SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB


(Mark One)

[ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
         MAY 31, 1997


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

                         Commission file number: 0-24426


                               C-PHONE CORPORATION
                               -------------------
        (Exact name of small business issuer as specified in its charter)


         NEW YORK                                      06-1170506
         --------                                      ----------
  (State or other jurisdiction of                      (IRS Employer
  incorporation or organization)                       Identification No.)


                             6714 NETHERLANDS DRIVE
                        WILMINGTON, NORTH CAROLINA 28405
                        --------------------------------
                    (Address of principal executive offices)

                                 (910) 395-6100
                                 --------------
                (Issuer's telephone number, including area code)

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

         State the number of shares  outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.  5,203,356 shares of common
stock as of JULY 10, 1997.

         Transitional Small Business Disclosure Form      Yes_____    No __X__




<PAGE>


                               C-PHONE CORPORATION

                                   FORM 10-QSB

                                      INDEX



                                                                  PAGE NUMBER
                                                                  -----------

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

         Balance Sheets as of February 28, 1997
         and May 31, 1997 (unaudited)                                  3

         Statements of Operations for the three
         months ended May 31, 1996 and 1997
         (unaudited)                                                   4

         Statements of Cash Flows for the three
         months ended May 31, 1996 and 1997
         (unaudited)                                                   5

         Notes to Unaudited Financial Statements                       6

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR
         PLAN OF OPERATION                                             8


PART II. OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K                             13

SIGNATURES                                                            14




                                                                               2

<PAGE>


PART I.           FINANCIAL INFORMATION

ITEM 1.           FINANCIAL STATEMENTS


                               C-PHONE CORPORATION
                                 BALANCE SHEETS

<TABLE>
<CAPTION>


                                                                  FEBRUARY 28, 1997                 MAY 31, 1997
                                                                  -----------------                 ------------
                                                                                                     (unaudited)
                                     ASSETS

Current assets:
<S>                                                                  <C>                           <C>         
  Cash and cash equivalents                                          $  1,398,049                  $  4,187,900
  Accounts receivable, net of allowance for
    doubtful accounts of $120,000 at February
    28, 1997 and $150,000 at May 31, 1997
    (unaudited)                                                           422,042                       466,195
  Inventories                                                           1,341,931                     1,137,584
  Prepaid expenses and other current assets                                82,066                       115,463
                                                                     ------------                  ------------
    Total current assets                                                3,244,088                     5,907,142

Property and equipment, net                                               251,913                       257,770

Other assets                                                              154,246                        65,571
                                                                     ------------                  ------------

    Total assets                                                     $  3,650,247                  $  6,230,483
                                                                     ============                  ============


                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable, trade                                            $    587,877                  $    692,719
  Accrued expenses                                                        325,938                       242,517
  Current obligations under capital leases                                 11,507                         7,302
                                                                     ------------                  ------------

    Total current liabilities                                             925,322                       942,538
                                                                     ------------                  ------------


Shareholders' equity:
  Common stock,  $.01 par value; 10,000,000
    shares  authorized;  4,355,393 and
    5,203,356 shares  issued and  outstanding
    at February 28, 1997 and May 31, 1997
    (unaudited)                                                            43,554                        52,034
  Paid-in capital                                                      13,530,208                    19,949,816
  Accumulated deficit                                                 (10,848,837)                  (12,713,905)
                                                                     ------------                  ------------
    Total shareholders' equity                                          2,724,925                     5,287,945
                                                                     ------------                  ------------

    Total liabilities and shareholders' equity                       $  3,650,247                  $  6,230,483
                                                                     ============                  ============

</TABLE>


    The accompanying notes are an integral part of the financial statements.



                                                                               3

<PAGE>




                               C-PHONE CORPORATION
                            STATEMENTS OF OPERATIONS
                                   (unaudited)


                                                 THREE MONTHS ENDED
                                                 ------------------
                                                       MAY 31,
                                                       -------


                                               1996                1997
                                               ----                ----

Net sales                                $   400,240         $   436,800

Cost of goods sold                           388,649             901,016
                                         -----------         -----------

Gross profit (loss)                           11,591            (464,216)
                                         -----------         -----------

Operating expenses:
  Selling, general
   and administrative                        661,940           1,162,212
  Research, development
   and engineering                           267,721             280,739
                                         -----------         -----------

Total operating expenses                     929,661           1,442,951
                                         -----------         -----------

Operating loss                              (918,070)         (1,907,167)

Interest expense                                (811)               (312)

Interest income                               47,756              42,411
                                         -----------         -----------

Net loss                                 $  (871,125)        $(1,865,068)
                                         ===========         ===========

Per-share data:
  Net loss per share                     $     (0.20)        $     (0.38)
                                         ===========         ===========

Weighted average number
 of common shares and
 common share equivalents
 outstanding                               4,347,293           4,918,908
                                         ===========         ===========



    The accompanying notes are an integral part of the financial statements.



                                                                               4

<PAGE>

                               C-PHONE CORPORATION
                            STATEMENTS OF CASH FLOWS
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                 THREE MONTHS ENDED MAY 31,
                                                                 --------------------------
                                                                  1996                1997
                                                                  ----                ----
<S>                                                         <C>                   <C>         
Cash flows from operating activities:
  Net loss                                                  $  (871,125)          $(1,865,068)
  Adjustments to reconcile net loss to net
   cash used in operating activities:
      Depreciation and amortization                              33,823                26,597
      Provision for doubtful accounts                            30,000                30,000
      Compensation expense of stock options                          --                 9,600
      Compensation expense of stock issued                           --                14,220
      Changes in operating assets and liabilities:
        Accounts receivable                                     (53,040)              (74,153)
        Inventories                                            (174,615)              204,347
        Prepaid expenses and other current assets                37,221               (33,397)
        Other assets                                             (3,633)               88,675
        Accounts payable                                         (2,791)              104,842
        Accrued expenses                                         11,129               (83,421)
                                                            -----------           -----------

          Net cash used in operating activities                (993,031)           (1,577,758)
                                                            -----------           -----------

Cash flows from investing activities:
  Equipment purchases                                           (44,609)              (32,454)
  Purchase of short term investments                           (887,428)                   --
  Maturities of short investments                               967,323                    -- 
                                                            -----------           -----------

          Net cash provided by (used in)
           investing activities                                  35,286               (32,454)
                                                            -----------           -----------

Cash flows from financing activities:
  Proceeds from exercise of stock options                            --                34,750
  Proceeds from private placement of
   common stock                                                      --             4,369,518
  Payment of capital lease obligations                           (4,233)               (4,205)
                                                            -----------           -----------


          Net cash (used in) provided by
           financing activities                                  (4,233)            4,400,063
                                                            -----------           -----------

          Net (decrease) increase in cash
           and cash equivalents                                (961,978)            2,789,851

Cash and cash equivalents, beginning of period                1,852,820             1,398,049
                                                            -----------           -----------

Cash and cash equivalents, end of period                    $   890,842           $ 4,187,900
                                                            ===========           ===========

Supplemental disclosure of cash flow information:

  Interest paid                                             $       811           $       312
                                                            ===========           ===========

  Income taxes paid                                         $        --           $        --
                                                            ===========           ===========

</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                               5
<PAGE>



                               C-PHONE CORPORATION
                     NOTES TO UNAUDITED FINANCIAL STATEMENTS

                                  MAY 31, 1997


1.  BASIS OF PRESENTATION

The  accompanying  unaudited  financial  statements of C-Phone  Corporation (the
"Company") have been prepared in accordance with generally  accepted  accounting
principles for interim  financial  information and with the instructions to Form
10-QSB and Item 310(b) of Regulation SB. Accordingly, they do not include all of
the  information  and  footnotes  required  by  generally  accepted   accounting
principles for complete financial statements. In the opinion of management, such
financial statements include all adjustments necessary to present fairly, in all
material respects, the information set forth therein.  Operating results for the
three months  period ended May 31, 1997 are not  necessarily  indicative  of the
results that may be expected for the fiscal year ending  February 28, 1998.  The
unaudited  financial  statements  should be read in conjunction with the audited
financial  statements  and footnotes  thereto  included in the Company's  Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1997.

2.  STOCK OPTIONS

As of May 31, 1997,  options for 291,710 shares of common stock were outstanding
under the  Company's  1994 Stock Option Plan (the  "Plan")  (46,250 of which are
non-qualified  options exercisable at prices which range from $3.00 to $7.00 per
share,  depending  upon the date of grant,  and  245,460 of which are  incentive
stock  options  exercisable  at prices  which  range from  $3.125 to $10.625 per
share,  depending upon the date of the grant), and options for 190,634 shares of
common  stock were  available  for  future  grants.  Due to  vesting  provisions
included  in  the  options,   only  options   representing  90,319  shares  were
exercisable  as of May 31, 1997, of which 17,350 are  exercisable  at $3.125 per
share,  6,250 are  exercisable  at $3.375 per share,  15,000 are  exercisable at
$7.00 per share,  32,720  are  exercisable  at $7.25 per  share,  and 18,999 are
exercisable at $7.50 per share.

3.  WARRANTS AND CONTINGENT VALUE RIGHTS

During the week of March 31,  1997,  the Company  completed a private  placement
(the "1997 Placement"), through a placement agent, pursuant to which the Company
issued an aggregate of 833,667 shares of common stock (the "Original Shares") to
the  participants  (the  "Investors")  in the 1997  Placement  and  received net
proceeds of approximately  $4,370,000  (after payment,  or accrual,  of fees and
expenses of approximately  $632,000).  Accompanying  each of the Original Shares
was the right,  under certain  circumstances,  to receive  additional  shares of
common stock in  accordance  with the terms of a  "contingent  value right" (the




                                                                               6

<PAGE>



"Rights").  The Rights, which expire June 25, 1998, are automatically  exercised
at the time,  and from time to time as, the Original  Shares are first  publicly
sold through a broker  dealer.  The terms of the Rights  provide that,  upon the
first such sale of any Original  Shares at a price of less than $8.00 per share,
the seller of the  Original  Shares will  automatically  receive,  for each such
Original Share sold,  and without the payment of any  additional  consideration,
such additional  number of shares of common stock as equals (i) $8.00 divided by
the Adjusted  Price,  minus (ii) one;  where the  Adjusted  Price will equal the
greater of (x) the average  closing  bid price per share of common  stock on The
Nasdaq National Market for the ten trading days  immediately  preceding the date
of sale of the  Original  Shares,  or (y)  $2.00.  In  connection  with the 1997
Placement,  the Company issued to an affiliate of the placement  agent warrants,
expiring September 23, 1997, to acquire an aggregate of 150,000 shares of common
stock at an exercise price of $9.60 per share. In addition to the foregoing,  as
of May 31, 1997, the Company had outstanding warrants, expiring August 18, 1999,
to acquire an aggregate of 200,000 shares of comon stock at an exercise price of
$8.40 per share which were granted to the managing  underwriter of the Company's
1994 initial public offering.

4.  NET LOSS PER SHARE

Per-share data has been computed on the basis of the weighted  average number of
shares of common stock outstanding during the periods.  Common stock options and
warrants, and contingent value rights are not included for the periods presented
as they would be anti-dilutive.



                                                                               7

<PAGE>



ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         This  Quarterly  Report  on  Form  10-QSB  contains,   in  addition  to
         historical information, certain forward-looking statements that involve
         significant risks and uncertainties.  Such  forward-looking  statements
         are based on  management's  belief as well as assumptions  made by, and
         information  currently  available to, management  pursuant to the "safe
         harbor" provisions of the Private  Securities  Litigation Reform Act of
         1995.  Forward-looking  statements  can generally be identified as such
         because the context of the statement usually will include words such as
         the  Company  "believes"  or  "expects"  or  words of  similar  import.
         Similarly,   statements  that  describe  the  Company's  future  plans,
         objectives,  estimates  or goals are also  forward-looking  statements.
         Such statements address future events and conditions concerning capital
         expenditures,  earnings,  sales,  liquidity and capital resources,  and
         accounting   matters.   The  Company's   actual  results  could  differ
         materially from those expressed in, or implied by, the  forward-looking
         statements contained herein.  Factors that could cause or contribute to
         such  differences  include,  but are not limited to, those discussed in
         "Financial  Condition"  below and in Item 1 - "Description of Business"
         and  elsewhere in the  Company's  Annual  Report on Form 10-KSB for the
         year  ended  February  28,  1997,  as well as  factors  such as  future
         economic conditions, acceptance by customers of the Company's products,
         changes in customer  demand,  legislative,  regulatory and  competitive
         developments  in  markets  in which  the  Company  operates  and  other
         circumstances  affecting  anticipated  revenues and costs.  The Company
         undertakes  no  obligation  to  release  publicly  the  result  of  any
         revisions  to  these  forward  looking  statements  that may be made to
         reflect events or circumstances after the date of this Quarterly Report
         on Form  10-QSB or to reflect  the  occurrence  of other  unanticipated
         events.


Overview

                  Since  1993,  the Company  has been  primarily  engaged in the
engineering, manufacturing and marketing of C-Phone(R), a line of PC-based video
conferencing  systems.  During the year ended February 28, 1997 ("Fiscal 1997"),
the Company commenced  third-party  contractual  software development related to
its PC-based video conferencing systems and substantially  completed development
of C-Phone Home(TM), a TV-based video phone.

                  In August  1994,  the Company  completed  its  initial  public
offering of 2,000,000  shares of its common stock (the "1994 Public  Offering"),
pursuant to which it received  net  proceeds of  approximately  $12,288,000,  of
which  approximately  $1,947,000 was used for the repayment of indebtedness  and
accrued interest thereon.





                                                                               8

<PAGE>



                  During the week of March 31,  1997,  the  Company  completed a
private  placement  (the "1997  Placement")  of 833,667  shares of Common Stock,
subject  to the  issuance,  for no  further  consideration,  of up to  2,500,001
additional shares of Common Stock, pursuant to which it received net proceeds of
approximately $4,370,000. The Company expects to use such proceeds for sales and
marketing of C-Phone Home,  the  continued  development  of  additional  C-Phone
products and features and related products,  for sales and marketing of C-Phone,
and working capital,  including funding anticipated increases in inventories and
receivables.

                  The Company commenced  operations in 1986 as a manufacturer of
promotional  radios  and,  in 1990,  developed  data/fax  modems  under the name
"TWINCOM".  In early  1993,  because of  continued  price  pressures,  shrinking
margins and for competitive  reasons, the Company shifted its primary focus from
modems to the  development of C-Phone and, during the fiscal year ended February
28,  1995,  the Company  phased out its modem  product  line as it was no longer
profitable.  Since 1993,  the  Company has  invested  significant  resources  in
product  development,  engineering  and  marketing  activities  for  C-Phone and
related  products,  and  expects  that such  investments  will  continue  in the
foreseeable  future.  The Company began shipping its new C-Phone Home product in
March 1997.  C-Phone Home may be purchased on a stand-alone basis or, similar to
the method by which most  cellular  telephones are sold,  at a lower  price when
purchased with  telecommunications  services offered by the Company. As a result
of these  activities  and the low  volume of sales,  the  Company  has  incurred
significant losses during the three fiscal years ended February 28, 1997 and the
fiscal  quarter  ended May 31,  1997.  The Company  expects to continue to incur
significant losses in the foreseeable future due to its significant expenditures
for product development and its marketing strategy for C-Phone Home.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MAY 31, 1997 ("1ST QUARTER 98") AS COMPARED TO
THREE MONTHS ENDED MAY 31, 1996 ("1ST QUARTER 97")

                    NET SALES. Net sales increased 9% to $436,800 in 1st Quarter
98 from $400,240 in 1st Quarter 97. Net sales for 1st Quarter 98 included  sales
of C-Phone Home (the first shipments of which commenced  during 1st Quarter 98).
As a result, net sales of other C-Phone products decreased  approximately 18% in
1st Quarter 98 as compared  to 1st  Quarter 97. The Company  believes  that such
decrease was primarily  related to a change in sales and marketing  personnel in
the  second  half of Fiscal  1997,  management's  determination  to focus on the
launch of C-Phone  Home and the  introduction  of a variety of new  products  by
third parties  which  management  believes may have  affected the  acceptance of
desktop video conferencing equipment.

                  COST  OF  GOODS  SOLD.  Cost of  goods  sold  includes  labor,
materials and other  manufacturing  costs (such as salaries,  supplies,  leasing
costs,  depreciation  related to  production  operations  and the  write-down of
inventory  to net  realizable  value).  Cost of  goods  sold  increased  132% to



                                                                               9

<PAGE>


$901,016 (206% of net sales) in 1st value). Cost of goods sold increased 132% to
$901,016  (206% of net sales) in 1st Quarter 98 from $388,649 (97% of net sales)
in 1st  Quarter 97. The  increase in cost of goods sold and the  increase in the
percentage of cost of goods sold to net sales were both primarily related to the
cost of manufacture  of C-Phone Home and the write-down of related  inventory to
its net  realizable  value,  based upon the  Company's  marketing  strategy  for
C-Phone Home.

                  GROSS  PROFIT  (LOSS).  The gross loss from sales of goods was
$464,216 (106% of net sales) in 1st Quarter 98, as compared to a gross profit of
$11,591 (3% of revenues) in 1st Quarter 97. The gross loss was directly  related
to the Company's marketing strategy for C-Phone Home.

                  SELLING,  GENERAL  AND  ADMINISTRATIVE.  Selling,  general and
administrative  expenses  increased 76% to $1,162,212  (or 266% of net sales) in
1st  Quarter  98 from  $661,940  (or 165% of net sales) in 1st  Quarter  97. The
primary  reason for the  increase was a 145%  increase in selling and  marketing
expenses to approximately $718,000 in 1st Quarter 98 from approximately $293,000
in 1st Quarter 97,  substantially  all of which increase was directly related to
the  initial  marketing  launch  of  C-Phone  Home.  In  addition,  general  and
administrative  expenses  increased  as a result of  increased  personnel  costs
resulting from  additional  customer  support  personnel and a  reallocation  of
duties of certain  personnel from research,  development  and  engineering.  The
Company expects that it will continue to incur substantial selling,  general and
administrative expenses during the fiscal year ending February 28, 1998 ("Fiscal
1998") as a result of the commercialization of C-Phone Home.

                  RESEARCH,  DEVELOPMENT AND ENGINEERING.  Research, development
and  engineering  expenses  increased  5% to $280,739  (64% of net sales) in 1st
Quarter 98 from  $267,721 (67% of net sales) in 1st Quarter 97. The increase was
primarily the result of  development  and  engineering  expenses  related to the
development of enhancements  to C-Phone Home,  offset by a decrease in personnel
costs resulting from a partial change in duties of certain personnel to selling,
general and  administrative.  All of these costs were charged to  operations  as
incurred and were funded by the Company's cash reserves.  The Company expects to
continue to invest  significant  resources during the foreseeable  future in new
product development and engineering.

                  OPERATING  LOSS. As a result of the factors  discussed  above,
the Company's operating loss increased 108% to $1,907,167 in 1st Quarter 98 from
$918,070 in 1st Quarter 97.

                  INTEREST.  Interest  income  decreased  11% to  $42,411 in 1st
Quarter 98 from $47,756 in 1st Quarter 97 as a result of decreased  investments,
as the Company  utilized  the net  proceeds of the 1994 Public  Offering for the
continuing development and commercialization of C-Phone products,  offset by the
receipt in April 1997 of the net proceeds from the 1997 Placement.



                                                                              10

<PAGE>



                  INCOME TAXES.  The Company's losses for 1st Quarter 97 and 1st
Quarter 98 may be utilized as an offset against future earnings,  although there
is no assurance that future operations will produce taxable earnings.

FINANCIAL CONDITION

                  The Company has financed its recent operations  primarily as a
result of the 1994 Public  Offering,  which raised net proceeds of approximately
$12,288,000,  and the 1997 Placement, which raised net proceeds of approximately
$4,370,000.

                  At May 31, 1997, the Company had working capital of $4,964,604
(an increase from $2,318,766 at February 28, 1997) and cash and cash equivalents
(including  short-term  investments) of $4,187,900 (as compared to $1,398,049 at
February 29, 1997).  The Company's  invested  funds consist  primarily of United
States  Treasury  Bills and  obligations of United States  government  agencies.
During  1st  Quarter  98,  operating  activities  used  $1,577,758  of net cash,
primarily to fund operating activities, investing activities used $32,454 of net
cash for equipment  purchases,  and financing  activities provided $4,400,063 of
net cash primarily from the 1997 Placement.  Due to the technical  nature of the
Company's business and the anticipated  expansion of its C-Phone technology into
new applications, management expects to continue to expend significant resources
for  continued  development  and  engineering  as well as selling and  marketing
expenses.

                  The Company believes that its current working  capital,  which
includes the net proceeds from the 1997  Placement,  together  with  anticipated
funds  from  operations,  will be  sufficient  to meet the  Company's  projected
operating    needs   and   capital    expenditures,    including   the   initial
commercialization  of C-Phone Home, through the end of the Fiscal 1998. However,
if C-Phone Home gains any market acceptance, of which there can be no assurance,
the Company's  pricing strategy and the very substantial  investment which would
then be  required  by the Company for  manufacturing,  inventory  and  marketing
expenditures   and   carrying   of   accounts    receivable   related   to   the
commercialization   of  C-Phone  Home,  would  require  the  Company  to  obtain
additional  working  capital by the third fiscal  quarter of the current  fiscal
year.  The Company has commenced the planning  process to raise such funds.  The
Company  anticipates  that  such  funds  should be  available  through a private
placement of (i) its debt securities,  (ii) authorized,  but unissued, shares of
its Common Stock, or (iii) its debt securities  which would be convertible  into
such shares; and if and when still further funds are needed, that such funds may
be available through a possible public offering of its authorized, but unissued,
shares of Common Stock.  There can be no assurance that additional  funds needed
by the Company will be available when needed or, if available, that the terms of
such fundings will be favorable or acceptable to the Company.

                  Assuming  acceptance of C-Phone Home by the  marketplace,  the
Company  anticipates  that it may take in excess  of two  years,  if at all,  to



                                                                              11

<PAGE>


obtain  positive cash flow from the  Company's  anticipated  operations,  during
which time the Company may be required to obtain  still more  financing.  If the
Company is unable to timely obtain any of its required  funds,  its C-Phone Home
marketing  strategy may not be attainable  and its business  could be materially
adversely  affected.  Unless  adequate  income  from  sales of  C-Phone  Home is
attained,  the timing or receipt of which cannot be  predicted,  the Company may
require  additional cash resources for the development of alternative  products.
There can be no assurance  that  additional  funds needed by the Company will be
available when needed or, if available,  that the terms of such fundings will be
favorable or acceptable to the Company.

                  In  connection  with its 1994  Public  Offering,  the  Company
issued  warrants (the "1994  Warrants") to Josephthal  Lyon & Ross  Incorporated
("JLR") pursuant to a Representative's  Warrant  Agreement.  On or about January
13, 1997,  the  Company  received  from  the  holders of a majority  of the 1994
Warrants,  most of whom are officers of JLR, a request to register the shares of
Common Stock issuable upon exercise of the 1994  Warrants.  Although the Company
filed a registration  statement  with the Securities and Exchange  Commission to
register such shares (which registration statement was declared effective by the
Securities and Exchange  Commission on June 25, 1997), the Company's  failure to
file the  registration  statement within 45 days after January 13, 1997 may have
given the  holders of a majority of the 1994  Warrants  the right to require the
Company to repurchase  the 1994 Warrants for an aggregate of up to $1,370,000 at
any  time  prior to the  sale of a  majority  of such  shares  pursuant  to such
registration  statement.  If such holders  successfully  assert such right,  the
Company may not have the  financial  ability to make such  payment;  and, in the
event that such right is  successfully  asserted  at a time when the Company has
the  financial  ability to make such  payment,  such  payment  could  materially
adversely  affect the Company's  financial  condition and may deplete all of its
necessary cash resources for the  continuation of its  operations.  The possible
existence of this repurchase  right,  and the possibility of its exercise,  will
increase the difficulty of the Company raising its required  additional  working
capital on terms acceptable to the Company.

                  The development and recent  introduction,  of C-Phone Home has
placed a significant strain on the Company's limited  personnel,  management and
other resources.  The Company's ability to manage any future growth  effectively
will require it to continue to attract, train, motivate and manage its employees
successfully  and  to  continue  to  improve  its  operational,   financial  and
management systems. The Company's failure to effectively manage its growth could
have a material adverse effect on the Company's business and operating results.

                  The Company  leases its facility and has financed a portion of
its manufacturing  equipment  expenditures through capital leases. As of May 31,
1997, the Company had no material commitments for capital expenditures.



                                                                              12

<PAGE>



                  At  February  28,  1997,  the  Company  estimates  that it had
available net operating loss  carryforwards  of  approximately  $10,233,000  for
Federal   purposes  and  net  economic  loss   carryforwards   of  approximately
$10,482,000  for state  purposes,  which may be used to  reduce  future  taxable
income, if any. The Federal  carryforwards  will expire starting in 2009 and the
state carryforwards will expire starting in 1999.

                  The  Company  believes  that,  during  the past  three  years,
inflation has not had a significant  impact on the Company's  sales or operating
results. Certain of the components and sub-assemblies used by the Company in its
products,  such  as  the  CCD  color  camera  presently  used  in  C-Phone,  are
manufactured  outside of the United States and represents a material  portion of
the unit cost of the  Company's  basic  products.  Although  the Company has not
experienced  any  significant  price increases to date as a result of changes in
foreign currency rates,  there can be no assurance that, in the future,  changes
in foreign  currency  rates will not  affect the cost of its  foreign  purchased
components and sub-assemblies.

                  The Company's  foreign sales are  denominated in U.S.  dollars
and the Company does not incur any foreign currency risks; however, fluctuations
in  currency  exchange  rates  could  cause  the  Company's  products  to become
relatively  more  expensive  to  foreign  customers,  which  would  result  in a
reduction in foreign sales or the profitability of any of such sales.


PART II.          OTHER INFORMATION

ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

                  (A)  EXHIBITS

                       27.      Financial Data Schedule

                  (B)  REPORTS ON FORM 8-K

                       The  Company  filed a  Current  Report  on Form  8-K on 
                  April 2, 1997,  which responded to Item 5. "Other Events."





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<PAGE>



                                   SIGNATURES

                  In accordance  with the  requirements of the Exchange Act, the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.


                               C-PHONE CORPORATION



Date: July 14, 1997                          By: /S/ DANIEL P. FLOHR
                                                 -------------------
                                                   Daniel P. Flohr
                                                   President and Chief
                                                    Executive Officer
                                                   (Principal Executive Officer)




Date: July 14, 1997                          By: /S/ PAUL H. ALBRITTON
                                                 ---------------------
                                                     Paul H. Albritton
                                                     Vice President and Chief
                                                       Financial Officer
                                                     (Principal Accounting and
                                                       Financial Officer)






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