qualified or until their earlier resignation, removal or disqualification. There are no family relationships between the Company's directors and executive officers. For certain relationships between the Company and its directors, see "Certain Relationships and Related Transactions."

Board Committees

The Company's Board of Directors has four committees as set forth below. The members of each committee are appointed by the Board of Directors. The members of the each of these committees are Messrs. Panetta, Sung and Farese:

•

Audit Committee.    The Audit Committee generally reviews the scope and results of the audit by the Company's independent auditors and reviews the Company's procedures for establishing and monitoring internal accounting controls.

48

•

Finance Committee.    The Finance Committee develops strategies for the financing and development of the Company and monitors and evaluates progress toward established objectives.



•

Compensation Committee.    The Compensation Committee generally reviews compensation matters with respect to executive and senior management arrangements.



•

Stock Option Committee.    The Stock Option Committee administers the Company's stock option plans.

The Board of Directors does not have a standing nominating committee.

Board and Committee Meetings

During 2001, the Board of Directors held three formal meetings and also acted by unanimous written consent on two occasions. Through September 30, 2002, the Board held three formal meetings and also acted by unanimous written consent on two occasions. The Committees held meetings jointly with the formal Board meetings in 2001 and have held meetings jointly with the formal Board through the first nine months of 2002. For the year ended December 31, 2001, each incumbent director participated in all of the formal meetings of the Board and each Committee on which he served, except Michael Farese who was not appointed to the Board until February 2002. For the nine months ended September 30, 2002, each incumbent director participated in all of the formal meetings of the Board and each Committee on which he served, except Michael Farese who was not appointed to the Board until February 2002.

Director Compensation

For their services as directors of the Company, all non-employee directors receive a fee of $1,000 for each Board of Directors meeting attended and all directors are reimbursed for all reasonable out-of-pocket expenses incurred in connection with attending such meetings. Directors are also eligible to receive stock options. In June 2001, Louis Panetta and C. B. Sung were each granted immediately exercisable non-qualified options to purchase 25,000 shares of common stock at an exercise price of $1.01, which options expire on June 18, 2008. The Company retains a repurchase option on the shares underlying these options for one year from the date of grant.

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EXECUTIVE OFFICERS

The following table sets forth, as of October 24, 2002, the name and age of each executive officer of the Company, and all positions and offices of the Company presently held by each of them.

Name	Age	Positions Currently Held
Guido D. DiGregorio	63	Chairman of the Board, Chief Executive Officer and President
Francis V. Dane	51	Chief Legal Officer, Secretary and Chief Financial Officer

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

Guido D. DiGregorio—See the discussion above.

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

EXECUTIVE COMPENSATION

The following table sets forth compensation awarded to, earned by or paid to the Company's President, regardless of the amount of compensation, and each executive officer of the Company serving as of December 31, 2001 whose total annual salary and bonus for 2001 exceeded $100,000 (collectively, the "Named Executive Officers").

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Summary Compensation Table

		Annual Compensation					Long-Term Compensation
Name and Principal Position		Year	Salary			Other Annual Compensation	Securities Underlying Options
Guido DiGregorio—Chairman,		2001	$	180,000		—	—
	President and Chief Executive Officer	2000		180,000		—	—
		1999		180,000		—	1,950,000
							600,000	(1)
Francis V. Dane—Chief Legal Officer, Secretary and Chief Financial Officer		2001	$	20,000	(2)	—	—

(1)

Mr. DiGregorio surrendered these options on January 12, 1999 when he received a new grant of 1,800,000 options.

(2)

Mr. Dane was named as an Executive Officer as of October 1, 2001.

Option Grants in 2001

No options were granted to Executive Officers in 2001.

Aggregate Option Exercises in 2001 and Year-End Option Values

The following table sets forth certain information concerning the Named Executive Officers with respect to the exercise of options in 2001, the number of shares covered by exercisable and unexercisable stock options at December 31, 2001 and the aggregate value of exercisable and unexercisable "in-the-money" options at December 31, 2001.

Name	Shares Acquired On Exercise	Value Realized		Number of Securities Underlying Unexercised Options at Fiscal Year-End Exercisable(E)/ Unexercisable(U)		Value of Unexercised In-The-Money Options at Fiscal Year-End(1) Exercisable(E)/ Unexercisable(U)
Guido DiGregorio	—	$	—	1,700,000	(E)	$	—(E)(1)
Francis V. Dane	—	$	—	143,943	(E)	$	—(E)(1)

(1)

The value of unexercised in-the-money options was determined by using the difference between the closing sale price of the common stock on the Nasdaq SmallCap Market as of December 31, 2001 ($0.64) and the exercise price of such options.

Audit Committee Report

In 2002, the Audit Committee:

•

Reviewed and discussed the Company's 2001 audited financial statements with the Company's management;



•

Discussed with the independent auditors, Stonefield Josephson, Inc., the matters required to be discussed by the American Institute of Certified Public Accountants Auditing Standards Board Statement on Auditing Standards No. 61 ("Communication with Audit Committees"), which includes, among other items, matters related to the conduct of the audit of the Company's financial statements; and

51

•

Received written disclosures and the letter from the independent auditors required by International Standards Board Standard No.1 ("Independent Discussions with Audit Committees") and discussed with the auditors the auditors' independence from the Company.

Based on review and discussion of the Company's 2001 audited financial statements with management and the independent auditors, the Audit Committee recommended to the Board of Directors that the Company's audited financial statements for the fiscal year ended December 31, 2001, be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

The Audit Committee
Of the Board of Directors

Louis P. Panetta
Michael Farese
C. B. Sung

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COMPENSATION AND STOCK OPTION COMMITTEE REPORT

The Compensation Committee and Stock Option Committee have provided the following Report.

Compensation Philosophy and Objectives. The Committees' compensation philosophy is based upon the belief that the success of the Company results from the coordinated efforts of all employees working as a team to achieve objectives of providing superior products and services to the Company's customers and maximizing the Company's value for the benefit of its stockholders.

The Company's compensation programs are designed to attract, retain and reward personnel whose individual and team performance contributes significantly to the short and long-term objectives of the Company. The Company's executive compensation programs are guided by the following principles, which may also be considered in making compensation decisions for employees:

•

To ensure competitiveness, the Company monitors industry standards and considers this information when it makes compensation decisions: and



•

The compensation of executive officers is affected by individual, team and overall Company performance. Overall Company performance is based upon achievement of strategic and operating goals. Such factors include revenues generated, technology validations, timely product introductions, capturing market share and preservation of and increases in stockholder value. Individual and team performance is considered to the extent of whether departmental goals are achieved within the time and budget constraints of Company operating plans. Additionally, individual performance is measured, in part, against the extent to which an individual executive officer is able to foster team spirit and loyalty and minimize employee turnover.

Methods of Compensation. The key elements of the Company's executive compensation program consist primarily of base salary and stock options. Base salary for the Company's executive officers is generally determined by performance, the combined base salary and annual bonus for competitive positions in the industry and general market and Company conditions. Currently, the Company does not have an annual bonus plan. The Committees believe that the use of stock options as a means of compensation provide an incentive for executives and align their interests with those of the stockholders. All employees are eligible to receive stock options under the Company's stock option plans

President and Chief Executive Officer's Compensation. Mr. Guido DiGregorio, the Chairman of the Board, Chief Executive Officer and President of the Company, was appointed to the Presidency by the Board of Directors in November 1997, to the office of Chief Executive in June 1999 and to the Chairmanship in February 2002. The Company does not currently have an employment agreement with Mr. DiGregorio. Mr. DiGregorio currently receives an annual salary of $250,000. His 2001 compensation remained at the same level as the previous year. He has agreed until December 31, 2002 to defer a portion of his salary the result of which is that his annual salary is effectively $180,000. After December 31, 2002, he may demand repayment of all deferred portions of his compensation

COMPENSATION COMMITTEE	STOCK OPTION COMMITTEE
Louis P. Panetta	Louis P. Panetta
Michael Farese	Michael Farese
C. B. Sung	C. B. Sung

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of October, 24, 2002 with respect to the beneficial ownership of (i) any person known to be the beneficial owner of more than 5% of any class of voting securities of the Company, (ii) each director and director nominee of the Company, (iii) each of the current executive officers of the Company named in the Summary Compensation Table of this prospectus under the heading "Executive Compensation" and (iv) all directors and executive officers of the Company as a group.

	Common Stock
Name of Beneficial Owner	Number of Shares	Percent of Class
Guido DiGregorio (1)	1,813,636	1.98	%
C. B. Sung (2)	498,518	*
Louis P. Panetta (3)	114,068	*
Michael Farese (4)	75,000	*
Francis V. Dane (5)	189,609	*
All directors and executive officers as a group (5 persons)	2,690,831	2.91	%

*

Less than 1%.

(1)

The number of shares of common stock represents 1,813,636 shares of a total of 1,950,000 shares, which are issuable upon the exercise of stock options granted to Mr. DiGregorio in January 1999 and February 2002, that are exercisable within 60 days of this prospectus. The business address of Mr. DiGregorio is 275 Shoreline Drive, Suite 500, Redwood Shores, California 94065. See "Certain Relationships and Related Transactions."

(2)

The number of shares of common stock includes (a) 337,051 shares held by the Sung Family Trust of which Mr. Sung is a trustee, (b) 3,369 shares held by the Sung-Kwok Foundation of which Mr. Sung is the Chairman, and (c) 158,098 shares of common stock issuable upon the exercise of stock options which are exercisable within 60 days of this prospectus. Mr. Sung may be deemed to beneficially own the shares held by the Sung Family Trust and the Sung-Kwok Foundation. The business address of Mr. Sung is, UNISON Group, 1001 Bayhill Dr., 2^nd Floor, San Bruno, California 94066.

(3)

The number of shares of common stock represents 114,068 shares, issuable upon the exercise of options granted on October 30, 2000, May 11, 2001 and June 18, 2001, which are exercisable within 60 days of this prospectus. Mr. Panetta's business address is 827 Via Mirada, Monterey, California 93940.

(4)

The number of shares of common stock represents 75,000 shares issuable upon the exercise of stock options granted to Mr. Farese in February 2002 that are exercisable within 60 days of this prospectus. The business address of Mr. Farese is 401 River Oaks Parkway San Jose, CA 95134.

(5)

The number of shares of common stock represents (a) 212 shares held By Mr. Dane and (b) 189,397 shares of a total of 243,943 shares, which are issuable upon the exercise of stock options granted to Mr. Dane in January 1999 and February 2002, that are exercisable within 60 days of this prospectus. The business address of Mr. Dane is 275 Shoreline Drive, Suite 500, Redwood Shores, California 94065.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On June 18, 2001, the Board of Directors granted immediately exercisable non-qualified stock options to purchase 25,000 shares of common stock to each of Mr. Sung and Mr. Panetta at an exercise price of $1.01 per share and an expiration date of June 18, 2008. The Company retains a repurchase option on the shares underlying the options for one year from the date of grant.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of common stock in the public market following the offering could adversely affect the market price of the common stock and adversely affect our ability to raise capital at a time and on terms favorable to us. As of October 24, 2002, we had 91,480,777 shares of common stock issued and outstanding, 24,430,623 shares of common stock reserved for issuance under the Line of Credit and 6,687,707 shares reserved for issuance upon exercise of options at a weighted average purchase price of $1.13 per share and 2,400,893 for options which may be granted in the future. See "Description of Securities." If we were to issue $15,000,000 worth of our common stock under the Line of Credit at the market price of $0.26 per share and all of the options were granted and exercised, the number of outstanding shares of common stock would increase from 91,480,777 shares as of October 24, 2002, to 125,000,000 shares. Of these additional shares, however, 1,119,581 stock options are subject to vesting requirements from October 24, 2002, to September 25, 2005. As of the date of this prospectus, 5,568,126 options are vested and exercisable. All of the shares to be issued upon exercise of the options are covered by an effective registration statements.

ELIMINATION OF DIRECTOR LIABILITY

Our Certificate of Incorporation provides that to the fullest extent permitted by the Delaware law, our director shall not be liable to the Company or our shareholders for damages resulting from a breach of the director's fiduciary duties.

INDEMNIFICATION OF OFFICERS AND DIRECTORS

We have agreed to indemnify, to the full extent permitted by the laws of the State of Delaware, any current or former directors and officers who are made, or threatened to be made, a party to an action or proceedings, whether criminal, civil, administrative or investigative, by reason of the fact that such person or such persons is or was a director or officer of the Company, or served any other enterprise as a director or officer at the request of the Company.

In addition, we may enter into agreements with our directors providing contractually for indemnification consistent with our certificate of incorporation and bylaws. Currently, we have no such agreements.

The Delaware General Corporation Law also authorizes us to purchase insurance for our directors and officers insuring them against risks as to which we may be unable lawfully to indemnify them. We have obtained limited insurance coverage for our officers and directors as well as insurance coverage to reimburse us for potential costs of our corporate indemnification of officers and directors.

As far as indemnification for liabilities arising under the Securities Act of 1933 may be permitted for directors and officers and controlling persons, we have been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

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WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements, and other information with the SEC. You may read and copy any reports, statements, or other information on file at the SEC's public reference room in Washington, D.C. You can request copies of those documents, upon payment of a duplicating fee, by writing to the SEC.

We have filed a Registration Statement on Form S-1 with the SEC. This prospectus, which forms a part of the Registration Statement, does not contain all of the information included in the Registration Statement. Certain information is omitted, and you should refer to the Registration Statement and its exhibits. With respect to references made in this prospectus to any contract or other document of ours, such references are not necessarily complete, and you should refer to the exhibits attached to the Registration Statement for copies of the actual contract or document. You may review a copy of the Registration Statement at the SEC's public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549; Chicago, Illinois; or New York, New York. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms.

Our Securities and Exchange Commission filings and the Registration Statement can also be reviewed by accessing the SEC's web site at http://www.sec.gov.

LEGAL MATTERS

The legality of the issuance of shares offered hereby will be passed upon by Davis Wright Tremaine LLP, Portland, Oregon.

EXPERTS

Stonefield Josephson, Inc., independent auditors, have audited our consolidated financial statements and schedule as of December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, as set forth in their report appearing in this prospectus and registration statement. We have included our financial statements and schedules in the prospectus and elsewhere in the registration statement in reliance on their report, given on their authority as experts in accounting and auditing.

TRANSFER AGENT AND WARRANT AGENT

Our stock transfer agent is American Stock Transfer & Trust Company, 59 Maiden Lane, New York, New York 10038.

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Index to financial statements

Financial Statements	Page
Condensed Consolidated Balance Sheets at September 30, 2002 (unaudited) and December 31, 2001	F-2
Condensed Consolidated Statements of Operations for the Three and Nine-Month Periods Ended September 30, 2002 and 2001 (unaudited)	F-3
Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three and Nine-Month Periods Ended September 30, 2002 and 2001 (unaudited)	F-4
Condensed Consolidated Statements of Cash Flows for the Nine-Month Period Ended September 30, 2002 and 2001 (unaudited)	F-5
Notes to Unaudited Condensed Consolidated Financial Statements	F-6
Report of Stonefield Josephson, Inc., Independent Auditor	F-11
Consolidated Balance Sheets at December 31, 2001 and 2000	F-12
Consolidated Statements of Operations for the years ended December 31, 2001, 2000, and 1999	F-13
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2001, 2000 and 1999	F-14
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999	F-15
Notes to Consolidated Financial Statements	F-16
Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts and Reserves	S-1

F-1

Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In thousands)

			September 30, 2002			December 31, 2001
			(Unaudited)
Assets
Current assets:
Cash and cash equivalents			$	1,246		$	2,588
Accounts receivable, net				748			1,043
Inventories				149			129
Prepaid expenses and other current assets				229			139
		Total current assets		2,372			3,899
Property and equipment, net				156			161
Capitalized software costs				16			26
Patents and trademarks				5,515			5,799
Other assets				88			187
		Total assets	$	8,147		$	10,072
Liabilities and Stockholders' equity
Current liabilities:
Short-term debt			$	—		$	181
Accounts payable				109			206
Accrued compensation				211			208
Other accrued liabilities				470			196
Deferred revenue				123			88
Capital lease obligations				40			3
		Total current liabilities		953			882
Notes payable, related party — noncurrent				3,000			3,000
Minority interest				133			130
Commitments
Stockholders' equity:
	Common stock			914			909
	Additional paid-in capital			82,026			81,605
	Accumulated deficit			(78,687	)		(76,258	)
	Cumulative translation adjustment			(192	)		(196	)
		Total stockholders' equity		4,061			6,060
Total liabilities and stockholders' equity			$	8,147		$	10,072

See accompanying notes.

F-2

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

			Three Months Ended September 30,						Nine Months Ended September 30,
			2002			2001			2002			2001
Revenues:
	Online		$	83		$	237		$	287		$	977
	Corporate			132			222			1,538			1,884
	Nonrecurring maintenance fees (net) -M10 (previously PenOp Inc.)			—			—			—			352
	China			310			456			968			1,223
		Total revenues		525			915			2,793			4,436
Operating costs and expenses:
	Cost of sales:
		Online		13			132			198			707
		Corporate		15			12			148			244
		China		176			312			602			829
	Research and development			367			428			1,145			1,399
	Sales and marketing			367			470			1,181			1,604
	General and administrative			583			728			1,762			2,107
		Total operating costs and expenses		1,521			2,082			5,036			6,890
(Loss) from operations				(996	)		(1,167	)		(2,243	)		(2,454	)
Interest and other income (expense), net				(19	)		5			(28	)		19
Interest expense				(53	)		(66	)		(155	)		(225	)
Minority interest				(2	)		(1	)		(3	)		(3	)
		Net (loss)		(1,070	)		(1,229	)		(2,429	)		(2,663	)
Basic and diluted (loss) per common share			$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.03	)
Weighted average common shares outstanding				91,481			90,715			91,237			90,495

See accompanying notes.

F-3

Communication Intelligence Corporation
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
(In thousands, except per share amounts)

	Common Stock		Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Gain (Loss)			Total
Balances as of December 31, 2001	$	909	$	81,605	$	(76,258	)	$	(196	)	$	6,060
Exercise of options for 148 shares of Common Stock		1		109		—			—			110
Foreign currency translation adjustment		—		—		—			3			3
Net loss		—		—		(688	)		—			(688	)
Balances as of March 31, 2002	$	910	$	81,714	$	(76,946	)	$	(193	)	$	5,485
Exercise of options for 420 shares of Common Stock		4		312		—			—			316
Foreign currency translation adjustment		—		—		—			(1	)		(1	)
Net loss		—		—		(671	)					(671	)
Balances as of June 30, 2002	$	914	$	82,026	$	(77,617	)	$	(194	)	$	5,129
Foreign currency translation adjustment		—		—		—			2			2
Net loss		—		—		(1,070	)		—			(1,070	)
Balances as of September 30, 2002	$	914	$	82,026	$	(78,687	)	$	(192	)	$	4,061
Total shares outstanding as of December 31, 2001, March 31, 2002, June 30, 2002 and September 30, 2002 were: 90,911; 91,060; 91,471 and 91,481, respectively.

See accompanying notes.

F-4

Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

				Nine Months Ended September 30,
				2002			2001
Cash flows from operating activities:
	Net loss			$	(2,429	)	$	(2,663	)
	Adjustments to reconcile net loss to net cash (used) in operating activities:
		Depreciation			69			125
		Patent amortization			284			322
		Loan discount amortization			—			74
		Non-cash compensation			—			46
		Disposal of fixed assets			6			—
		Changes in operating assets and liabilities:
			Accounts receivable, net		295			1,018
			Inventories		(19	)		(44	)
			Prepaid expenses and other current assets		(87	)		24
			Other assets		99			(12	)
			Accounts payable		(66	)		(541	)
			Accrued compensation		3			(43	)
			Other accrued liabilities		241			(11	)
			Deferred revenue		35			91
		Net cash used in operating activities			(1,569	)		(1,614	)
Cash flows from investing activity:
	Acquisition of property and equipment				(54	)		(53	)
		Net cash used in investing activity			(54	)		(53	)
Cash flows from financing activities:
	Payments on short-term debt				(181	)		(1,802	)
	Acquisition of property under capital lease				40			—
	Proceeds from acquisition of short-term debt				—			362
	Proceeds from acquisition of long-term debt				—			3,000
	Proceeds from exercise of stock options and warrants				426			817
	Principal payments on capital lease obligations				(4	)		(6	)
		Net cash provided by financing activities			281			2,371
Effect of exchange rate changes on cash					—			—
Net increase (decrease) in cash and cash equivalents					(1,342	)		704
Cash and cash equivalents at beginning of period					2,588			2,349
Cash and cash equivalents at end of period				$	1,246		$	3,053

See accompanying notes.

F-5

Communication Intelligence Corporation

and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

1.    Interim financial statements

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 GAAP for complete financial statements. In the opinion of management, the financial statements included in this quarterly report reflect all adjustments (consisting only of normal recurring adjustments) which 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 develops and markets software that can verify handwritten signatures delivered wirelessly and electronic signature and handwritten data entry software solutions aimed at emerging, fast growth, large potential markets such as e-commerce, corporate security, mobile voice/Internet devices including smartphones/communicators, PDAs, webpads and the Palm OS aftermarket.

The Company's core software technologies include multilingual handwriting recognition systems (Jot®) and the Handwriter Recognition System, referred to as HRS™, electronic signature, handwritten signature verification, writing with the aid of symbols, electronic ink recording tools (InkTools®), Sign-it®, iSign™ and Sign-On™, and operating systems extensions that enable pen input (PenX™).

Other consumer and original equipment manufacturer ("OEM") products include electronic notetaking (QuickNotes™ and InkSnap™) and predictive text input, (WordComplete®). CIC's products are designed to increase the ease of use, functionality and security of electronic devices with a primary focus on wireless internet and information devices such as smartphones, electronic organizers ("PDA's") and portable web browsers.

The Company offers a wide range of multi-platform software products that enable or enhance pen-based computing. The Company's core technologies are classified into two broad categories: "natural input technologies" and "transaction and communication enabling technologies". Natural input technologies are designed to allow users to interact with a computer or handheld device by using an electronic pen or "stylus" as the primary input device or in conjunction with a keyboard. CIC's natural input offerings include multilingual handwriting recognition systems, software keyboards, predictive text entry, and electronic ink capture technologies. Many small handheld devices such as electronic organizers, pagers and smart cellular phones do not have a keyboard. For such devices, handwriting recognition and software keyboards offer viable solutions for performing text entry and editing. CIC's predictive text entry technology simplifies data entry even further by reducing the number of actual letters required to be entered. The Company's ink capture technologies facilitate the capture of electronic ink for notetaking, drawings or short handwritten messages. The Company's transaction and communication enabling technologies are designed to provide a cost-effective means for securing electronic transactions, providing network and device access control, and enabling workflow automation of traditional paper form processing. CIC believes that these technologies offer more efficient methods for conducting electronic transactions and provide more functional user authentication and heightened data security. The Company's transaction and communication enabling technologies have been fundamental in its development of software for signature verification, data security, and data compression.

F-6

For the nine month period ended September 30, 2002, the Company's cash and cash equivalents decreased by $1,340 from $2,588 at the beginning of the period to $1,246. The decrease was due primarily to cash used in operating activities of $1,569, and cash used in investing activities of $54, offset by $281 provided by financing activities. The $281 provided by financing activities consists of $426 in proceeds from the exercise of stock options by the Company's employees and former chairman, the acquisition of capital equipment under capital lease of $40, reduced by the repayment of the note by the Company's joint venture in China ("Joint Venture") of $181 and by payments of capital lease obligations of $4.

As of September 30, 2002, the Company's principal source of funds was its cash and cash equivalents aggregating $1,246. The Company was incorporated in Delaware in 1986 and the accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations that raise a doubt about its ability to continue as a going concern. The Company is in the process of filing a registration statement with the Securities and Exchange Commission in order to obtain funding from equity financing. However, there can be no assurance that the Company will have adequate capital resources to fund planned operations or that any additional funds will be available to the Company when needed, or if available, will be available on favorable terms or in amounts required by the Company. If the Company is unable to obtain adequate capital resources to fund operations, it may be required to delay, scale back or eliminate some or all of its operations, which may have a material adverse effect on the Company's business, results of operations and ability to operate as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The financial information contained herein should be read in conjunction with the Company's audited financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2001.

2.    Cash and cash equivalents

The Company considers all highly liquid investments with original maturities of up to 90 days to be cash equivalents.

Cash and cash equivalents consist of the following:

	September 30, 2002		December 31, 2001
Cash in bank	$	1,135	$	1,621
Commercial paper		—		26
Money market		111		941
	$	1,246	$	2,588

3.    Inventories

Inventories are stated at the lower of cost or market, cost being determined using the first-in, first-out (FIFO) method. At September 30, 2002, inventories consisted primarily of finished goods.

F-7

4.    Short-term debt

On August 23, 2001, the Company's 90% owned Joint Venture borrowed the aggregate equivalent of $181, denominated in Chinese currency, from a Chinese bank. The loan bears interest at 5.37% per annum and was due August 23, 2002. The borrowing did not require the Joint Venture to deposit a compensating balance. In February 2002, the Joint Venture repaid $121 and in August 2002, paid the remaining equivalent of $60 denominated in Chinese currency.

5.    Related Party Transactions:

A.    Long-term debt related party

On June 19, 2001, the Company consummated a three-year $3 million financing (the "Loan") with a charitable remainder annuity trust of which a former director and officer of the Company is a trustee (the "Trust"). The proceeds of the Loan were used to refinance $1,500 of indebtedness outstanding to the Trust pursuant to a loan made by the Trust to the Company in October 1999 and for working capital purposes.

The Loan bears interest at the rate of 2% over the prime rate publicly announced by Citibank N.A. from time to time, which was 6.75% per annum at September 30, 2002, and is due June 18, 2004. The Loan may be pre-paid by the Company in whole or in part at any time without penalty, subject to the right of the Trust to convert the outstanding principal amount of the Loan into shares of common stock. Pursuant to the terms of the Loan, the Trust has the option, at any time prior to maturity, to convert all or any portion of the outstanding principal amount of the Loan into shares of common stock of the Company at a conversion price of $2.00 per share, subject to adjustment upon the occurrence of certain events. If, prior to maturity of the Loan, the Company consummates one or more financings providing $5 million or more in gross proceeds, the Company is required to apply 50% of the proceeds in excess of $5 million to the then outstanding principal amount of the Loan. The Loan is secured by a first priority security interest in and lien on all of the Company's assets as now owned or hereafter acquired by the Company.

In connection with the Loan, the Company entered into a registration rights agreement with the Trust which obligates the Company to file a registration statement with the Securities and Exchange Commission covering the sale of the shares of the Company's common stock issuable upon conversion of the Loan if it receives a demand by the holder of the Loan to do so, and to use its reasonable best efforts to cause such registration statement to become effective.

B.    Transactions with PenOp

During the fourth quarter of 2000, the Company engaged in a transaction with PenOp to provide nonrecurring maintenance services from pre-existing PenOp contracts in the aggregate amount of $1.5 million, of which a net amount of $877 was recorded as revenue during that quarter. At September 30, 2001, the Company recognized $325 of this contract revenue net of related expenses of $48. The Company previously entered into a separate transaction, to acquire the intellectual property rights from PenOp.

F-8

6.    Revenue recognition

Online Revenue—Revenue from retail product sales is recognized upon sell through, while revenue from other product sales is recognized upon shipment provided that no significant obligations remain and the collection of the resulting receivable is probable. The Company provides for estimated sales returns at the time of shipment.

Corporate Revenue—License and product revenues are recognized when the software has been delivered and when all significant obligations have been met in accordance with the American Institute of Certified Public Accountants Statement of Position Number 97-2, "Software Revenue Recognition." The Company also follows Staff Accounting Bulletins 101 ('SAB 101') and the interpretive guidance issued by the Securities and Exchange Commission and EITF issue 00-21 of the AICPA Emerging Issues Task Force. Royalty revenues are recognized as products are licensed/sold by licensees. Development contract revenue is generated primarily from non-recurring engineering activities. Revenue is recognized in accordance with the terms of the agreements, generally when collection is probable and related costs have been incurred.

China Revenue—Revenue from system integration activities and product sales are recognized upon shipment provided that no significant obligations remain and the collection of the resulting receivable is probable.

7.    Net loss per share

The Company calculates earnings per share under the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires the disclosure of both basic earnings per share, which is based on the weighted average number of shares outstanding, and diluted earnings per share, which is based on the weighted average number of shares and dilutive potential shares outstanding. For the three and nine month periods ended September 30, 2002 and 2001, potential equivalent shares excluded from the calculation of diluted earnings per share, as their effect is not dilutive, include stock options of 6,688, and 7,443, respectively, of equivalent shares and warrants of 470 equivalent shares at September 30, 2001.

8.    Comprehensive income (loss)

Total comprehensive (loss) was as follows:

		Nine month Ended September 30,
		2002			2001
Net loss		$	(2,429	)	$	(2,663	)
Other comprehensive income:
Cumulative translation adjustment			4			5
	Total comprehensive loss	$	(2,425	)	$	(2,658	)

F-9

9.    Segment Information

The Company's segment information under the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of An Enterprise and Related Information" ("SFAS 131"), is comprised of two segments handwriting recognition software and systems integration.

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

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

The table below presents information about reporting segments for the periods indicated:

	Nine month ended September 30,
	2002									2001
	Handwriting Recognition			Systems Integration			Total			Handwriting Recognition			Systems Integration			Total
Revenues	$	2,016		$	777		$	2,793		$	3,439		$	997		$	4,436
Loss from Operations	$	(2,202	)	$	36		$	2,166		$	(2,368	)	$	(86	)	$	(2,454	)
Significant Change in Total Assets from Year End	$	—		$	(35	)	$	(35	)	$	—		$	—		$	—

F-10

Independent Auditors Report

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

We have audited the accompanying consolidated balance sheets of Communication Intelligence Corporation and its subsidiary as of December 31, 2001 and 2000 and the related consolidated statements of operations, changes in stockholders' equity (deficit), cash flows and financial statement schedule for each of the three years in the period ended December 31, 2001, as listed in the index appearing under Item 14(a)(1) and (2) of this Annual Report on Form 10-K. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion the consolidated financial statements and financial statements schedule listed in the index appearing under Item 14(a)(1) and (2) of this Annual Report on Form 10-K present fairly, in all material respects, the financial position of Communication Intelligence Corporation and its subsidiaries ("the Company") as of December 31, 2001, and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

STONEFIELD JOSEPHSON INC.
Certified Public Accountants

San Francisco, California
February 18, 2002

F-11

Communication Intelligence Corporation

Consolidated Balance Sheets

(In thousands, except par value amounts)

			December 31,
			2001			2000
Assets
Current assets:
	Cash and cash equivalents		$	2,588		$	2,349
	Accounts receivable, including $350 from M10 (Previously PenOp) at December 31, 2000 net of allowances of $278 and $118 at December 31, 2001 and 2000, respectively			1,043			1,760
	Inventories			129			171
	Prepaid expenses and other current assets			139			270
		Total current assets		3,899			4,550
	Note receivable from officer			—			46
	Property and equipment, net			161			262
	Patents and trademarks			5,799			6,234
	Other assets			213			210
		Total assets	$	10,072		$	11,302
Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable		$	206		$	679
	Short-term debt			181			120
	Accrued compensation			208			263
	Other accrued liabilities			199			318
	Deferred revenue			88			61
		Total current liabilities		882			1,441
Long-term debt—related party				3,000			1,427
Minority interest				130			127
Commitments
Stockholders' equity:
	Common stock, $.01 par value; 125,000 shares authorized; 90,912 and 89,668 shares issued and outstanding at December 31, 2001 and 2000, respectively			909			897
	Additional paid-in capital			81,605			80,656
	Accumulated deficit			(76,258	)		(73,043	)
	Accumulated other comprehensive loss			(196	)		(203	)
Total stockholders' equity				6,060			8,307
	Total liabilities and stockholders' equity		$	10,072		$	11,302

See accompanying Notes to Consolidated Financial Statements

F-12

Communication Intelligence Corporation

Consolidated Statements of Operations

(In thousands, except per share amounts)

			Years ended December 31,
			2001			2000			1999
Revenues:
	Online		$	913		$	1,198		$	1,675
	Corporate			2,958			3,326			3,223
	Nonrecurring maintenance fees—M10 (Previously PenOp)			352			877			—
	China			1,724			1,911			1,620
				5,947			7,312			6,518
Operating costs and expenses:
	Cost of sales:
		Online		805			1,087			1,832
		Corporate		290			416			325
		China		1,145			1,393			1,160
	Research and development			1,808			1,603			1,363
	Sales and marketing			2,054			2,239			1,877
	General and administrative			2,791			2,181			1,683
				8,893			8,919			8,240
Loss from operations				(2,946	)		(1,607	)		(1,722	)
Interest income and other income (expense), net				16			76			55
Interest expense				(282	)		(266	)		(73	)
Minority interest				(3	)		(2	)		—
Net loss			$	(3,215	)	$	(1,799	)	$	(1,740	)
Basic and diluted loss per share			$	(0.04	)	$	(0.02	)	$	(0.02	)
Weighted average shares				90,571			85,324			79,625

See accompanying Notes to Consolidated Financial Statements

F-13

Communication Intelligence Corporation

Consolidated Statements of Changes in Stockholders' Equity (Deficit)

(In thousands)

	Common Stock		Additional Paid-In Capital		Accumulated Deficit			Other Comprehensive Loss			Total
Balances as of December 31, 1998	$	785	$	70,205	$	(69,504	)	$	(154	)	$	1,332
Issuance of 300 warrants in connection with Long-term debt		—		179		—			—			179
Exercise of options for 3,421 shares of Common Stock		34		1,802		—			—			1,836
Exercise of 329 warrants for 329 shares of Common Stock		3		797		—			—			800
Foreign currency translation adjustment		—		—					(58	)		(58	)
Net loss		—		—		(1,740	)		—			(1,740	)
Balances as of December 31, 1999	$	822	$	72,983	$	(71,244	)	$	(212	)	$	2,349
Exercise of 2,352 options for 2,352 shares of Common Stock	$	24	$	1,559	$	—		$	—		$	1,583
Exercise of 406 warrants for 361 shares of Common Stock		4		433		—			—			437
Issuance of 4,700 shares of Common Stock in exchange for intellectual property of PenOp Ltd.		47		5,681		—			—			5,728
Foreign currency translation adjustment		—		—		—			9			9
Net loss		—		—		(1,799	)					(1,799	)
Balances as of December 31, 2000	$	897	$	80,656	$	(73,043	)	$	(203	)	$	8,307
Exercise of options for 1,176 shares of Common Stock	$	11	$	892	$	—		$	—		$	903
Issuance of 68 shares of Common Stock in exchange for services		1		57		—			—			58
Foreign currency translation adjustment		—		—		—			7			7
Net loss						(3,215	)					(3,215	)
Balances as of December 31, 2001	$	909	$	81,605	$	(76,258	)	$	(196	)	$	6,060

See accompanying Notes to Consolidated Financial Statements

F-14

Communication Intelligence Corporation

Consolidated Statements of Cash Flows

(In thousands)

			Years ended December 31,
			2001			2000			1999
Cash flows from operating activities
Net loss			$	(3,215	)	$	(1,799	)	$	(1,740	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization			687			328			334
	Equity securities issued for services			58			—			—
	Non-cash compensation			46			89			—
	(Gain) loss on disposal of property and equipment			—			—			(1	)
	Changes in operating assets and liabilities
		Accounts receivable, net		717			(185	)		(429	)
		Inventories		42			(90	)		(7	)
		Prepaid expenses and other current assets		135			(95	)		(72	)
		Other assets		(14	)		48			(49	)
		Accounts payable		(469	)		390			(184	)
		Accrued compensation		(55	)		(3	)		38
		Other accrued liabilities		(117	)		(176	)		70
		Deferred revenue		26			26			(616	)
Net cash used in operating activities				(2,159	)		(1,467	)		(2,656	)
Cash flows from investing activities
Acquisition of property and equipment				(58	)		(636	)		(78	)
Acquisition of property through capital leases				—			2			17
Net cash used in investing activities				(58	)		(634	)		(61	)
Cash flows from financing activities
Proceeds from issuance of short-term debt				181			120			96
Proceeds from issuance of long-term debt—related party				3,000			—			1,500
Restricted cash related to short-term debt				—			—			250
Principal payments on short-term debt				(120	)		(60	)		(181	)
Principal payments on short-term debt				(1,500	)		—			—
Principal payments on capital lease obligations				(8	)		(4	)		(5	)
Proceeds from exercise of warrants				—			437			800
Proceeds from exercise of stock options				903			1,583			1,836
Net cash provided by (used in) financing activities				2,456			2,076			4,296
Effect of exchange rate changes on cash				—			—			—
Net increase (decrease) in cash and cash equivalents				239			(25	)		1,579
Cash and cash equivalents at beginning of year				2,349			2,374			795
Cash and cash equivalents at end of year			$	2,588		$	2,349		$	2,374

See accompanying Notes to Consolidated Financial Statements

F-15

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

The Company

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

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

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

        For the five-year period ended December 31, 2001, the Company incurred aggregate losses of $27.3 and, at December 31, 2001, the Company's accumulated deficit was approximately $76.3. The Company has primarily funded these losses through the sale of debt and equity securities.

        As of December 31, 2001, the Company's principal source of liquidity was its cash and cash equivalents of $2,588. Although there can be no assurance, the Company believes that its current resources, together with expected revenues, will provide sufficient funds for planned operations for at least the next twelve months. However, if the Company is unable to generate adequate cash flow from sales, or if expenditures required to achieve the Company's plans are greater than expected, the Company may need to obtain additional funds or reduce discretionary spending. Management believes that it will be able to reduce discretionary spending if required.

Basis of Consolidation

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

Use of Estimates

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

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Reclassification

        The revenues have been reclassified to conform with the current year presentation.

Fair Value of Financial Instruments

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

Cash and Cash Equivalents

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

        Short-term investments are classified as "available-for-sale." For all periods presented, cost of investments approximated fair market value. The cost of securities sold is based on the specific identification method. The Company had no short-term investments as of December 31, 2001 or 2000.

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

		2001		2000
Cash in bank		$	1,621	$	1,332
Commercial paper			26		687
Money markets			941		330
	Cash and cash equivalents	$	2,588	$	2,349

Concentrations of Credit Risk

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

        At December 31, 2001, the Joint Venture had approximately $802 in cash accounts held by a financial institution in the People's Republic of China. The Joint Venture deposits are not covered by any federal deposit insurance program that is comparable to the programs applicable to U.S. deposits.

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

        Six customers accounted for approximately 62% of gross accounts receivable at December 31, 2001. Eleven customers accounted for approximately 72% of gross accounts receivable at December 31, 2000.

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Inventories

        Inventories are stated at the lower of cost or market, cost being determined using the first-in first-out ("FIFO") method. Cost principally includes direct materials. At December 31, 2001 and 2000, inventories consisted of finished goods.

Property and Equipment, Net

        Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, ranging from three to five years. Leasehold improvements are amortized over their estimated useful lives, not to exceed the term of the related lease. The cost of additions and improvements is capitalized, while maintenance and repairs are charged to expense as incurred. Depreciation expense was $140, $166 and $190 for the year ended December 31, 2001, 2000 and 1999, respectively.

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

	2001			2000
Machinery and equipment	$	1,224		$	1,191
Office furniture and fixtures		448			448
Leasehold improvements		84			84
Purchased software		206			174
		1,962			1,897
Less accumulated depreciation and amortization		(1,801	)		(1,635	)
	$	161		$	262

        Included in property and equipment as of December 31, 2001, and 2000 is $42 and $42, respectively, of assets acquired under capital leases. Accumulated depreciation on such assets totaled $38 and $32 at December 31, 2001 and 2000, respectively.

Patents

        On October 6, 2000, a wholly-owned subsidiary of the Company, acquired certain assets of PenOp Limited ("PenOp") and its subsidiary PenOp Inc. pursuant to an asset purchase agreement dated as of September 29, 2000. Patents are stated at cost less accumulated amortization which in Management's opinion is less than fair value. Amortization is computed using the straight-line method over the estimated lives of the related assets, ranging from five to seventeen years. Amortization expense was $436, $43 and $15 for the years ended December 31, 2001, 2000 and 1999, respectively.

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

	Expiration	Life	2001			2000
Patent	Various	5	$	9		$	9
Patent	Various	7		476			476
Patent	2013	13		93			93
Patent	2014	14		187			187
Patent	2015	15		373			373
Patent	2017	17		5,607			5,607
				6745			6,745
Less accumulated amortization				(946	)		(511	)
			$	5,799		$	6,234

Long-Lived Assets

        The Company evaluates the recoverability of its long-lived assets whenever circumstances or events indicate such assets might be impaired. The Company would recognize an impairment reserve in the event the net book value of such assets exceeded the future undiscounted cash flows attributable to such assets. No such reserves have been recorded in the three years ended December 31, 2001.

Software Development Costs

        The Company capitalizes software development costs upon the establishment of technological feasibility, subject to net realizable value considerations. Capitalization commences upon the completion of a working model and ends on general product release. As of December 31, 2001 and 2000, such costs were insignificant and are included as a component of "other assets" in the accompanying consolidated balance sheets. Amortization expense related to capitalized software development costs in 2001, 2000 and 1999 amounted to $12, $12 and $1, respectively.

Stock-Based Compensation

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

Revenue Recognition

        In October 1997, the American Institute of Certified Public Accountants (the "AICPA") issued Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), which the Company has adopted for transactions entered into during the fiscal year beginning January 1, 1998. SOP 97-2 provides guidance for recognizing revenue on software transactions and supersedes Statement of Position No. 91-1, "Software Revenue Recognition." In March 1998, the AICPA issued Statement of Position No. 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"). SOP 98-4 defers, for one year, the application of certain passages in SOP 97-2 which limit what is considered vendor-specific objective evidence ("VSOE") necessary to recognize revenue for software licenses in multiple-element arrangements when undelivered elements exist. In

F-19

December 1998, the AICPA issued Statement of Position No. 98-9 ("SOP 98-9") Modifications of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions." SOP 98-9 extends the effective date of SOP 98-4 and provides additional interpretative guidance. SOP 98-9 is effective for fiscal years beginning after March 15, 2000. The Company also follows the interpretive guidance of SAB 101 issued by The Securities and Exchange Commission and EITF issue 00-21 of the AICPA Emerging Issues Task Force.

Online Revenue

        Revenue from retail product sales is recognized upon sell through, while revenue from other product sales is recognized upon shipment provided that no significant obligations remain and the collection of the resulting receivable is probable. The Company provides for estimated sales returns at the time of shipment.

Corporate Revenue

        License revenues are recognized when the software has been delivered and when all significant obligations have been met. Royalty revenues are recognized as products are licensed/sold by licensees. Deferred revenue in the accompanying balance sheets reflects service contract fees received from the Company's licensees in advance of revenue being earned.

        Development contracts revenue is generated primarily from non-recurring engineering activities and research grants from licensees and government agencies. Revenue is recognized in accordance with the terms of the grants and agreements, generally when collection is probable and related costs have been incurred.

China Joint Venture Revenue

        Revenue from system integration activities and product sales are recognized upon shipment provided that no significant obligations remain and the collection of the resulting receivable is probable.

        Three customers accounted for 13%, 9% and 7%, respectively, of revenues in 2001. Three customers accounted for 16%, 6% and 5%, respectively, of revenues in 2000. One customer accounted for 27% of revenues in 1999. No other customers accounted for greater than 10% of revenues in 2001, 2000 and 1999.

Research and Development

        Research and development costs are charged to expense as incurred.

Advertising

        The Company expenses advertising costs as incurred. Advertising expense for the year ended December 31, 2001, 2000, and 1999 was $203, $399 and $140, respectively.

Net Loss Per Share

        The Company calculates earnings per share under the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires the disclosure of both basic earnings per share, which is based on the weighted average number of shares outstanding,

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and diluted earnings per share, which is based on the weighted average number of shares and dilutive potential shares outstanding. For the year ended December 31, 2001, 2000 and 1999 potential equivalent shares excluded from the calculation of diluted earnings per share, as their effect is not dilutive, include stock options of 7,027, 8,145 and 9,956 of equivalent shares and warrants of 237, 237 and 876 equivalent shares, respectively.

Foreign Currency Translation

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

        Net foreign currency transaction gains and losses are included in "interest income and other income (expense), net" in the accompanying consolidated statements of operations. The Company recorded a net foreign currency transaction gain of $59 for the year ended December 31, 1999. Foreign currency transaction gains in 2001 and 2000 were insignificant.

Income Taxes

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

Acquisition of Assets From PenOp

        On October 6, 2000, a wholly-owned subsidiary of the Company, (the "Buyer"), acquired certain assets of PenOp Limited ("PenOp") and its subsidiary PenOp Inc., (collectively, the "Sellers") pursuant to an asset purchase agreement dated as of September 29, 2000, by and among Buyer and the Sellers for 4.7 million shares of common stock of the Company (the "Acquisition"). Out of the 4.7 million shares issued to Sellers in connection with the Acquisition, approximately 940,000 shares are being held in escrow to cover indemnification of Buyer. The Company ascribed a value of $5,728 to the assets which will be charged to income over the estimated lives of the assets, five to seventeen years.

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

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

F-21

New Accounting Pronouncements

        In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141 supersedes Accounting Principles Board ("APB") No. 16 and requires that business combinations entered into after June 20, 2001 be accounted for as using the purchase method, eliminating the pooling-of-interest method defined in APB 16. The statement is effective for business combinations initiated after June 30, 2001 and shall apply to all business combinations accounted for by the purchase method for which the date of acquisition is July 1, 2001 or later. The Company believes that adoption of FASB No. 141 will not have a material impact on its current financial position or results of operations.

        In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles." SFAS No. 142 addresses the initial recognition, measurement and amortization of intangible assets acquired individually or in a group of other assets (not acquired in a business combination) and addresses the amortization provisions for excess cost over fair value of net assets or intangibles assets acquired in a business combination. The statement is effective for fiscal years beginning after December 15, 2001, and is effective July 1, 2001 for any intangibles acquired in a business combination initiated after June 30, 2001. The Company is evaluating the effect, if any, on its financial position and results of operations arising from the issuance of SFAS No. 142, "Goodwill and Other Intangibles."

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets. The statement provides a single accounting model for long-lived assets to be disposed of. New criteria must be met to classify the asset as an asset held-for-sale. SFAS No. 144 also focuses on reporting the effects of a disposal of a segment of a business. Statement SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company does not expect SFAS No. 144 will have a material impact on the Company's financial position or results of operations at this time.

New Accounting Pronouncements

        In January 2001, the Financial Accounting Standards Board's Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-27 effective for convertible debt instruments issued after November 16, 2000. This pronouncement requires the use of the intrinsic value method for recognition of the detachable and imbedded equity features included with indebtedness, and requires amortization of the amount associated with the convertibility feature over the life of the debt instrument rather than the period for which the instrument first became convertible. The Company does not expect EITF Issue No. 00-27 will have a material impact on the Company's financial position or results of operations at this time.

2. Chinese Joint Venture

        The Company currently owns 90% of a joint venture with the Information Industry Bureau of the Jiangsu Province, a provincial agency of the People's Republic of China (the "Agency"). In June 1998, the registered capital of the Joint Venture was reduced from $10,000 to $2,550. As of December 31, 2001, the Company had contributed an aggregate of $1,800 in cash to the Joint Venture and provided it with non-exclusive licenses to technologies and certain distribution rights and the Agency had contributed certain land use rights. Following the reduction in registered capital of the Joint Venture, neither the Company nor the Agency are required to make further contributions to the Joint Venture. Prior to the reduction in the amount of registered capital, the Joint Venture was subject to the annual

F-22

licensing requirements of the Chinese government. Concurrent with the reduction in registered capital, the Joint Venture's business license has been renewed through October 18, 2043.

3. Comprehensive Income

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

        The accumulated other comprehensive loss at December 31, 2001 and 2000 consisted of cumulative foreign currency translation adjustments.

F-23

4. Short-term Debt

        On August 23, 2001, the Company's 90% owned Joint Venture borrowed the aggregate equivalent of $181, denominated in Chinese currency, from a Chinese bank. The loan bears interest at 5.37% per annum and is due August 23, 2002. The borrowing did not require the Joint Venture to deposit a compensating balance.

        On September 1, and September 19, 2000, respectively, the Company's 90% owned Joint Venture borrowed, in two transactions, the aggregate equivalent of $121, denominated in Chinese currency, from a Chinese bank. The loans bear interest at 5.12%. The borrowings did not require a compensating balance. The loans were paid in March 2001.

        Interest expense for the years ending December 31, 2001, 2000, and 1999 was $281, $266, and $53, respectively. Interest expense associated with related party debt was $274, $258 and $53 for the years ended December 31, 2001, 2000 and 1999, respectively.

5. Related Party Transactions

        In April 1994, the Company loaned $210 to the Company's then Chief Executive Officer in exchange for a note, secured by shares of the Company's Common Stock, bearing interest at the lesser of the highest marginal rate per annum applicable to the Company's borrowings or the highest rate allowable by law (10% per annum at December 31, 1997). On August 14, 1998, the Company entered into an employment agreement (the "Employment Agreement") with the aforementioned former officer. Under the Employment Agreement, the former officer provided consulting services to the Company through December 15, 2001. In exchange for these services, $110 of the note receivable from the officer was forgiven on a monthly basis over the period commencing August 15, 1998 and ending December 15, 2001. Per the terms of the employment agreement, the remaining $100 of the note receivable from the officer was forgiven on December 15, 2001.

        On June 16, 1999, the Company obtained a bridge loan (the "Bridge Loan") in the amount of $500 from a charitable remainder annuity trust, a trustee of which was then a director and officer of the Company. The Bridge Loan was increased by $150 and $100 in August and September 1999, respectively. Amounts outstanding under the Bridge Loan bore interest at the prime rate plus 2%. The loan was secured by the Company's cash, accounts receivable and other receivables as then owned or thereafter acquired by the Company. The Bridge Loan plus accrued interest was due December 31, 1999. In October 1999, the Bridge Loan was converted to long-term debt as discussed below.

        On October 20, 1999, the Company entered into a loan agreement with the same charitable remainder annuity trust, whereby the then existing Bridge Loan of $750 was converted into a long term loan in the amount of $1,500 (the "1999 Loan"). The 1999 Loan is secured by a first priority security interest in all of the Company's assets as now owned or hereafter acquired by the Company. The 1999 Loan bore interest at the rate of 2% over the prime rate as published by Citibank from time to time. The note had a due date of January 31, 2002. In connection with the 1999 Loan the Company issued to the charitable remainder annuity trust warrants to purchase 300 shares of the Company's common stock. The warrants had an exercise price of $1.09 per share. The Company ascribed a value of $179 to these warrants, which was amortized to the Company's results of operations over the life of the debt. The fair value ascribed to the warrants was estimated on the date of issuance using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 5.50%; expected life of 2 years; expected volatility of 99%; and expected dividend yield of 0%. On January 20, 2000, the charitable remainder trust exercised all 300 warrants issued in connection with the $1,500 long-term debt. The warrants were exercised under the cashless exercise provision in the warrant agreement. The Company issued 255 shares of common stock in exchange for the 300 warrants. The 1999 Loan was paid off June 19, 2001 as discussed below.

F-24

        On June 19, 2001, the Company consummated a three-year $3 million financing (the "Loan") with the charitable remainder annuity trust, a trustee of which was then a director and officer of the Company (the "Trust"). The proceeds of the Loan were used to refinance $1,500 of indebtedness outstanding to the Trust pursuant to a loan made by the Trust to the Company in October 1999 and for working capital purposes. The Loan is secured by a first priority security interest in all of the Company's assets as now owned or hereafter acquired by the Company. The Loan bears interest at the rate of 2% over the prime rate publicly announced by Citibank N. A. from time to time, which was 8.00% per annum at September 30, 2001, and is due June 18, 2004. The Loan may be pre-paid by the Company in whole or in part at any time without penalty, subject to the right of the Trust to convert the outstanding principal amount of the Loan into shares of common stock. Pursuant to the terms of the Loan, the Trust has the option, at any time prior to maturity, to convert all or any portion of the outstanding principal amount of the Loan into shares of common stock of the Company at a conversion price of $2.00 per share, subject to adjustment upon the occurrence of certain events. If, prior to maturity of the Loan, the Company consummates one or more financings providing $5 million or more in gross proceeds, the Company is required to apply 50% of the proceeds in excess of $5 million to the then outstanding principal amount of the Loan.

        In connection with the Loan, the Company entered into a registration rights agreement with the Trust which obligates the Company to file a registration statement with the Securities and Exchange Commission covering the sale of the shares of the Company's common stock issuable upon conversion of the Loan if it receives a demand by the holder of the Loan to do so, and to use its reasonable best efforts to cause such registration statement to become effective.

        In 2001, 2000, and 1999, $150 in consulting fees, including office expenses, were paid to a party who, at that time, was a director of the Company.

        During the fourth quarter of 2000 the Company engaged in a transaction with PenOp (See Note 1) to provide nonrecurring maintenance services from pre-existing PenOp contracts in the aggregate amount of $1.5 million. The Company recorded $877 and $352 in nonrecurring maintenance services during the fourth quarter of 2000 and the first quarter of 2001, respectively, (net). The Company previously entered into a separate transaction, to acquire the intellectual property rights from PenOp.

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

6. Stockholders' Equity

Common Stock Options

        The Company adopted two stock option plans in 1991 (the 1991 Stock Option Plan and the 1991 Non-discretionary Plan, collectively, the "1991 Plans"). Incentive and non-qualified options under the 1991 Plans may be granted to employees, officers, and consultants of the Company. As amended, there are 2,050 shares of Common Stock authorized for issuance under the 1991 Plans. At December 31, 2001, 63 options are available for grant. In late 1994 the Company adopted the 1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan allows directors, officers and employees to be eligible for grants of incentive and non-qualified stock options. In May 1997, the stockholders approved an increase of 1,000 shares to the number of shares authorized for issuance under the 1994 Plan. Accordingly, a total of 6,000 shares of Common Stock are authorized for issuance under the 1994 Plan. The exercise prices of options under the 1994 Plan are determined by a committee of the Board of Directors, but, in the case

F-25

of an incentive stock option, the exercise price may not be less than 100% of the fair market value of the underlying Common Stock on the date of grant. Non-qualified options may not have an exercise price of less than 85% of the fair market value of the underlying Common Stock on the date of grant. Options under the 1994 Plan generally vest over four years. For those options which vest over four years, 20% of the total options granted vest on the first anniversary of the date of grant, and an additional 20%, 20%, and 40% of the total options granted vest on the second, third, and fourth anniversaries of the date of grant, respectively. Options under the 1994 Plan are generally exercisable over a period not to exceed seven years. At December 31, 2001, there were 433 options available for grant under the 1994 Plan.

        In December 1994, for services rendered options to purchase 180 shares of Common Stock at $0.50 per share were granted to three directors of the Company under non-plan option agreements. In addition, a non-plan option to purchase 100 shares of Common Stock at $0.50 per share was granted on December 28, 1994 to a newly elected director. The newly elected director also received an option, vesting one year from date of grant, to purchase 50 shares of Common Stock at an exercise price of $0.50 per share pursuant to the Company's 1991 Non-discretionary Plan. The non-plan options generally vest over four years. For those non-plan options which vest over four years, 20% of the total non-plan options granted vest on the first anniversary of the date of grant and an additional 20%, 20%, and 40% of the total non-plan options granted vest on the second, third, and fourth anniversaries of the date of grant, respectively. Non-plan options are generally exercisable over a period not to exceed seven years. As of December 31, 2001, 3,585 non-plan options were outstanding with a weighted average exercise price of $0.88 per share. Of such non-plan options, 3,167 were exercisable at December 31, 2001 with a weighted average exercise price of $0.89 per share.

        In June 1999, the Company adopted and the shareholders approved a stock option plan (the "1999 Plan"). Incentive and non-qualified options under the 1999 Plan may be granted to employees, officers, and consultants of the Company. There are 2,000 shares of Common Stock authorized for issuance under the 1999 Plan. The options have a ten year life and generally vest quarterly over three years. At December 31, 2001, there were 1,035 shares available for future grants.

Common Stock Options

        Information with respect to the Company's 1991 Plans the 1994 Plan and the 1999 Plan is summarized below:

	Year Ended December 31,
	2001					2000
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding at beginning of period		3,257		$	1.54		3,544		$	1.02
Granted		1,367		$	1.21		947		$	3.19
Exercised		(384	)	$	0.90		(757	)	$	0.85
Forfeited		(798	)	$	1.53		(477	)	$	2.07
Outstanding at period end		3,442		$	1.48		3,257		$	1.54
Options exercisable at period end		2,208		$	1.35		1,150		$	1.27
Weighted average grant-date fair value of options granted during the period	$	0.98				$	1.54

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The following table summarizes information about stock options outstanding under the 1991 Plans, the 1994 Plan and the 1999 Plan at December 31, 2001:

Range of Exercise Prices		Options Outstanding	Remaining Contractual Life (Years)	Weighted Average Exercise Price
$	0.00 — $0.50	24	3.8	$	0.47
$	0.51 — $2.00	2,812	6.2	$	1.11
$	2.01 — $2.99	58	7.8	$	2.32
$	3.00 — $7.50	548	8.3	$	3.35
		3,442

Common Stock Options

        The following table summarizes information about stock options exercisable under the 1991 Plans, the 1994 Plan and the 1999 Plan at December 31, 2001:

Range of Exercise Prices		Options Exercisable	Weighted Average Exercise Price
$	0.00 — $0.50	12	$	0.47
$	0.51 — $2.00	1,862	$	1.03
$	2.01 — $2.99	56	$	2.30
$	3.00 — $7.50	278	$	3.35
		2,208

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

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

		2001			2000			1999
Net loss available to stockholders:
	As reported	$	(3,215	)	$	(1,799	)	$	(1,740	)
	Pro forma	$	(4,743	)	$	(3,937	)	$	(3,316	)
Basic and diluted net loss per share available to stockholders:
	As reported	$	(0.04	)	$	(0.02	)	$	(0.02	)
	Pro forma	$	(0.05	)	$	(0.05	)	$	(0.04	)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the applicable periods: risk-free interest rate of 4.1% for 2001, 4.7% for 2000, and 5.4% for 1999, an expected life of

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6 years for 2001, 3.5 years for 2000, and 4 years for 1999, respectively; expected volatility of 100% all periods and dividend yield of 0% for all periods.

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

Warrants

        On March 28, 1997, and effective as of December 31, 1996, holders constituting 100% of the then issued and outstanding shares of Series A Preferred Stock executed a waiver to certain provisions of the registration rights agreement (the "Agreement") entered into in connection with the December Private Placement. Under the waiver, these holders irrevocably waived any redemption obligation of the Company with respect to its Series A Preferred Stock in exchange for the issuance to the holders of warrants to purchase the 300 shares of the Company's Common Stock, allocated amongst the holders on a pro-rata basis. The warrants expire five years from the date of issuance and have an exercise price of $2.00 per share, subject to adjustment for anti-dilution. The Company has ascribed a value of $484 to these warrants, which was recorded as an expense in the Company's statement of operations during the first quarter of 1997. The fair value ascribed to the warrants was estimated on the date of issuance using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 6.60%; expected life of 5 years; expected volatility of 104%; and expected dividend yield of 0%.

        On October 20, 1999, in connection with the 1999 Loan (as defined below in Note 6) the Company issued to a charitable remainder annuity trust warrants to purchase 300 shares of the Company's common stock. The warrants expire two years from the effective date of issuance and have an exercise price of $1.09 per share. The Company ascribed a value of $179 to these warrants, which were amortized to the Company's results of operations over the life of the warrant. The fair value ascribed to the warrants was estimated on the date of issuance using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 5.50%; expected life of 2 years; expected volatility of 99%; and expected dividend yield of 0%.

        Warrants to purchase a total of 237 shares of Common Stock were outstanding as of December 31, 2001, and have a weighted average remaining contractual life of 3 months and a weighted average exercise price of $2.00 per share.

        As of December 31, 2001, 7,264 shares of Common Stock were reserved for issuance upon exercise of outstanding options and warrants.

7. Commitments

Operating Lease Commitments

        The Company currently leases its principal facilities (the "Principal Offices) in Redwood Shores, California, pursuant to a sublease that expires in 2006. In addition, the Company subleased to third parties certain space adjacent to the Principal Offices through August 2001. The Joint Venture leases approximately 1,000 square feet in Nanjing, China. In addition to monthly rent, the U.S. facilities are subject to additional rental payments for utilities and other costs above the base amount. Facilities rent expense was approximately $443, $390, and $376 in 2001, 2000, and 1999, respectively. Sublease income was approximately $35, $104, and $209 for the years ended December 31, 2001, 2000, and 1999, respectively.

F-28

        Future minimum lease payments under noncancelable operating leases are approximately, $397,$408,$419, $430, and $407 for the years ending December 31, 2002, 2003, 2004, 2005 and 2006, respectively. The Company's rent expense was reduced by approximately $35 in 2001 in connection with the subleases described above. Future minimum payments required under capital leases, which expire in 2002, were insignificant at December 31, 2001.

8. Income Taxes

        As of December 31, 2001, the Company had federal net operating loss carryforwards available to reduce taxable income through 2012 of approximately $53,179. The Company also had federal research and investment tax credit carryforwards of approximately $315 which expire at various dates through 2010.

F-29

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

	2001			2000
Deferred tax assets:
Net operating loss carryforwards	$	21,272		$	20,192
Credit carryforwards		315			315
Deferred income		13			13
Other, net		775			782
Total deferred tax assets		22,375			21,602
Valuation allowance		(22,375	)		(21,602	)
Net deferred tax assets	$	—		$	—

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

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

9. Segment Information

        In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of An Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises information regarding the reporting of operating segments and was required to be adopted in periods beginning after December 15, 1997. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company adopted SFAS 131 for the year ended December 31, 1998 and the Company's information has been stratified into two Segments—Handwriting recognition software and Systems integration.

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

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

F-30

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

		Handwriting Recognition			Systems Integration			Total
2001 Revenues		$	4,546		$	1,401		$	5,947
	Loss from Operations	$	(2,842	)	$	(104	)	$	(2,946	)
	Total assets	$	8,662		$	1,410		$	10,072
	Depreciation and amortization	$	662		$	25		$	687
2000 Revenues		$	5,401		$	1,911		$	7,312
	Loss from Operations	$	(1,594	)	$	(13	)	$	(1,607	)
	Total assets	$	9,896		$	1,405			11,301
	Depreciation and amortization	$	310		$	18		$	328
1999 Revenues		$	4,898		$	1,620		$	6,518
	Loss from Operations	$	(1,078	)	$	(44	)	$	(1,722	)
	Total assets	$	3,523		$	1,440		$	4,963
	Depreciation and amortization	$	289		$	45		$	334

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

		Revenues						Long Lived Assets
		2001		2000		1999		2001		2000		1999
U.S.		$	4,223	$	5,401	$	4,898	$	6,113	$	6,430	$	261
China			1,724		1,911		1,620		44		66		83
	Total	$	5,947	$	7,312	$	6,518	$	6,157	$	6,496	$	344

        The Company's export sales from U.S. operations were 16%, 36%, and 16%, of total revenues in 2001, 2000, and 1999, respectively.

10. Statement of Cash Flows Data

		December 31,
		2001		2000		1999
Schedule of non-cash transactions:
	Non-cash compensation	$	46	$	89	$	—
	Equity securities issued for services	$	58	$	—	$	—
	Intellectual property acquired in exchange for 4,700 shares of the Company's common stock	$	—	$	5,728	$	—
	Fair market value of warrants in connection with long-term debt—related party	$	—	$	$—	$	176

Supplemental disclosure of cash flow information:

        Interest paid in 2001, 2000, and 1999 was $196, $187, and $4, respectively.

F-31

11. Employee Benefit Plans

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

12. Quarterly information (Unaudited)

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

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
2001 Unaudited
Net Sales	$	1,618		$	1,903		$	915		$	1,511		$	5,947
Gross profit	$	996		$	1,201		$	459		$	1,051		$	3,707
Income (loss) before income taxes, and minority interest	$	(741	)	$	(691	)	$	(1,228	)	$	(552	)	$	(3,212	)
Net income (loss)	$	(741	)	$	(693	)	$	(1,229	)	$	(552	)	$	(3,215	)
Basic and diluted income (loss) per share	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.04	)
2000 Unaudited
Net Sales	$	1,377		$	1,250		$	2,346		$	2,339		$	7,312
Gross profit	$	648		$	442		$	1,649		$	1,677		$	4,416
Income (loss) before income taxes, and minority interest	$	(889	)	$	(1,127	)	$	107		$	112		$	(1,797	)
Net income (loss)	$	(888	)	$	(1,127	)	$	106		$	110		$	(1,799	)
Basic and diluted income (loss) per share	$	(0.01	)	$	(0.01	)	$	(0.00	)	$	(0.00	)	$	(0.02	)
1999 Unaudited
Net Sales	$	1,247		$	1,436		$	1,966		$	1,869		$	6,518
Gross profit	$	617		$	903		$	831		$	850		$	3,201
Income (loss) before income taxes, and minority interest	$	(448	)	$	(380	)	$	(430	)	$	(482	)	$	(1,740	)
Net income (loss)	$	(448	)	$	(380	)	$	(430	)	$	(482	)	$	(1,740	)
Basic and diluted income (loss) per share	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.02	)

13. Subsequent event

        In February 2002, Mr. Guido DiGregorio, President & CEO was appointed Chairman, President & CEO. Prior to Mr. DiGregorio's appointment, Mr. Philip Sassower resigned his Chairmanship and board position and Mr. Jeffrey Steiner also resigned from the board.

F-32

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

Years Ended December 31, 1999, 2000, 2001

		Balance At Beginning Of Period		Charged to Costs and Expense		Deductions			Balance At End Of Period
Year ended December 31, 1999:
	Accounts receivable reserves	$	174	$	39	$	(200	)	$	13
Year ended December 31, 2000:
	Accounts receivable reserves	$	13	$	108	$	(3	)	$	118
Year ended December 31, 2001:
	Accounts receivable reserves	$	118	$	78	$	—		$	196

S-1

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

        The following table sets forth the costs and expenses, other than agent's commissions, payable by us in connection with the sale of common stock being registered. All amounts are estimates except the Securities and Exchange Commission filing fee.

Securities and Exchange Commission filing fee	$	540
Legal fees and expenses*	$	75,000
Accounting fees and expenses*	$	60,000
Printing and engraving expenses*	$	25,000
Miscellaneous*	$	19,460
Total	$	180,000

*

Indicates estimate for the purpose of this filing.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

        The Delaware General Corporation Law permits a corporation organized under it to indemnify its directors, officers, employees, and agents for various acts. Our articles of incorporation conform to the Delaware General Corporation Law. Our certificate of incorporation, as amended, is incorporated by reference as Exhibit 3.1 to this registration statement.

        In general, we may indemnify any officer, director, employee, or agent against expenses, fines, penalties, settlements, or judgments arising in connection with a legal proceeding to which this person is a party, if that person's actions were in good faith, were believed to be in our best interest, and were not unlawful. Indemnification is mandatory with respect to a director or officer who was wholly successful in defense of a proceeding. In all other cases, indemnification of a director, officer, employee, or agent requires the board of directors independent determination, independent legal counsel's determination, or a vote of the stockholders that the person to be indemnified met the applicable standard of conduct.

        The circumstances under which indemnification is granted in connection with an action brought on our behalf are generally the same as those mentioned above. However, with respect to actions against directors, indemnification is granted only with respect to reasonable expenses actually incurred in connection with the defense or settlement of the action. In these actions, the person to be indemnified must have acted in good faith and in a manner the person reasonably believed was in our best interest; the person must not have been adjudged liable to us; and the person must not have received an improper personal benefit.

        Indemnification may also be granted under the terms of agreements which may be entered into in the future according to a vote of stockholders or directors. In addition, we are authorized to purchase and maintain insurance which protects our officers and directors against any liabilities incurred in connection with their services in these positions. We may obtain an insurance policy in the future.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

        During the past three years, the registrant has issued and sold unregistered securities as set forth below. We did not utilize an underwriter in any of these transactions. The recipients of securities in each transaction represented their intention to acquire the securities without a view to the distribution

II-1

thereof. All the issued securities were restricted securities under Rule 144 and appropriate restrictive legends were affixed to the securities in each transaction:

•

In October 1999, the registrant entered into a loan agreement with a trust controlled by one of the registrant's executive officers and directors, In connection with that loan agreement, the registrant issued warrant to acquire 300,000 shares of the registrant's common stock. The loan and warrants were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.



•

In June 2001, the registrant entered into a loan agreement with a trust, the trustee of which was an executive officer and director of the registrant, pursuant to which the registrant issued a convertible promissory note in the principal amount of $3,000,000. The convertible note is convertible into shares of the registrant's common stock at the price of $2.00 per share. The convertible note was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended



•

In July 2002, the registrant entered into an Equity Line of Credit Agreement with a single investor. Under that agreement, the registrant may require the investor to acquire shares from time to time under certain conditions. The agreement, and the shares of common stock to be issued under the agreement, are exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

        The Financial Statements and Schedule I—Condensed Financial Information of Registrant and Schedule II—Valuation and Qualifying Accounts listed on the index on Page F-1 following are included herein by reference. All other schedules are omitted, either because they are not applicable or because the required information is shown in the financial statements or the notes thereto.

EXHIBITS

Number	Description
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	Amendment to the Company's Amended and Restated Certificate of Incorporation dated June 12, 1998, incorporated herein by reference to Exhibit 10.24 of the Company's 1998 Form 10-K (File No. 0-19301).
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).

II-2

4.1	1984 Stock Option Plan of the Company, as amended and restated as of October 15, 1987 and as amended by resolutions of the stockholders of the Company passed on August 15, 1989 and October 8, 1990 to increase the aggregate shares covered thereby to 1,000,000, incorporated herein by reference to Exhibit 4.4 to the Company's Registration Statement on Form 10 (File No. 0-19301).
4.2	Form of Stock Option Grant under 1984 Stock Option Plan, incorporated herein by reference to Exhibit 4.5 to the Company's Registration Statement on Form 10 (File No. 0-19301).
4.3	1991 Stock Option Plan of the Company, incorporated herein by reference to Exhibit 4.5 of the Company's Form S-1 dated December 23, 1991 (Registration No. 33-43879).
4.4	1991 Non-Discretionary Stock Option Plan, incorporated herein by reference to Exhibit 4.6 of the Company's Form S-1 dated December 23, 1991 (Registration No. 33-43879).
4.5	Form of Incentive Stock Option Grant under 1991 Stock Option Plan, incorporated herein by reference to Exhibit 4.7 of the Company's Form S-1 dated December 23, 1991 (Registration No. 33-43879).
4.6	Form of Non-Qualified Stock Option Grant under 1991 Stock Option Plan, incorporated herein by reference to Exhibit 4.8 of the Company's Form S-1 dated December 23, 1991 (Registration No. 33-43879).
4.7	Form of Stock Option Grant under 1991 Non-Discretionary Stock Option Plan, incorporated herein by reference to Exhibit 4.9 of the Company's Form S-1 dated December 23, 1991 (Registration No. 33-43879).
4.8	1994 Stock Option Plan, incorporated herein by reference to Exhibit G of the Company's Second Amended Disclosure Statement filed on Form 8-K dated October 19, 1994 and approved by shareholders on November 14, 1994.
4.9	Form of Warrant of the Company dated March 28, 1997 issued in connection with the Waiver by and among the Company and the signatories thereto, incorporated herein by reference to Exhibit 4.9 of the Company's 1996 Form 10-K (File No. 0-19301).
4.10	1999 Stock Option Plan, incorporated herein by reference to Exhibit A of the Company's Definitive Proxy Statement filed on May 4, 1999 and approved by shareholders on June 7, 1999.
4.11	Form of Registration Rights Agreement between the Company and the Purchasers, dated November 28, 1995, incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
4.12	Form of Warrant of the Company issued to Libra Investments, Inc. on November 28, 1995, incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
4.13	Form of Registration Rights Agreement between the Company and Libra Investments, Inc., dated November 28, 1995, incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
4.14	Form of Subscription Agreement between the Company and various investors, dated June 13, 1996, incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated June 27, 1996.
4.15	Form of Registration Rights Agreement between the Company and various investors, dated June 13, 1996, incorporated herein by reference to Exhibit 2 of the Company's Form 8-K dated June 27, 1996.
4.16	Form of Preferred Stock Investment Agreement, dated as of December 31, 1996, between the Company and the investors listed on Schedule 1 thereto, incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated December 31, 1996.

II-3

4.17	Form of Registration Rights Agreement between the Company and the Investors Listed on Schedule 1 thereto, incorporated herein by reference to Exhibit 2 of the Company's Form 8-K dated December 31, 1996.
4.18	Form of Certificate of Designation of the Company with respect to the 5% Cumulative Convertible Preferred Stock, incorporated herein by reference to Exhibit 3 of the Company's Form 8-K dated December 31, 1996.
4.19	Form of Subscription Agreement between the Company and each subscriber, dated as of November 25, 1997, incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated December 3, 1997.
4.20	Certificate of Designations of the Company with respect to the Series B 5% Cumulative Convertible Preferred Stock, incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K dated November 13, 1997.
4.21	Form of Registration Rights Agreement, by and among the Company and the signatories thereto, dated as of November 25, 1997, incorporated herein by reference to Exhibit 10.3 to the Company's Form 8-K dated November 13, 1997.
4.22	Amendment to the Company's Certificate of Designation with respect to the 5% Cumulative Convertible Preferred Stock dated June 12, 1998, incorporated herein by reference to Exhibit 10.23 of the Company's 1998 Form 10-K (File No. 0-19301).
*4.23	Registration Rights Agreement dated July 23, 2002 by and between the Company and Cornell Capital Partners, LP.
4.24	Registration Rights Agreement dated June 19, 2001, by and between the Company and The Philip S. Sassower 1996 Charitable Remainder Annuity Trust, incorporated by reference to the Company's Form 10-K for the year ended December 31, 2001 (File No. 0-19301).
**5.1	Opinion of Davis Wright Tremaine LLP re: legality.
+10.1	Licensing and Development Agreement for Use and Marketing of Program Materials dated September 25, 1992 between the Company and International Business Machines Corporation, incorporated herein by reference to Exhibit 10.13 of the Company's 1992 Form 10-K (File No. 0-19301)
10.2	Standby Stock Purchase Agreement between the Company and Philip Sassower dated October 3, 1994, incorporated herein by reference to Exhibit 10.13 of the Company's 1994 Form 10-K (File No. 0-19301)
10.3	Form of Subscription Agreement between the Company and the Purchasers, dated November 28, 1995, incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
10.4	Waiver, dated March 26, 1997, effective December 31, 1996, by and among the Company and the signatories thereto, incorporated herein by reference to Exhibit 10.19 of the Company's 1996 Form 10-K (File No. 0-19301).
10.5	Employment Agreement dated August 14, 1998 between James Dao and the Company, incorporated herein by reference to Exhibit 10.25 of the Company's 1998 Form 10-K (File No. 0-19301).
++10.6	Software Development and License Agreement dated December 4, 1998 between Ericsson Mobile Communications AB and the Company, incorporated herein by reference to Exhibit 10.26 of the Company's 1998 Form 10-K (File No. 0-19301).
10.7	Loan and Warrant Agreement dated October 20, 1999 between the Company and the Philip S. Sassower 1996 Charitable Remainder Annuity Trust, incorporated herein by reference to Exhibit 10.20 to the Company's December 31, 1999 Form 10-K (File No. 0-19301).
10.8	Asset Purchase Agreement between the Company and PenOp Ltd and PenOp Inc., incorporated herein by reference to the Company's Form 8-K dated October 6, 2000.

II-4

10.9	Loan dated June 19, 2001 between the Company and the Philip S. Sassower 1996 Charitable Remainder Annuity Trust, incorporated by reference to the Company's Form 10K for the year ended December 31, 2001.
*10.10	Equity Line of Credit Agreement dated July 23, 2002.
*10.10.1	Amendment to Equity Line of Credit Agreement.
*21.1	Schedule of Subsidiaries.
*23.1	Consent of Stonefield Josephson, Inc., Independent Accountants
**23.2	Consent of Davis Wright Tremaine LLP (filed as part of Exhibit 5).
24	Power of Attorney (See page II-7).

*

Filed herewith.

**

To be filed by amendment.

+

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

++

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

ITEM 17. UNDERTAKINGS

        The undersigned registrant hereby undertakes:

(1)

To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i)

To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

(ii)

To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and

(iii)

To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

(2)

That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and

(3)

To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

II-5

        Insofar as indemnification by the registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by a director, officer, or controlling person in connection with the securities being registered hereunder, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

        The undersigned registrant hereby further undertakes that:

(1)

For the purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

(2)

For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-6

SIGNATURES

        Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized Portland, Oregon, on October 31, 2002.

COMMUNICATION INTELLIGENCE CORPORATION
By:	/s/  GUIDO DIGREGORIO
Guido DiGregorio CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER

POWER OF ATTORNEY

        Each of the undersigned hereby constitutes and appoints Guido DiGregorio and Frank Dane, or either of them, each with full power of substitution and resubstitution, such person's true and lawful attorney-in-fact and agent, in such person's name and on such person's behalf, in any and all capacities, to sign any and all amendments to this Registration Statement, including any post-effective amendments, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission.

        Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below on the 31st day of October, 2002, by the following persons in the capacities indicated:

Signature	Title
/s/  GUIDO DIGREGORIO
Guido DiGregorio	Chairman and Chief Executive Officer (Principal Executive Officer)
/s/  FRANK DANE
Frank Dane	Chief Financial Officer (Principal Financial and Accounting Officer)
/s/  MICHAEL FARESE
Michael Farese	Director
/s/  LOUIS P. PANETTA
Louis P. Panetta	Director
/s/  C. B. SUNG
C. B. Sung	Director

II-7

Exhibit Index

Number	Description
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	Amendment to the Company's Amended and Restated Certificate of Incorporation dated June 12, 1998, incorporated herein by reference to Exhibit 10.24 of the Company's 1998 Form 10-K (File No. 0-19301).
3.3	By-laws of the Company adopted on October 6, 1986, incorporated herein by reference to Exhibit 3.5 to the Company's Registration Statement on Form 10 (File No. 0-19301).
4.1	1984 Stock Option Plan of the Company, as amended and restated as of October 15, 1987 and as amended by resolutions of the stockholders of the Company passed on August 15, 1989 and October 8, 1990 to increase the aggregate shares covered thereby to 1,000,000, incorporated herein by reference to Exhibit 4.4 to the Company's Registration Statement on Form 10 (File No. 0-19301).
4.2	Form of Stock Option Grant under 1984 Stock Option Plan, incorporated herein by reference to Exhibit 4.5 to the Company's Registration Statement on Form 10 (File No. 0-19301).
4.3	1991 Stock Option Plan of the Company, incorporated herein by reference to Exhibit 4.5 of the Company's Form S-1 dated December 23, 1991 (Registration No. 33-43879).
4.4	1991 Non-Discretionary Stock Option Plan, incorporated herein by reference to Exhibit 4.6 of the Company's Form S-1 dated December 23, 1991 (Registration No. 33-43879).
4.5	Form of Incentive Stock Option Grant under 1991 Stock Option Plan, incorporated herein by reference to Exhibit 4.7 of the Company's Form S-1 dated December 23, 1991 (Registration No. 33-43879).
4.6	Form of Non-Qualified Stock Option Grant under 1991 Stock Option Plan, incorporated herein by reference to Exhibit 4.8 of the Company's Form S-1 dated December 23, 1991 (Registration No. 33-43879).
4.7	Form of Stock Option Grant under 1991 Non-Discretionary Stock Option Plan, incorporated herein by reference to Exhibit 4.9 of the Company's Form S-1 dated December 23, 1991 (Registration No. 33-43879).
4.8	1994 Stock Option Plan, incorporated herein by reference to Exhibit G of the Company's Second Amended Disclosure Statement filed on Form 8-K dated October 19, 1994 and approved by shareholders on November 14, 1994.

4.9	Form of Warrant of the Company dated March 28, 1997 issued in connection with the Waiver by and among the Company and the signatories thereto, incorporated herein by reference to Exhibit 4.9 of the Company's 1996 Form 10-K (File No. 0-19301).
4.10	1999 Stock Option Plan, incorporated herein by reference to Exhibit A of the Company's Definitive Proxy Statement filed on May 4, 1999 and approved by shareholders on June 7, 1999.
4.11	Form of Registration Rights Agreement between the Company and the Purchasers, dated November 28, 1995, incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
4.12	Form of Warrant of the Company issued to Libra Investments, Inc. on November 28, 1995, incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
4.13	Form of Registration Rights Agreement between the Company and Libra Investments, Inc., dated November 28, 1995, incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
4.14	Form of Subscription Agreement between the Company and various investors, dated June 13, 1996, incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated June 27, 1996.
4.15	Form of Registration Rights Agreement between the Company and various investors, dated June 13, 1996, incorporated herein by reference to Exhibit 2 of the Company's Form 8-K dated June 27, 1996.
4.16	Form of Preferred Stock Investment Agreement, dated as of December 31, 1996, between the Company and the investors listed on Schedule 1 thereto, incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated December 31, 1996.
4.17	Form of Registration Rights Agreement between the Company and the Investors Listed on Schedule 1 thereto, incorporated herein by reference to Exhibit 2 of the Company's Form 8-K dated December 31, 1996.
4.18	Form of Certificate of Designation of the Company with respect to the 5% Cumulative Convertible Preferred Stock, incorporated herein by reference to Exhibit 3 of the Company's Form 8-K dated December 31, 1996.
4.19	Form of Subscription Agreement between the Company and each subscriber, dated as of November 25, 1997, incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated December 3, 1997.
4.20	Certificate of Designations of the Company with respect to the Series B 5% Cumulative Convertible Preferred Stock, incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K dated November 13, 1997.
4.21	Form of Registration Rights Agreement, by and among the Company and the signatories thereto, dated as of November 25, 1997, incorporated herein by reference to Exhibit 10.3 to the Company's Form 8-K dated November 13, 1997.
4.22	Amendment to the Company's Certificate of Designation with respect to the 5% Cumulative Convertible Preferred Stock dated June 12, 1998, incorporated herein by reference to Exhibit 10.23 of the Company's 1998 Form 10-K (File No. 0-19301).
*4.23	Registration Rights Agreement dated July 23, 2002 by and between the Company and Cornell Capital Partners, LP.

4.24	Registration Rights Agreement dated June 19, 2001, by and between the Company and The Philip S. Sassower 1996 Charitable Remainder Annuity Trust, incorporated by reference to the Company's Form 10-K for the year ended December 31, 2001 (File No. 0-19301).
**5.1	Opinion of Davis Wright Tremaine LLP re: legality.
+10.1	Licensing and Development Agreement for Use and Marketing of Program Materials dated September 25, 1992 between the Company and International Business Machines Corporation, incorporated herein by reference to Exhibit 10.13 of the Company's 1992 Form 10-K (File No. 0-19301)
10.2	Standby Stock Purchase Agreement between the Company and Philip Sassower dated October 3, 1994, incorporated herein by reference to Exhibit 10.13 of the Company's 1994 Form 10-K (File No. 0-19301)
10.3	Form of Subscription Agreement between the Company and the Purchasers, dated November 28, 1995, incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
10.4	Waiver, dated March 26, 1997, effective December 31, 1996, by and among the Company and the signatories thereto, incorporated herein by reference to Exhibit 10.19 of the Company's 1996 Form 10-K (File No. 0-19301).
10.5	Employment Agreement dated August 14, 1998 between James Dao and the Company, incorporated herein by reference to Exhibit 10.25 of the Company's 1998 Form 10-K (File No. 0-19301).
++10.6	Software Development and License Agreement dated December 4, 1998 between Ericsson Mobile Communications AB and the Company, incorporated herein by reference to Exhibit 10.26 of the Company's 1998 Form 10-K (File No. 0-19301).
10.7	Loan and Warrant Agreement dated October 20, 1999 between the Company and the Philip S. Sassower 1996 Charitable Remainder Annuity Trust, incorporated herein by reference to Exhibit 10.20 to the Company's December 31, 1999 Form 10-K (File No. 0-19301).
10.8	Asset Purchase Agreement between the Company and PenOp Ltd and PenOp Inc., incorporated herein by reference to the Company's Form 8-K dated October 6, 2000.
10.9	Loan dated June 19, 2001 between the Company and the Philip S. Sassower 1996 Charitable Remainder Annuity Trust, incorporated by reference to the Company's Form 10-K for the year ended December 31, 2001. (File No. 0-19301).
*10.10	Equity Line of Credit Agreement dated July 23, 2002.
*10.10.1	Amendment to Equity Line of Credit Agreement.
*21.1	Schedule of Subsidiaries.
*23.1	Consent of Stonefield Josephson, Inc., Independent Accountants
**23.2	Consent of Davis Wright Tremaine LLP (filed as part of Exhibit 5).
24	Power of Attorney (See page II-7).

*

Filed herewith.

**

To be filed by amendment.

+

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

++

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

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TABLE OF CONTENTS
PROSPECTUS SUMMARY
FORWARD LOOKING STATEMENTS
RISK FACTORS
SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED QUARTERLY FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollars in thousands, except per share data)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 and 2001 (unaudited)
EQUITY LINE OF CREDIT AGREEMENT
DESCRIPTION AND PRICE RANGE OF CAPITAL STOCK
CAPITALIZATION
DILUTION
USE OF PROCEEDS
SELLING STOCKHOLDERS
PLAN OF DISTRIBUTION
BUSINESS (dollars in thousands)
DIRECTORS
EXECUTIVE OFFICERS
EXECUTIVE COMPENSATION
Summary Compensation Table
Option Grants in 2001
Aggregate Option Exercises in 2001 and Year-End Option Values
Audit Committee Report
COMPENSATION AND STOCK OPTION COMMITTEE REPORT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SHARES ELIGIBLE FOR FUTURE SALE
ELIMINATION OF DIRECTOR LIABILITY
INDEMNIFICATION OF OFFICERS AND DIRECTORS
WHERE YOU CAN FIND MORE INFORMATION
LEGAL MATTERS
EXPERTS
TRANSFER AGENT AND WARRANT AGENT
Index to financial statements
Communication Intelligence Corporation and Subsidiary Condensed Consolidated Balance Sheets (In thousands)
Communication Intelligence Corporation and Subsidiary Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except per share amounts)
Communication Intelligence Corporation and Subsidiary Consolidated Statements of Changes in Stockholders' Equity (Unaudited) (In thousands, except per share amounts)
Communication Intelligence Corporation and Subsidiary Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Communication Intelligence Corporation and Subsidiary Notes to Unaudited Condensed Consolidated Financial Statements (In thousands, except per share amounts)
Independent Auditors Report
Communication Intelligence Corporation Consolidated Balance Sheets (In thousands, except par value amounts)
Communication Intelligence Corporation Consolidated Statements of Operations (In thousands, except per share amounts)
Communication Intelligence Corporation Consolidated Statements of Changes in Stockholders' Equity (Deficit) (In thousands)
Communication Intelligence Corporation Consolidated Statements of Cash Flows (In thousands)
SCHEDULE II Communication Intelligence Corporation Valuation and Qualifying Accounts and Reserves (In thousands) Years Ended December 31, 1999, 2000, 2001
PART II INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

EXHIBITS

ITEM 17. UNDERTAKINGS

SIGNATURES
Exhibit Index

EX-4.23

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Exhibit 4.23

Registration Rights Agreement between
Communications Intelligence Corporation
and
Cornell Capital Partners, LP, a Delaware limited partnership

REGISTRATION RIGHTS AGREEMENT

REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of July 23, 2002 by and between COMMUNICATION INTELLIGENCE CORP., a Delaware corporation, with its principal office located at 275 Shoreline Drive Redwood Shores, California 94065 (the "Company"), and CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor").

WHEREAS:

        A.    In connection with the Equity Line of Credit Agreement by and between the parties hereto of even date herewith (the "Equity Line of Credit Agreement"), the Company has agreed, upon the terms and subject to the conditions of the Equity Line of Credit Agreement, to issue and sell to the Investor that number of shares of the Company's common stock, par value $            per share (the "Common Stock"), which can be purchased pursuant to the terms of the Equity Line Credit Agreement for an aggregate purchase price of up to Fifteen Million Dollars ($15,000,000). Capitalized terms not defined herein shall have the meaning ascribed to them in the Equity Line of Credit Agreement.

        B.    To induce the Investor to execute and deliver the Equity Line of Credit Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations there under, or any similar successor statute (collectively, the "1933 Act"), and applicable state securities laws.

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investor hereby agree as follows:

        1.    DEFINITIONS.

        As used in this Agreement, the following terms shall have the following meanings:

        a.    "Person" means a corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency.

        b.    "Register," "registered," and "registration" refer to a registration effected by preparing and filing one or more Registration Statements (as defined below) in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous or delayed basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement(s) by the United States Securities and Exchange Commission (the "SEC").

        c.    "Registrable Securities" means the shares of Common Stock issuable to Investors pursuant to the Equity Line of Credit Agreement.

        d.    "Registration Statement" means a registration statement under the 1933 Act which covers the Registrable Securities.

        2.    REGISTRATION.

        a.    Mandatory Registration.    The Company shall prepare and file with the SEC a Registration Statement on Form S-3 or on such other form as is available. The Company shall cause such Registration Statement to be declared effective by the SEC prior to the first sale to Investor of the Company's Common Stock pursuant to the Equity Line of Credit Agreement.

        b.    Sufficient Number of Shares Registered.    In the event the number of shares available under a Registration Statement filed pursuant to Section 2(a) is insufficient to cover all of the Registrable Securities which the Investor has purchased pursuant to the Equity Line of Credit Agreement, the Company shall amend the Registration Statement, or file a new Registration Statement (on the short form available therefore, if applicable), or both, so as to cover all of such Registrable Securities which the Investor has purchased pursuant to the Equity Line of Credit

Agreement as soon as practicable, but in any event not later than fifteen (15) days after the necessity therefore arises. The Company shall use it best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. For purposes of the foregoing provision, the number of shares available under a Registration Statement shall be deemed "insufficient to cover all of the Registrable Securities" if at any time the number of Registrable Securities issuable on an Advance Notice Date is greater than the number of shares available for resale under such Registration Statement.

        3.    RELATED OBLIGATIONS.

        a.    The Company shall keep the Registration Statement effective pursuant to Rule 415 at all times until the earlier of the date on which the Investor shall be able to sell all Registrable Securities without regard to the volume limitations under Rule 144 or the Investor shall have sold all the Registrable Securities covered by such Registration Statement (the "Registration Period"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading.

        b.    The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until the earlier of the date on which the Investor shall be able to sell all Registrable Securities without regard to the volume limitations under Rule 144 or all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such Registration Statement. In the case of amendments and supplements to a Registration Statement which are required to be filed pursuant to this Agreement (including pursuant to this Section 3(b)) by reason of the Company's filing a report on Form 10K, Form 10Q or Form 8-K or any analogous report under the Securities Exchange Act of 1934, as amended (the "1934 Act"), the Company shall have incorporated such report by reference into the Registration Statement, if applicable, or shall file such amendments or supplements with the SEC on the same day on which the 1934 Act report is filed which created the requirement for the Company to amend or supplement the Registration Statement.

        c.    The Company shall furnish to the Investor without charge, (i) at least one copy of such Registration Statement as declared effective by the SEC and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference, all exhibits and each preliminary prospectus, (ii) ten (10) copies of the final prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as such Investor may reasonably request) and (iii) such other documents as such Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by such Investor.

        d.    The Company shall use its best efforts to (i) register and qualify the Registrable Securities covered by a Registration Statement under such other securities or "blue sky" laws of such jurisdictions in the United States as the Investor reasonably requests, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection

therewith or as a condition thereto to (w) make any change to its certificate of incorporation or by-laws, (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify the Investor of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or "blue sky" laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threat of any proceeding for such purpose.

        e.    As promptly as practicable after becoming aware of such event or development, the Company shall notify the Investor in writing of the happening of any event or development as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (provided that in no event shall such notice contain any material, nonpublic information), and promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to each Investor. The Company shall also promptly notify the Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to the Investor by facsimile on the same day of such effectiveness), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, and (iii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate.

        f.      The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction within the United States of America and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify the Investor of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose.

        g.    At the reasonable request of the Investor, the Company shall furnish to the Investor, on the date of the effectiveness of the Registration Statement and thereafter from time to time on such dates as the Investor may reasonably request (i) a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, and (ii) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the Investor.

        h.    The Company shall make available for inspection by (i) the Investor and (ii) one firm of accountants or other agents retained by the Investor (collectively, the "Inspectors") all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably deemed necessary by each Inspector, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request; provided, however, that each Inspector shall agree, and the Investor hereby agrees, to hold in strict confidence and shall not make any disclosure (except to an Investor) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available

to the public other than by disclosure in violation of this or any other agreement of which the Inspector and the Investor has knowledge. The Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential.

        i.      The Company shall hold in confidence and not make any disclosure of information concerning the Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning the Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to the Investor and allow the Investor, at the Investor's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information.

        j.      The Company shall use its best efforts either to cause all the Registrable Securities covered by a Registration Statement to be listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange or to secure the inclusion for quotation on the National Association of Securities Dealers, Inc., Smallcap for such Registrable Securities. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(j).

        k.    The Company shall cooperate with the Investor to the extent applicable, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the Investor may reasonably request and registered in such names as the Investor may request.

        l.      The Company shall use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities.

        m.    The Company shall otherwise use its best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder.

        n.    Within two (2) business days after a Registration Statement which covers Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with copies to the Investor) confirmation that such Registration Statement has been declared effective by the SEC in the form attached hereto as Exhibit A.

        o.    The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investors of Registrable Securities pursuant to a Registration Statement.

        4.    OBLIGATIONS OF THE INVESTOR.

        The Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e), the Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until the Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(e) or receipt of notice that no supplement or amendment is

required. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended certificates for shares of Common Stock to a transferee of the Investor in accordance with the terms of the Equity Line of Credit Agreement in connection with any sale of Registrable Securities with respect to which the Investor has entered into a contract for sale prior to the Investor's receipt of a notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e) and for which the Investor has not yet settled.

        5.    EXPENSES OF REGISTRATION.

        All expenses incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers, legal and accounting fees shall be paid by the Company.

        6.    INDEMNIFICATION.

        With respect to Registrable Securities which are included in a Registration Statement under this Agreement:

        a.    To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend the Investor, the directors, officers, partners, employees, agents, representatives of, and each Person, if any, who controls the Investor within the meaning of the 1933 Act or the 1934 Act (each, an "Indemnified Person"), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys' fees, amounts paid in settlement or expenses, joint or several (collectively, "Claims") incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto ("Indemnified Damages"), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered ("Blue Sky Filing"), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading; or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation there under relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). The Company shall reimburse the Investor and each such controlling person promptly as such expenses are incurred and are due and payable, for any legal fees or disbursements or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (x) shall not apply to a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto; (y) shall not be available to the extent such Claim is based on a failure of the Investor to deliver or to cause to be delivered the prospectus made available by the Company, if such prospectus was timely made available by the Company pursuant to Section 3(e); and (z) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect

regardless of any investigation made by or on behalf of the Indemnified Person. In connection with a Registration Statement, the Investor agrees to indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement and each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (each an "Indemnified Party"), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or is based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by the Investor expressly for use in connection with such Registration Statement; and, subject to Section 6(d), the Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to the Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the prospectus was corrected and such new prospectus was delivered to the Investor prior to the Investor's use of the prospectus to which the Claim relates.

        b.    To the fullest extent permitted by law, the Investor agrees to indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement and each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (each an "Indemnified Party"), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or is based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by the Investor expressly for use in connection with such Registration Statement; and, subject to Section 6(d), the Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to the Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the prospectus was corrected and such new prospectus was delivered to the Investor prior to the Investor's use of the prospectus to which the Claim relates.

        c.    Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses of not more than one counsel for such Indemnified Person or Indemnified Party to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its prior written consent; provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the prior written consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such claim or litigation. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action.

        d.    The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred.

        e.    The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law.

        7.    CONTRIBUTION.

        To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (ii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities.

        8.    REPORTS UNDER THE 1934 ACT.

        With a view to making available to the Investor the benefits of Rule 144 promulgated under the 1933 Act or any similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144") the Company agrees to:

        a.    make and keep public information available, as those terms are understood and defined in Rule 144;

        b.    file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 6.3 of the Equity Line of Credit Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and

        c.    furnish to the Investor so long as the Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without registration.

        9.    AMENDMENT OF REGISTRATION RIGHTS.

        Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Investor. Any amendment or waiver effected in accordance with this Section 9 shall be binding upon the Investor and the Company. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of this Agreement unless the same consideration also is offered to all of the parties to this Agreement.

        10.  MISCELLANEOUS.

        a.    A Person is deemed to be a holder of Registrable Securities whenever such Person owns or is deemed to own of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities.

        b.    Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one business day after deposit with a nationally recognized overnight

delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

If to the Company, to:	Communication Intelligence Corp.
	275 Shoreline Drive—Suite 520 Redwood Shores, CA 94065 Attention: Frank Dane Telephone: 650-802-7737 Facsimile: 419-735-7922
With a copy to:	Davis Wright Tremaine LLP 1300 S.W. Fifth Avenue, 23d Floor Portland, Oregon 97204 Attention: David C. Baca Telephone: (503) 241-2300 Facsimile: (503) 778-5299
If to the Investor, to:	Cornell Capital Partners, LP
	101 Hudson Street—Suite 3606 Jersey City, NJ 07302 Attention:        Mark Angelo                         Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266
With copy to:	Butler Gonzalez LLP 1000 Stuyvesant Avenue—Suite 6 Union, NJ 07083 Attention:        David Gonzalez, Esq. Telephone: (908) 810-8588 Facsimile: (908) 810-0973

        Any party may change its address by providing written notice to the other parties hereto at least five days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively.

        c.    Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.

        d.    The corporate laws of the State of Delaware shall govern all issues concerning the relative rights of the Company and the Investor. All other questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New Jersey, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New Jersey or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New Jersey. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the Superior Courts of the State of New Jersey, sitting in Hudson County, New Jersey and the Federal District Court for the District of New Jersey sitting in Newark, New Jersey, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper.

Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

        e.    This Agreement, the Equity Line of Credit Agreement and the Escrow Agreement constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, the Equity Line of Credit Agreement and the Escrow Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof.

        f.      This Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto.

        g.    The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

        h.    This Agreement may be executed in identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

        i.      Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

        j.      The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party.

        k.    This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of day and year first above written.

COMPANY: COMMUNICATION INTELLIGENCE CORP.
By:
Name:
Title:
INVESTOR: CORNELL CAPITAL PARTNERS, LP
By: Yorkville Advisors, LLC
Its: General Partner
	By:
	Name:	Mark Angelo
	Title:	Portfolio Manager

EXHIBIT A

FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT

[TRANSFER AGENT]

Attn:

                Re: COMMUNICATION INTELLIGENCE CORP.

Ladies and Gentlemen:

        We are counsel to Communication Intelligence Corp., a Delaware corporation (the "Company"), and have represented the Company in connection with that certain Equity Line of Credit Agreement (the "Equity Line of Credit Agreement") entered into by and between the Company and Cornell Capital Partners, LP (the "Investor") pursuant to which the Company issued to the Investor shares of its Common Stock, par value $            per share (the "Common Stock"). Pursuant to the Equity Line of Credit Agreement, the Company also has entered into a Registration Rights Agreement with the Investor (the "Registration Rights Agreement") pursuant to which the Company agreed, among other things, to register the Registrable Securities (as defined in the Registration Rights Agreement) under the Securities Act of 1933, as amended (the "1933 Act"). In connection with the Company's obligations under the Registration Rights Agreement, on                                    , the Company filed a Registration Statement on Form            (File No. 333-                        ) (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") relating to the Registrable Securities which names the Investor as a selling stockholder thereunder.

        In connection with the foregoing, we advise you that a member of the SEC's staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement effective under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after telephonic inquiry of a member of the SEC's staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities are available for resale under the 1933 Act pursuant to the Registration Statement.

Very truly yours,

DAVIS WRIGHT TREMAINE LLP

By:

cc: Cornell Capital Partners, LP

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Exhibit 4.23

Registration Rights Agreement between Communications Intelligence Corporation and Cornell Capital Partners, LP, a Delaware limited partnership

EX-10.10

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Exhibit 10.10

Equity Line of Credit Agreement

EQUITY LINE OF CREDIT AGREEMENT

AGREEMENT dated as of the    day of July, 2002 (the "Agreement") between CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor"), and COMMUNICATION INTELLIGENCE CORP., a corporation organized and existing under the laws of the State of Delaware (the "Company").

WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Investor, from time to time as provided herein, and the Investor shall purchase from the Company up to Fifteen Million ($15,000,000) Dollars of the Company's common stock, par value $0.01 per share (the "Common Stock"), for a total purchase price of Fifteen Million ($15,000,000) Dollars; and

WHEREAS, such investments will be made in reliance upon the provisions of Regulation D ("Regulation D") of the Securities Act of 1933, as amended, and the regulations promulgated there under (the "Securities Act"), and or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the investments to be made hereunder.

WHEREAS, the Company has engaged Westrock Advisors, Inc. to act as the Company's exclusive placement agent in connection with the sale of the Company's Common Stock to the Investor hereunder.

NOW, THEREFORE, the parties hereto agree as follows:

ARTICLE 1.
Certain Definitions

        Section 1.1. "Advance" shall mean the portion of the Commitment Amount requested by the Company in the Advance Notice.

        Section 1.2. "Advance Date" shall mean the date Butler Gonzalez LLP/Wachovia Bank, N.A. Escrow Account is in receipt of the funds from the Investor and Butler Gonzalez LLP, as the Investor's Counsel, is in possession of Free Trading Shares from the Company and therefore an Advance by the Investor to the Company can be made and Butler Gonzalez LLP can release the Free Trading Shares to the Investor. No Advance Date shall be less than six (6) Trading Days after an Advance Notice Date.

        Section 1.3. "Advance Notice" shall mean a written notice to the Investor setting forth the Advance amount that the Company requests from the Investor and the Advance Date.

        Section 1.4. "Advance Notice Date" shall mean each date the Company delivers to the Investor an Advance Notice requiring the Investor to advance funds to the Company, subject to the terms of this Agreement. No Advance Notice Date shall be less than seven (7) Trading Days after the prior Advance Notice Date.

        Section 1.5. "Bid Price" shall mean, on any date, the closing bid price (as reported by Bloomberg L.P.) of the Common Stock on the Principal Market or if the Common Stock is not traded on a Principal Market, the highest reported bid price for the Common Stock, as furnished by the National Association of Securities Dealers, Inc.

        Section 1.6. "Closing" shall mean one of the closings of a purchase and sale of Common Stock pursuant to Section 2.3.

        Section 1.7. "Commitment Amount" shall mean the aggregate amount of up to Fifteen Million Dollars ($15,000,000) which the Investor has agreed to provide to the Company in order to purchase the Company's Common Stock pursuant to the terms and conditions of this Agreement, provided that the Company shall not request an Advance if the issuance of the full number of shares of Common Stock issuable in connection with such Advance would result in a violation of the Listing Qualifications

of the National Association of Securities Dealers, Inc., Market Place Rules (or any similar applicable section) unless the necessary shareholder approval or consent has been received prior to such request.

        Section 1.8. "Commitment Period" shall mean the period commencing on the earlier to occur of (i) the Effective Date, or (ii) such earlier date as the Company and the Investor may mutually agree in writing, and expiring on the earliest to occur of (x) the date on which the Investor shall have made payment of Advances pursuant to this Agreement in the aggregate amount of Fifteen Million Dollars ($15,000,000), (y) the date this Agreement is terminated pursuant to Section 2.5, or (z) the date occurring twenty four (24) months after the Effective Date.

        Section 1.9. "Common Stock" shall mean the Company's common stock, par value $0.01 per share.

        Section 1.10. "Condition Satisfaction Date" shall have the meaning set forth in Section 7.2.

        Section 1.11. "Damages" shall mean any loss, claim, damage, liability, costs and expenses (including, without limitation, reasonable attorney's fees and disbursements and costs and expenses of expert witnesses and investigation).

        Section 1.12. "Effective Date" shall mean the date on which the SEC first declares effective a Registration Statement registering the resale of the Registrable Securities as set forth in Section 7.2(a).

        Section 1.13. "Escrow Agreement" shall mean the escrow agreement among the Company, the Investor, the Investor's Counsel and Wachovia Bank, N.A. dated the date hereof.

        Section 1.14. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated there under.

        Section 1.15. "Free Trading Shares" shall mean shares of Common Stock that are covered by a Registration Statement with an effective date prior to the date such shares are delivered to Investor's Counsel.

        Section 1.16. "Material Adverse Effect" shall mean any condition, circumstance, or situation that would prohibit or otherwise materially interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement or the Registration Rights Agreement in any material respect.

        Section 1.17. "Market Price" shall mean the average closing Bid Price of the Common Stock during the Pricing Period.

        Section 1.18. "Maximum Advance Amount" shall be equal up to One Million Dollars ($1,000,000), in the aggregate, in any thirty (30) calendar day period after the Effective Date.

        Section 1.19. "NASD" shall mean the National Association of Securities Dealers, Inc.

        Section 1.20. "Person" shall mean an individual, a corporation, a partnership, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

        Section 1.21. "Placement Agent" shall mean Westrock Advisors, Inc. a registered broker-dealer.

        Section 1.22. "Pricing Period" shall mean the five (5) consecutive Trading Days after the Advance Notice Date.

        Section 1.23. "Principal Market" shall mean the Nasdaq National Market, the Nasdaq SmallCap Market, the American Stock Exchange, the OTC Bulletin Board or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock.

        Section 1.24. "Purchase Price" shall be set at one hundred percent (100%) of the Market Price during the Pricing Period.

        Section 1.25. "Registrable Securities" shall mean the shares of Common Stock (i) issuable to the Investor under this Agreement, (ii) which have not been sold under circumstances meeting all of the applicable conditions of Rule 144 (or any similar provision then in force) under the Securities Act

("Rule 144") or (iii) which have not been otherwise transferred to a holder who may trade such shares without restriction under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend.

        Section 1.26. "Registration Rights Agreement" shall mean the Registration Rights Agreement dated the date hereof, regarding the filing of the Registration Statement for the resale of the Registrable Securities, entered into between the Company and the Investor.

        Section 1.27. "Registration Statement" shall mean a registration statement on Form S-3 (if use of such form is then available to the Company pursuant to the rules of the SEC and, if not, on such other form promulgated by the SEC for which the Company then qualifies and which counsel for the Company shall deem appropriate, and which form shall be available for the resale of the Registrable Securities to be registered there under in accordance with the provisions of this Agreement and the Registration Rights Agreement, and in accordance with the intended method of distribution of such securities), for the registration of the resale by the Investor of the Registrable Securities under the Securities Act.

        Section 1.28. "Regulation D" shall have the meaning set forth in the recitals of this Agreement.

        Section 1.29. "SEC" shall mean the Securities and Exchange Commission.

        Section 1.30. "Securities Act" shall have the meaning set forth in the recitals of this Agreement.

        Section 1.31. "SEC Documents" shall mean Annual Reports on Form 10K, Quarterly Reports on Form 10Q, Current Reports on Form 8 K and Proxy Statements of the Company as supplemented to the date hereof, filed by the Company for a period of at least twelve (12) months immediately preceding the date hereof or the Advance Date, as the case may be, until such time as the Company no longer has an obligation to maintain the effectiveness of a Registration Statement as set forth in the Registration Rights Agreement.

        Section 1.32. "Trading Day" shall mean any day during which the New York Stock Exchange shall be open for business.

ARTICLE 2.
Advances

        Section 2.1.    Investments.

        (a)  Advances. Upon the terms and conditions set forth herein (including, without limitation, the provisions of Article VII hereof), on any Advance Notice Date the Company may request an Advance by the Investor by the delivery of an Advance Notice. The number of shares of Common Stock that the Investor shall receive for each Advance shall be determined by dividing the amount of the Advance by the Purchase Price. No fractional shares shall be issued. Fractional shares shall be rounded to the next higher whole number of shares. The aggregate maximum amount of all Advances that the Investor shall be obligated to make under this Agreement shall not exceed the Commitment Amount.

        (b)  The Company shall only be entitled to an Advance if the Company's Common Stock has an active bid at all times during the Pricing Period. Notwithstanding the foregoing, in the event the Company's Common Stock does not have an active bid price during every day of the Pricing Period, the Pricing Period shall be extend one (1) day for every one (1) day the Company's Common Stock does not have an active bid price during the Pricing Period.

        (c)  The Company acknowledges that the Investor may sell the Company's Common Stock purchased pursuant to an Advance Notice during the corresponding Pricing Period. Notwithstanding the foregoing, the Investor shall not make any short sales of the Company's Common Stock during the term of this Agreement.

        Section 2.2.    Mechanics.

        (a)    Advance Notice.    At any time during the Commitment Period, the Company may deliver an Advance Notice to the Investor, subject to the conditions set forth in Section 7.2; provided, however, unless waived by the Investor, the amount for each Advance as designated by the Company in the applicable Advance Notice, as well as the aggregate amount of multiple Advances in any thirty (30) calendar day period, shall not be more than the Maximum Advance Amount. The aggregate amount of the Advances pursuant to this Agreement shall not exceed the Commitment Amount, unless otherwise agreed by the Investor in the Investor's sole and absolute discretion. The Company acknowledges that the Investor may sell shares of the Company's Common Stock corresponding with a particular Advance Notice on the day the Advance Notice is received by the Investor. There will be a minimum of seven (7) Trading Days between each Advance Notice Date. In no event shall the number of shares issuable to the Investor pursuant to an Advance exceed nine and 9/10 percent (9.9%) of the then outstanding Common Stock of the Company.

        (b)    Date of Delivery of Advance Notice.    An Advance Notice shall be deemed delivered on (i) the Trading Day it is received by facsimile or otherwise by the Investor if such notice is received prior to 12:00 noon Eastern Time, or (ii) the immediately succeeding Trading Day if it is received by facsimile or otherwise after 12:00 noon Eastern Time on a Trading Day or at any time on a day which is not a Trading Day. No Advance Notice may be deemed delivered on a day that is not a Trading Day.

        (c)  In the event the Investor sells the Company's Common Stock pursuant to Section 2.1 (b) herein and the Company fails to perform it's obligations as mandated in Section 2.5, and specifically fails to provide the Investor with the shares of Common Stock for the applicable Advance, the Company acknowledges that the Investor shall suffer financial hardship and therefore shall be liable for any and all losses, commissions, fees, or financial hardship caused to the Investor.

        Section 2.3.    Closings.    On each Advance Date, which shall be six (6) Trading Days after an Advance Notice Date, (i) the Company shall deliver to the Investor's Counsel, as defined pursuant to the Escrow Agreement, shares of the Company's Common Stock, representing the amount of the Advance by the Investor pursuant to Section 2.1 herein, registered in the name of the Investor which shall be delivered to the Investor, or otherwise in accordance with the Escrow Agreement and (ii) the Investor shall deliver to Wachovia Bank, N.A. (the "Escrow Agent") the amount of the Advance specified in the Advance Notice by wire transfer of immediately available funds, which shall be delivered to the Company, or otherwise in accordance with the Escrow Agreement. In addition, on or prior to the Advance Date each of the Company and the Investor shall deliver to the other through the Investor's Counsel all documents, instruments and writings required to be delivered or reasonably requested by either of them pursuant to this Agreement in order to implement and effect the transactions contemplated herein. Payment of funds to the Company and delivery of the Company's Common Stock to the Investor shall occur in accordance with the conditions set forth above and those contained in the Escrow Agreement; provided, however, that to the extent the Company has not paid the fees, expenses, and disbursements of the Investor or its Investor's counsel in accordance with Section 12.4, the amount of such fees, expenses, and disbursements may be deducted by the Investor (and shall be paid to the relevant party) from the amount of the Advance with no reduction in the amount of shares of the Company's Common Stock to be delivered on such Advance Date.

        Section 2.4.    Termination of Investment.    The obligation of the Investor to make an Advance to the Company pursuant to this Agreement shall terminate permanently (including with respect to an Advance Date that has not yet occurred) in the event that (i) there shall occur any stop order or suspension of the effectiveness of the Registration Statement for an aggregate of fifty (50) Trading Days, other than due to the acts of the Investor, during the Commitment Period, and (ii) the Company shall at any time fail materially to comply with the requirements of Article VI and such failure is not cured within thirty (30) days after receipt of written notice from the Investor, provided, however, that this termination provision shall not apply to any period commencing upon the filing of a post-effective amendment to such Registration Statement and ending upon the date on which such post effective amendment is declared effective by the SEC.

        Section 2.5.    Agreement to Advance Funds.

        (a)  The Investor agrees to advance the amount specified in the Advance Notice to the Company after the completion of each of the following conditions and the other conditions set forth in this Agreement:

          (i)  the execution and delivery by the Company, and the Investor, of this Agreement, and the Exhibits hereto;

        (ii)  Investor's Counsel shall have received the shares of Common Stock applicable to the Advance;

        (iii)  the Company's Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement shall have been declared effective by the SEC;

        (iv)  the Company shall have obtained all material permits and qualifications required by any applicable state for the offer and sale of the Registrable Securities, or shall have the availability of exemptions there from. The sale and issuance of the Registrable Securities shall be legally permitted by all laws and regulations to which the Company is subject;

        (v)  the Company shall have filed with the Commission in a timely manner all reports, notices and other documents required of a "reporting company" under the Exchange Act and applicable Commission regulations;

        (vi)  the fees as set forth in Section 12.4 below shall have been paid or can be withheld as provided in Section 2.3;

      (vii)  the conditions set forth in Section 7.2 shall have been satisfied.

      (viii)  the Company shall have provided to the Investor an acknowledgement, to the satisfaction of the Investor, from the Company's accountants as to the accountant's ability to provide all consents required in order to file a registration statement in connection with this transaction; and

        (ix)  The Company's transfer agent shall be DWAC eligible.

        Section 2.6.    Lock Up Period.

        (a)  The Company shall not, without the prior consent of the Investor, issue or sell (i) any Common Stock without consideration or for a consideration per share less than the Bid Price on the date of issuance or (ii) issue or sell any warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock without consideration or for a consideration per share less than the Bid Price on the date of issuance.

        (b)  On the date hereof, the Company shall obtain from each officer and director a lock-up agreement, as defined below, in the form annexed hereto as Schedule 2.6(b) agreeing to only sell in compliance with the volume limitation of Rule 144.

ARTICLE 3.
Representations and Warranties of Investor

        Investor hereby represents and warrants to, and agrees with, the Company that the following are true and as of the date hereof and as of each Advance Date:

        Section 3.1.    Organization and Authorization.    The Investor is duly incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite power and authority to purchase and hold the securities issuable hereunder. The decision to invest and the execution and delivery of this Agreement by such Investor, the performance by such Investor of its obligations hereunder and the consummation by such Investor of the transactions contemplated hereby have been duly authorized and requires no other proceedings on the part of the Investor. The undersigned has the right, power and authority to execute and deliver this Agreement and all other

instruments (including, without limitations, the Registration Rights Agreement), on behalf of the Investor. This Agreement has been duly executed and delivered by the Investor and, assuming the execution and delivery hereof and acceptance thereof by the Company, constitutes the legal, valid and binding obligations of the Investor, enforceable against the Investor in accordance with its terms.

        Section 3.2.    Evaluation of Risks.    The Investor has such knowledge and experience in financial tax and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. It recognizes that its investment in the Company involves a high degree of risk.

        Section 3.3.    No Legal Advice From the Company.    The Investor acknowledges that it had the opportunity to review this Agreement and the transactions contemplated by this Agreement with his or its own legal counsel and investment and tax advisors. The Investor is relying solely on such counsel and advisors and not on any statements or representations of the Company or any of its representatives or agents for legal, tax or investment advice with respect to this investment, the transactions contemplated by this Agreement or the securities laws of any jurisdiction.

        Section 3.4.    Investment Purpose.    The securities are being purchased by the Investor for its own account, for investment and without any view to the distribution, assignment or resale to others or fractionalization in whole or in part. The Investor agrees not to assign or in any way transfer the Investor's rights to the securities or any interest therein and acknowledges that the Company will not recognize any purported assignment or transfer except in accordance with applicable Federal and state securities laws. No other person has or will have a direct or indirect beneficial interest in the securities. The Investor agrees not to sell, hypothecate or otherwise transfer the Investor's securities unless the securities are registered under Federal and applicable state securities laws or unless, in the opinion of counsel satisfactory to the Company, an exemption from such laws is available.

        Section 3.5.    Accredited Investor.    The Investor is an "Accredited Investor" as that term is defined in Rule 501(a)(3) of Regulation D of the Securities Act.

        Section 3.6.    Information.    The Investor and its advisors (and its counsel), if any, have been furnished with all materials relating to the business, finances and operations of the Company and information it deemed material to making an informed investment decision. The Investor and its advisors, if any, have been afforded the opportunity to ask questions of the Company and its management. Neither such inquiries nor any other due diligence investigations conducted by such Investor or its advisors, if any, or its representatives shall modify, amend or affect the Investor's right to rely on the Company's representations and warranties contained in this Agreement. The Investor understands that its investment involves a high degree of risk. The Investor is in a position regarding the Company, which, based upon employment, family relationship or economic bargaining power, enabled and enables such Investor to obtain information from the Company in order to evaluate the merits and risks of this investment. The Investor has sought such accounting, legal and tax advice, as it has considered necessary to make an informed investment decision with respect to this transaction.

        Section 3.7.    Receipt of Documents.    The Investor and its counsel has received and read in their entirety: (i) this Agreement and the Exhibits annexed hereto; (ii) all due diligence and other information necessary to verify the accuracy and completeness of such representations, warranties and covenants; (iii) the Company's Form 10- K for the year ended year ended December 31, 2001; and (v) answers to all questions the Investor submitted to the Company regarding an investment in the Company; and the Investor has relied on the information contained therein and has not been furnished any other documents, literature, memorandum or prospectus.

        Section 3.8.    Registration Rights Agreement and Escrow Agreement.    The parties have entered into the Registration Rights Agreement and the Escrow Agreement, each dated the date hereof.

        Section 3.9.    No General Solicitation.    Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the shares of Common Stock offered hereby.

        Section 3.10.    Not an Affiliate.    The Investor is not an officer, director or a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with the Company or any "Affiliate" of the Company (as that term is defined in Rule 405 of the Securities Act). Neither the Investor nor its Affiliates has an open short position in the Common Stock of the Company, and the Investor agrees that it will not, and that it will cause its Affiliates not to, engage in any short sales of or hedging transactions with respect to the Common Stock, provided that the Company acknowledges and agrees that upon receipt of an Advance Notice the Investor will sell the Shares to be issued to the Investor pursuant to the Advance Notice, even if the Shares have not been delivered to the Investor.

ARTICLE 4.
Representations and Warranties of the Company

        Except as stated below, on the disclosure schedules attached hereto or in the SEC Documents (as defined herein), the Company hereby represents and warrants to, and covenants with, the Investor that the following are true and correct as of the date hereof:

        Section 4.1.    Organization and Qualification.    The Company is duly incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite power and authority corporate power to own its properties and to carry on its business as now being conducted. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and within ten (10) days of the date hereof will be in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect on the Company and its subsidiaries taken as a whole.

        Section 4.2.    Authorization, Enforcement, Compliance with Other Instruments.    (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement and any related agreements, in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Registration Rights Agreement, the Escrow Agreement and any related agreements by the Company and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its stockholders, (iii) this Agreement, the Registration Rights Agreement, the Escrow Agreement and any related agreements have been duly executed and delivered by the Company, (iv) assuming the execution and delivery thereof and acceptance by the Investor this Agreement, the Registration Rights Agreement, the Escrow Agreement and any related agreements constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies.

        Section 4.3.    Capitalization.    As of the date hereof, the authorized capital stock of the Company consists of 125,000,000 shares of Common Stock, par value $0.01 per share and 10,000,000 shares of Preferred Stock, par value $0.01 per share, of which 91,480,777 shares of Common Stock and no shares of Preferred Stock were issued and outstanding. All of such outstanding shares have been validly issued and are fully paid and nonassessable. Except as disclosed in the SEC Documents, no shares of Common Stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company. Except as disclosed in the SEC Documents, as of the date hereof, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, (ii) there

are no outstanding debt securities and (iii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of their securities under the Securities Act (except pursuant to the Registration Rights Agreement). There are no securities or instruments containing anti-dilution or similar provisions that will be triggered by this Agreement or any related agreement or the consummation of the transactions described herein or therein.. The Company has furnished to the Investor true and correct copies of the Company's Certificate of Incorporation, as amended and as in effect on the date hereof (the "Certificate of Incorporation"), and the Company's By-laws, as in effect on the date hereof (the "By-laws"), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto.

        Section 4.4.    No Conflict.    The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Certificate of Incorporation, any certificate of designations of any outstanding series of preferred stock of the Company or By-laws or (ii) conflict with or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the Principal Market on which the Common Stock is quoted) applicable to the Company or any of its subsidiaries or by which any material property or asset of the Company or any of its subsidiaries is bound or affected and which would cause a Material Adverse Effect. Except as disclosed in the SEC Documents, neither the Company nor its subsidiaries is in violation of any term of or in default under its Certificate of Incorporation or By-laws or their organizational charter or by-laws, respectively, or any material contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its subsidiaries which would cause a Materially Adverse Effect. The business of the Company and its subsidiaries is not being conducted in violation of any material law, ordinance, regulation of any governmental entity. Except as specifically contemplated by this Agreement and as required under the Securities Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under or contemplated by this Agreement or the Registration Rights Agreement in accordance with the terms hereof or thereof where the failure to obtain such consents, authorizations or orders would have a Materially Adverse Effect. All consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. To the knowledge of the Company and its subsidiaries there is no fact or circumstance which might give rise to any of the foregoing.

        Section 4.5.    SEC Documents; Financial Statements.    Since May 20, 1991, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC under of the Exchange Act. The Company has delivered to the Investor or its representatives, or made available through the SEC's website at http://www.sec.gov, true and complete copies of the SEC Documents. As of their respective dates, the financial statements of the Company disclosed in the SEC Documents (the "Financial Statements") complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to the Investor which is not included in the SEC Documents contains any untrue statement of a material

fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

        Section 4.6.    10b-5.    The SEC Documents do not include any untrue statements of material fact, nor do they omit to state any material fact required to be stated therein necessary to make the statements made, in light of the circumstances under which they were made, not misleading.

        Section 4.7.    No Default.    Except as disclosed in Section 4.4, Schedule 4.7 or the SEC Documents, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement or any of the exhibits or attachments hereto will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under its Certificate of Incorporation, By-Laws, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound, or any statute, or any decree, judgment, order, rules or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, in each case which default, lien or charge is likely to cause a Material Adverse Effect on the Company's business or financial condition.

        Section 4.8.    Absence of Events of Default.    Except for matters described in the SEC Documents and/or this Agreement, no Event of Default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become an Event of Default (as so defined), has occurred and is continuing, which would have a Material Adverse Effect on the Company's business, properties, prospects, financial condition or results of operations.

        Section 4.9.    Intellectual Property Rights.    The Company and its subsidiaries own or possess adequate rights or licenses to use all material trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. The Company and its subsidiaries do not have any knowledge of any infringement by the Company or its subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, and, to the knowledge of the Company, there is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing.

        Section 4.10.    Employee Relations.    Neither the Company nor any of its subsidiaries is involved in any labor dispute nor, to the knowledge of the Company or any of its subsidiaries, is any such dispute threatened. None of the Company's or its subsidiaries' employees is a member of a union and the Company and its subsidiaries believe that their relations with their respective employees are good.

        Section 4.11.    Environmental Laws.    The Company and its subsidiaries are (i) in compliance with any and all applicable material foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval.

        Section 4.12.    Title.    Except as set forth in the SEC Documents, the Company has good and marketable title to its properties and material assets owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. Any real property and facilities held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries.

        Section 4.13.    Insurance.    The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its subsidiaries are engaged. Neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as a whole.

        Section 4.14.    Regulatory Permits.    The Company and its subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit.

        Section 4.15.    Internal Accounting Controls.    The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded

accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

        Section 4.16.    No Material Adverse Breaches, etc.    Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is in breach of any contract or agreement which breach, in the judgment of the Company's officers, has or is expected to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries.

        Section 4.17.    Absence of Litigation.    Except as set forth in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending against or affecting the Company, the Common Stock or any of the Company's subsidiaries, wherein an unfavorable decision, ruling or finding would (i) have a Material Adverse Effect on the transactions contemplated hereby (ii) adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein, or (iii) except as expressly disclosed in the SEC Documents, have a Material Adverse Effect on the business, operations, properties, financial condition or results of operation of the Company and its subsidiaries taken as a whole.

        Section 4.18.    Subsidiaries.    Except as disclosed in the SEC Documents, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity.

        Section 4.19.    Tax Status.    The Company and each of its subsidiaries has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject and (unless and only to the extent that the Company and each of its subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and to the Company's knowledge there is no basis for any such claim.

        Section 4.20.    Certain Transactions.    Except as set forth in the SEC Documents none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner.

        Section 4.21.    Rights of First Refusal.    Except as set forth in the SEC Documents, the Company is not obligated to offer the securities offered hereunder on a right of first refusal basis or otherwise to any third parties including, but not limited to, current or former shareholders of the Company, underwriters, brokers, agents or other third parties.

        Section 4.22.    Use of Proceeds.    The Company represents that the net proceeds from this offering will be used for general corporate purposes. However, in no event shall the net proceeds from this offering be used by the Company for the payment (or loaned to any such person for the payment) of any judgment, or other liability, incurred by any executive officer, officer, director or employee of the Company, except for any liability owed to such person for services rendered, or if any judgment or

other liability is incurred by such person originating from services rendered to the Company, or the Company has indemnified such person from liability.

        Section 4.23.    Further Representation and Warranties of the Company.    For so long as any securities issuable hereunder held by the Investor remain outstanding, the Company acknowledges, represents, warrants and agrees that it will maintain the listing of its Common Stock on the Principal Market

        Section 4.24.    Opinion of Counsel.    Investor shall receive an opinion letter, at the Company's expense, from Davis Wright Termaine LLP, counsel to the Company (updated where applicable) on the date hereof including and any and all opinions of counsel which may be reasonably required in order to sell the securities issuable hereunder without restriction.

        Section 4.25.    Dilution.    The Company is aware and acknowledges that issuance of shares of the Company's Common Stock could cause dilution to existing shareholders and could significantly increase the outstanding number of shares of Common Stock.

ARTICLE 5.
Indemnification

        The Investor and the Company represent to the other the following with respect to itself:

        Section 5.1.    Indemnification.

        (a)  In consideration of the Investor's execution and delivery of this Agreement, and in addition to all of the Company's other obligations under this Agreement, the Company shall defend, protect, indemnify and hold harmless the Investor, and all of its officers, directors, partners, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Investor Indemnitees") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Investor Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "Indemnified Liabilities"), incurred by the Investor Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, or (c) any cause of action, suit or claim brought or made against such Investor Indemnitee not arising out of any action or inaction of an Investor Indemnitee, and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Investor Indemnitees. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law.

        (b)  In consideration of the Company's execution and delivery of this Agreement, and in addition to all of the Investor's other obligations under this Agreement, the Investor shall defend, protect, indemnify and hold harmless the Company and all of its officers, directors, shareholders, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Company Indemnitees") from and against any and all Indemnified Liabilities incurred by the Company Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Investor in this Agreement, the Registration Rights Agreement, or any instrument or document contemplated hereby or thereby executed by the Investor, (b) any breach of any covenant, agreement or obligation of the Investor contained in this Agreement, the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby executed by the Investor, or (c) any cause of action, suit or claim brought or made against such Company

Indemnitee based on misrepresentations or due to a breach by the Investor and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Company Indemnitees. To the extent that the foregoing undertaking by the Investor may be unenforceable for any reason, the Investor shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law.

ARTICLE 6.
Covenants of the Company

        Section 6.1.    Registration Rights.    The Company shall cause the Registration Rights Agreement to remain in full force and effect and the Company shall comply in all material respects with the terms thereof.

        Section 6.2.    Listing of Common Stock.    The Company shall maintain the Common Stock's authorization for quotation on the Principal Market.

        Section 6.3.    Exchange Act Registration.    The Company will cause its Common Stock to continue to be registered under Section 12(g) of the Exchange Act, will file in a timely manner all reports and other documents required of it as a reporting company under the Exchange Act and will not take any action or file any document (whether or not permitted by Exchange Act or the rules there under to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Exchange Act.

        Section 6.4.    Transfer Agent Instructions.    Not later than two (2) days after each Advance Notice Date and prior to each Closing and resale of the Common Stock by the Investor, the Company will deliver instructions to its transfer agent to issue shares of Common Stock free of restrictive legends.

        Section 6.5.    Corporate Existence.    The Company will take all steps necessary to preserve and continue the corporate existence of the Company.

        Section 6.6.    Notice of Certain Events Affecting Registration; Suspension of Right to Make an Advance.    The Company will immediately notify the Investor upon its becoming aware of the occurrence of any of the following events in respect of a registration statement or related prospectus relating to an offering of Registrable Securities: (i) receipt of any request for additional information by the SEC or any other Federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the registration statement or related prospectus; (ii) the issuance by the SEC or any other Federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in the Registration Statement or related prospectus of any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate; and the Company will promptly make available to the Investor any such supplement or amendment to the related prospectus. The Company shall not deliver to the Investor any Advance Notice during the continuation of any of the foregoing events.

        Section 6.7.    Expectations Regarding Advance Notices.    Within ten (10) days after the commencement of each calendar quarter occurring subsequent to the commencement of the Commitment Period, the Company must notify the Investor, in writing, as to its reasonable expectations as to the dollar amount it intends to raise during such calendar quarter, if any, through the issuance of Advance Notices. Such notification shall constitute only the Company's good faith estimate and shall in no way obligate the Company to raise such amount, or any amount, or otherwise limit its ability to deliver Advance Notices. The failure by the Company to comply with this provision can be cured by the Company's notifying the Investor, in writing, at any time as to its reasonable expectations with respect to the current calendar quarter.

        Section 6.8.    Consent of Investor to Sell Common Stock.    Except with the consent of the Investor, which consent shall not be unreasonably withheld, during the Commitment Period, the Company shall not issue or sell (i) any Common Stock without consideration or for a consideration per share less than its Bid Price determined immediately prior to its issuance or (ii) issue or sell any warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock without consideration or for a consideration per share less than such Common Stock's Bid Price determined immediately prior to its issuance, provided, however, nothing herein shall prevent the Company from issuing any Common Stock or any warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock under a registration statement on Form S-8 or a registration statement on Form S-4.

        Section 6.9.    Consolidation; Merger.    The Company shall not, at any time after the date hereof, effect any merger or consolidation of the Company with or into, or a transfer of all or substantially all the assets of the Company to another entity (a "Consolidation Event") unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the Investor such shares of stock and/or securities as the Investor is entitled to receive pursuant to this Agreement.

        Section 6.10.    Issuance of the Company's Common Stock.    The sale of the shares of Common Stock shall be made in accordance with the provisions and requirements of Regulation D and any applicable state securities law.

ARTICLE 7.
Conditions for Advance and Conditions to Closing

        Section 7.1.    Conditions Precedent to the Obligations of the Company.    The obligation hereunder of the Company to issue and sell the shares of Common Stock to the Investor incident to each Closing is subject to the satisfaction, or waiver by the Company, at or before each such Closing, of each of the conditions set forth below.

        (a)    Accuracy of the Investor's Representations and Warranties.    The representations and warranties of the Investor shall be true and correct in all material respects.

        (b)    Performance by the Investor.    The Investor shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement and the Registration Rights Agreement to be performed, satisfied or complied with by the Investor at or prior to such Closing.

        Section 7.2.    Conditions Precedent to the Right of the Company to Deliver an Advance Notice and the Obligation of the Investor to Purchase Shares of Common Stock.    The right of the Company to deliver an Advance Notice and the obligation of the Investor hereunder to acquire and pay for shares of the Company's Common Stock incident to a Closing is subject to the satisfaction or waiver by the Investor, on (i) the date of delivery of such Advance Notice and (ii) the applicable Advance Date (each a "Condition Satisfaction Date"), of each of the following conditions:

        (a)    Registration of the Common Stock with the SEC.    The Company shall have filed with the SEC a Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement. As set forth in the Registration Rights Agreement, the

Registration Statement shall have previously become effective and shall remain effective on each Condition Satisfaction Date and (i) neither the Company nor the Investor shall have received notice that the SEC has issued or intends to issue a stop order with respect to the Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently, or intends or has threatened to do so (unless the SEC's concerns have been addressed and the Investor is reasonably satisfied that the SEC no longer is considering or intends to take such action) and (ii) no other suspension of the use or withdrawal of the effectiveness of the Registration Statement or related prospectus shall exist. The Registration Statement must have been declared effective by the SEC prior to the first Advance Notice Date.

        (b)    Authority.    The Company shall have obtained all permits and qualifications required by any applicable state in accordance with the Registration Rights Agreement for the offer and sale of the shares of Common Stock, or shall have the availability of exemptions there from. The sale and issuance of the shares of Common Stock shall be legally permitted by all laws and regulations to which the Company is subject.

        (c)    Material Changes.    There shall not exist any material changes to the information set forth in the Registration Statement which would require the Company to file a post-effective amendment to the Registration Statement.

        (d)    Performance by the Company.    The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement (including, without limitation, the conditions specified in Section 2.5 hereof) and the Registration Rights Agreement to be performed, satisfied or complied with by the Company at or prior to each Condition Satisfaction Date.

        (e)    No Injunction.    No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits or directly and adversely affects any of the transactions contemplated by this Agreement, and no proceeding shall have been commenced that may have the effect of prohibiting or adversely affecting any of the transactions contemplated by this Agreement.

        (f)    No Suspension of Trading in or Delisting of Common Stock.    The trading of the Common Stock is not suspended by the SEC or the Principal Market (if the Common Stock is traded on a Principal Market). The issuance of shares of Common Stock with respect to the applicable Closing, if any, shall not violate the shareholder approval requirements of the Principal Market (if the Common Stock is traded on a Principal market). The Company shall not have received any notice threatening the continued listing of the Common Stock on the Principal Market (if the Common Stock is traded on a Principal Market).

        (g)    Advances.    The amount of the individual Advance, as well as the aggregate amount of Advances in any thirty (30) calendar day period, requested by the Company does not exceed the Maximum Advance Amount unless waived by the Investor. In addition, in no event shall the number of shares issuable to the Investor pursuant to an Advance cause the Investor to own in excess of nine and 9/10 percent (9.9%) of the then outstanding Common Stock of the Company.

        (h)    No Knowledge.    The Company has no knowledge of any event more likely than not to have the effect of causing such Registration Statement to be suspended or otherwise ineffective.

        (i)    Prior Approval.    The Company shall have obtained all approvals necessary under the rules and regulations under the Listing Qualifications of the Market Place Rules established and maintained by the National Association of Securities Dealers, Inc., for the issuance of the shares of Common Stock to the Investor pursuant to Advances under this Agreement.

        (j)    Other.    On each Condition Satisfaction Date, the Investor shall have received and been reasonably satisfied with such other certificates and documents as shall have been reasonably requested by the Investor in order for the Investor to confirm the Company's satisfaction of the conditions set forth in this Section 7.2, including, without limitation, a certificate executed by an executive officer of

the Company and to the effect that all the conditions to such Closing shall have been satisfied as at the date of each such certificate substantially in the form annexed hereto on Exhibit A.

ARTICLE 8.
Due Diligence Review; Non-Disclosure of Non-Public Information

        Section 8.1.    Due Diligence Review.    Prior to the filing of the Registration Statement the Company shall make available for inspection and review by the Investor, advisors to and representatives of the Investor, any underwriter participating in any disposition of the Registrable Securities on behalf of the Investor pursuant to the Registration Statement, any such registration statement or amendment or supplement thereto or any blue sky, NASD or other filing, all financial and other records, all SEC Documents and other filings with the SEC, and all other corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Company's officers, directors and employees to supply all such information reasonably requested by the Investor or any such representative, advisor or underwriter in connection with such Registration Statement (including, without limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of the Registration Statement for the sole purpose of enabling the Investor and such representatives, advisors and underwriters and their respective accountants and attorneys to conduct initial and ongoing due diligence with respect to the Company and the accuracy of the Registration Statement.

        Section 8.2.    Non-Disclosure of Non-Public Information.

        (a)  The Company shall not disclose non-public information to the Investor, advisors to or representatives of the Investor unless prior to disclosure of such information the Company identifies such information as being non-public information and provides the Investor, such advisors and representatives with the opportunity to accept or refuse to accept such non-public information for review. The Company may, as a condition to disclosing any non-public information hereunder, require the Investor's advisors and representatives to enter into a confidentiality agreement in form reasonably satisfactory to the Company and the Investor.

        (b)  Nothing herein shall require the Company to disclose non-public information to the Investor or its advisors or representatives, and the Company represents that it does not disseminate non-public information to any investors who purchase stock in the Company in a public offering, to money managers or to securities analysts; provided, however, that notwithstanding anything herein to the contrary, the Company will, as hereinabove provided, immediately notify the advisors and representatives of the Investor and, if any, underwriters, of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities), which, if not disclosed in the prospectus included in the Registration Statement, would cause such prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements, therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this Section 8.2 shall be construed to mean that such persons or entities other than the Investor (without the written consent of the Investor prior to disclosure of such information) may not obtain non-public information in the course of conducting due diligence in accordance with the terms of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading.

ARTICLE 9.
Choice of Law/Jurisdiction

        Section 9.1.    Governing Law.    This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware without regard to the principles of conflict of laws. The parties further agree that any action between them shall be heard in Hudson County, New Jersey, and expressly consent to the jurisdiction and venue of the Superior Court of New Jersey, sitting in Hudson County, New Jersey and the United States District Court of New Jersey, sitting in Newark, New Jersey, for the adjudication of any civil action asserted pursuant to this paragraph.

ARTICLE 10.
Assignment; Termination

        Section 10.1.    Assignment.    Neither this Agreement nor any rights of the Company hereunder may be assigned to any other Person.

        Section 10.2.    Termination.    The obligations of the Investor to make Advances under Article II hereof shall terminate twenty-four (24) months after the Effective Date. The Company may terminate this Agreement, with or without cause, on not less than thirty (30) days advance written notice to the Investor.

ARTICLE 11.
Notices

        Section 11.1.    Notices.    Any notices, consents, waivers, or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy is mailed by U.S. certified mail, return receipt requested; (iii) three (3) days after being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

If to the Company, to:	Communication Intelligence Corp. 275 Shoreline Drive—Suite 520 Redwood Shores, California 94065 Attention: Frank Dane Telephone: (650) 802-7737 Facsimile: (419) 735-7922
With a copy to:	Davis Wright Termaine LLP 1300 S.W. Fifth Avenue, 23rd Floor Portland, Oregon 97201 Attention: David C. Baca Telephone: (503) 241-2300 Facsimile: (503) 779-5299
If to the Investor(s):	Cornell Capital Partners, LP 101 Hudson Street—Suite 3606 Jersey City, New Jersey 07302 Attention: Mark Angelo                   Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266

With a Copy to:
Butler Gonzalez LLP
1000 Stuyvesant Avenue—Suite 6
Union, New Jersey 07083
Attention: David Gonzalez, Esq.
Telephone: (908) 810-8588
Facsimile: (908) 810-0973

Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number.

ARTICLE 12.
Miscellaneous

        Section 12.1.    Counterparts.    This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event any signature page is delivered by facsimile transmission, the party using such means of delivery shall cause four (4) additional original executed signature pages to be physically delivered to the other party within five (5) days of the execution and delivery hereof.

        Section 12.2.    Entire Agreement; Amendments.    This Agreement supersedes all other prior oral or written agreements between the Investor, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement.

        Section 12.3.    Reporting Entity for the Common Stock.    The reporting entity relied upon for the determination of the trading price or trading volume of the Common Stock on any given Trading Day for the purposes of this Agreement shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of the Investor and the Company shall be required to employ any other reporting entity.

        Section 12.4.    Fees and Expenses.    The Company hereby agrees to pay the following fees:

        (a)    Commitment Fees.    On each Advance Date the Company shall pay to the Investor, directly from the gross proceeds held in escrow, an amount equal to six and one half percent (6.5%) of the amount of each Advance. The Company hereby agrees that if such payment, as is described above, is not made by the Company on the Advance Date, such payment will be made at the direction of the Investor as outlined and mandated by Section 2.3 of this Agreement.

        Section 12.5.    Brokerage.    Each of the parties hereto represents that it has had no dealings in connection with this transaction with any finder or broker who will demand payment of any fee or commission from the other party. The Company on the one hand, and the Investor, on the other hand, agree to indemnify the other against and hold the other harmless from any and all liabilities to any person claiming brokerage commissions or finder's fees on account of services purported to have been rendered on behalf of the indemnifying party in connection with this Agreement or the transactions contemplated hereby.

        Section 12.6.    Confidentiality.    If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party (except information publicly available or in such party's domain prior to the date hereof, and except as required by court order) and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herein.

        IN WITNESS WHEREOF, the parties hereto have caused this Line of Credit Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above.

COMPANY: COMMUNICATION INTELLIGENCE CORP.
By:
Name:	Frank Dane
Title:	Chief Legal Officer
INVESTOR: CORNELL CAPITAL PARTNERS, LP
By:	Yorkville Advisors, LLC
Its:	General Partner
By:
Name:	Mark Angelo
Title:	Portfolio Manager

EXHIBIT A

Advance Notice/Compliance Certificate

Communication Intelligence Corp.

The undersigned,                        hereby certifies, with respect to the sale of shares of Common Stock of Communication Intelligence Corp. (the "Company"), issuable in connection with this Advance Notice and Compliance Certificate dated                        (the "Notice"), delivered pursuant to the Equity Line of Credit Agreement (the "Agreement"), as follows:

        1.    The undersigned is the duly elected Chief Executive Officer of the Company.

        2.    There are no material changes to the information set forth in the Registration Statement which would require the Company to file a post effective amendment to the Registration Statement.

        3.    The Company has performed in all material respects all covenants and agreements to be performed by the Company on or prior to the Advance Date related to the Notice and has complied in all material respects with all obligations and conditions contained in the Agreement.

        4.    The Advance requested is                        .

        The undersigned has executed this Certificate this            day of                        .

COMMUNICATION INTELLIGENCE CORP.

By:

Name:

Title:

SCHEDULE 2.6(b)

Communication Intelligence Corp.

        The undersigned hereby agrees that for a period commencing on the date hereof and expiring on the termination of the Equity Line of Credit Agreement dated April 30, 2002 between Communication Intelligence Corp. (the "Company"), and Cornell Capital Partners, LP, (the "Investor") (the "Lock-up Period"), he, she or it will not, directly or indirectly, without the prior written consent of the Investor, issue, offer, agree or offer to sell, sell, grant an option for the purchase or sale of, transfer, pledge, assign, hypothecate, distribute or otherwise encumber or dispose of except pursuant to Rule 144 of the General Rules and Regulations under the Securities Act of 1933, any securities of the Company, including common stock or options, rights, warrants or other securities underlying, convertible into, exchangeable or exercisable for or evidencing any right to purchase or subscribe for any common stock (whether or not beneficially owned by the undersigned), or any beneficial interest therein (collectively, the "Securities") during any Pricing Period and pending the Closing of an Advance pursuant to this Agreement.

        In order to enable the aforesaid covenants to be enforced, the undersigned hereby consents to the placing of legends and/or stop-transfer orders with the transfer agent of the Company's securities with respect to any of the Securities registered in the name of the undersigned or beneficially owned by the undersigned, and the undersigned hereby confirms the undersigned's investment in the Company.

Dated:                        , 2002

Signature

Address:

City, State, Zip Code:

Print Social Security Number
or Taxpayer I.D. Number

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Exhibit 10.10

Equity Line of Credit Agreement

SCHEDULE 2.6(b)

Communication Intelligence Corp.

EX-10.10-1

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Exhibit 10.10.1

Amendment No. 1 to Equity Line of Credit Agreement

AMENDMENT TO EQUITY LINE OF CREDIT AGREEMENT

THIS AMENDMENT (the "Amendment") is made and entered into effective as of September     , 2002 by and between CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor") and COMMUNICATION INTELLIGENCE CORP., a corporation organized and existing under the laws of the state of Delaware (the "Company").

WITNESSETH:

WHEREAS, the Investor and the Company entered into an Equity Line of Credit Agreement, wherein the Company shall issue and sell to the Investor, from time to time as provided therein, and the Investor shall purchase from the Company up to Fifteen Million Dollars ($15,000,000) of the Company's common stock, par value $0.01 per share (the "Common Stock"), a Registration Rights Agreement, Escrow Agreement and Placement Agent Agreement dated July 23, 2002 (collectively referred to as the "Transaction Documents"); and

WHEREAS, the parties desire to amend the terms of the Transaction Documents accordingly as set forth herein.

NOW, THEREFORE, in consideration of the promises and the mutual promises, conditions and covenants herein contained and in the Transaction Documents, and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows:

1.    The Equity Line of Credit Agreement is hereby amended by deleting Section 1.17 in its entirety and inserting the following:

        Section 1.17 "Market Price" shall mean the average of the four (4) lowest VWAPs of the Company's Common Stock during the Pricing Period.

2.    The Equity Line of Credit Agreement is hereby amended by inserting the following:

        Section 1.33 "VWAP" shall mean the Volume Weighted Average Price of the Common Stock as reported by Bloomberg, LP.

3.    The Transaction Documents shall be amended where appropriate to reflect the changes made herein.

4.    Except as set forth hereinabove, all other terms and provisions of the Transaction Documents shall remain in full force and effect.

[THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF the parties have hereunto set their hands and seals the day and year set forth above.

COMPANY: COMMUNICATIONS INTELLIGENCE CORP.
By:
Name:	Frank Dane
Title:	Chief Legal Officer
INVESTOR: CORNELL CAPITAL PARTNERS, LP
By:	Yorkville Advisors, LLC
Its:	General Partner
By:
Name:	Mark Angelo
Title:	Portfolio Manager

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Exhibit 10.10.1

Amendment No. 1 to Equity Line of Credit Agreement

EX-21.1

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Exhibit 21.1

Schedule of Subsidiaries

•

Communication Intelligence Computer Corporation, Ltd., 90% owned by CICI, Limited, a 100% owned Bermuda corporation



•

CIC Acquisition Corporation: This is a 100% owned sub that was used to purchase the PenOp assets.



•

CICI, Limited, 100% owned Bermuda corporation.

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Exhibit 21.1

Schedule of Subsidiaries

EX-23.1

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Exhibit 23.1

CONSENT OF STONEFIELD JOSEPHSON, INC.

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The undersigned independent certified public accounting firm hereby consents to the inclusion of its report on the financial statements of Communication Intelligence Corp. for the years ended December 31, 2001, 2000, and 1999, and to the reference to it as experts in accounting and auditing relating to said financial statements, in the Form S-1 filed with Securities and Exchange Commission for Communication Intelligence Corp., dated October 31, 2002.

/s/ STONEFIELD JOSEPHSON, INC.

STONEFIELD JOSEPHSON, INC.
Certified Public Accountants

Santa Monica, California
October 31, 2002

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Exhibit 23.1

CONSENT OF STONEFIELD JOSEPHSON, INC. INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS