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 AUGUST 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.

            5,290,543 shares of common stock as of October 14, 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 August 31, 1997 (unaudited)                               3

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

             Statements of Cash Flows for the six months
             ended August 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 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS          13

ITEM 5.      OTHER INFORMATION                                            14

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K                             14


SIGNATURES                                                                15




                                                                               2
<PAGE>



PART I.  FINANCIAL INFORMATION

ITEM 1.           FINANCIAL STATEMENTS

                               C-PHONE CORPORATION
                                 BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                       February 28, 1997  August 31, 1997
                                                                       -----------------  ---------------
                                 ASSETS                                                   (unaudited)
<S>                                                                      <C>             <C>         
Current assets:
  Cash and cash equivalents                                              $  1,398,049    $  2,441,829
  Accounts receivable, net of allowance for
   doubtful accounts of $120,000 and $150,000
   at February 28, 1997 and at August 31, 1997 (unaudited)                    422,042         399,638
  Inventories                                                               1,341,931       1,279,202
  Prepaid expenses and other current assets                                    82,066         116,992
                                                                         ------------    ------------
    Total current assets                                                    3,244,088       4,237,661
Property and equipment, net                                                   251,913         235,601
Other assets                                                                  154,246          61,092
                                                                         ------------    ------------
    Total assets                                                         $  3,650,247    $  4,534,354
                                                                         ============    ============

                                  LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable, trade                                                $    587,877    $    367,771
  Accrued expenses                                                            325,938         165,938
  Current obligations under capital leases                                     11,507              --
                                                                         ------------    ------------
    Total current liabilities                                                 925,322         533,709
                                                                         ------------    ------------

Shareholders' equity:
  Common stock, $.01 par value; 20,000,000                                     
    shares authorized; 4,355,393 and 5,203,356
    shares issued and outstanding at February
    28, 1997 and August 31, 1997 (unaudited)                                   43,554          52,034
  Paid-in capital                                                          13,530,208      17,959,416
  Accumulated deficit                                                     (10,848,837)    (14,010,805)
                                                                         ------------    ------------
    Total shareholders' equity                                              2,724,925       4,000,645
                                                                         ------------    ------------
    Total liabilities and shareholders' equity                           $  3,650,247    $  4,534,354
                                                                         ============    ============
</TABLE>


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


                                                                               3

<PAGE>

<TABLE>
<CAPTION>

                                       C-PHONE CORPORATION
                                    STATEMENTS OF OPERATIONS
                                           (unaudited)


                                 Three months ended August 31,  Six months ended August 31,
                                 -----------------------------  ---------------------------
                                      1996           1997          1996            1997
                                  -----------    -----------    -----------    -----------
<S>                               <C>            <C>            <C>            <C>        
Net sales                         $   667,288    $   319,789    $ 1,067,528    $   752,910

Other revenue                              --          4,360             --          8,039
                                  -----------    -----------    -----------    -----------

     Total revenue                    667,288        324,149      1,067,528        760,949
                                  -----------    -----------    -----------    -----------

Cost of goods sold                    474,727        418,406        863,377      1,319,422

Cost of other revenue                      --          1,012             --          1,012
                                  -----------    -----------    -----------    -----------

     Total cost of revenue            474,727        419,418        863,377      1,320,434
                                  -----------    -----------    -----------    -----------

     Gross profit (loss)              192,561        (95,269)       204,151       (559,485)
                                  -----------    -----------    -----------    -----------

Operating expenses:

  Selling, general
   and administrative                 506,017      1,003,111      1,167,957      2,165,323

  Research, development
   and engineering                    265,247        240,247        532,968        520,986
                                  -----------    -----------    -----------    -----------

     Total operating expenses         771,264      1,243,358      1,700,925      2,686,309
                                  -----------    -----------    -----------    -----------

     Operating loss                  (578,703)    (1,338,627)    (1,496,774)    (3,245,794)

Interest expense                         (682)          (135)        (1,493)          (447)

Interest income                        35,912         41,862         83,668         84,273
                                  -----------    -----------    -----------    -----------

     Net loss                     $  (543,473)   $(1,296,900)   $(1,414,599)   $(3,161,968)
                                  ===========    ===========    ===========    ===========

Per-share data:

     Net loss per share           $     (0.13)   $     (0.25)   $     (0.33)   $     (0.62)
                                  ===========    ===========    ===========    ===========

     Weighted average number of
      common shares and
      common share equivalents
      outstanding                   4,347,293      5,203,356      4,347,293      5,061,132
                                  ===========    ===========    ===========    ===========
</TABLE>


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


                                                                               4
<PAGE>

                                                          C-PHONE CORPORATION
                                                       STATEMENTS OF CASH FLOWS
                                                              (unaudited)
<TABLE>
<CAPTION>

                                                                Six Months Ended August 31,
                                                                ---------------------------
                                                                    1996           1997
                                                                -----------    ------------
<S>                                                             <C>            <C>         
Cash flows from operating activities:
  Net loss                                                      $(1,414,599)   $(3,161,968)
  Adjustments to reconcile net loss to net
   cash used in operating activities:
      Depreciation and amortization                                  67,708         53,527
      Provision for doubtful accounts                                30,000         30,000
      Compensation expense of stock options                              --         19,200
      Compensation expense of stock issued                               --         14,220
      Changes in operating assets and liabilities:
        Accounts receivable                                         (84,437)        (7,596)
        Inventories                                                 (51,056)        62,729
        Prepaid expenses and other current assets                    27,841        (34,926)
        Other assets                                                (12,145)        93,154
        Accounts payable                                             45,669       (220,106)
        Accrued expenses                                            (15,423)      (160,000)
                                                                -----------    -----------
          Net cash used in operating activities                  (1,406,442)    (3,311,766)
                                                                -----------    -----------
Cash flows from investing activities:
  Equipment purchases                                               (49,505)       (37,215)
  Purchase of short term investments                             (1,282,189)            --
  Maturities of short investments                                 3,313,831             --
                                                                -----------    -----------
          Net cash provided by (used in) investing activities     1,982,137        (37,215)
                                                                -----------    -----------
Cash flows from financing activities:
  Proceeds from exercise of stock options                                --         34,750
  Net proceeds from private placement of common stock                    --      4,369,518
  Payment of capital lease obligations                               (8,069)       (11,507)
                                                                -----------    -----------
          Net cash (used in) provided by financing activities        (8,069)     4,392,761
                                                                -----------    -----------

          Net increase in cash and cash equivalents                 567,626      1,043,780
Cash and cash equivalents, beginning of period                    1,852,820      1,398,049
                                                                -----------    -----------
Cash and cash equivalents, end of period                        $ 2,420,446    $ 2,441,829
                                                                ===========    ===========

Supplemental disclosure of cash flow information:
  Interest paid                                                 $     1,493    $       447
                                                                ===========    ===========
  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

                                 AUGUST 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 and six  month  periods  ended  August  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 August 31, 1997,  options for 303,110 shares of common stock were
         outstanding  under the  Company's  1994 Stock  Option Plan (the "Plan")
         (54,750  of which  are  non-qualified  options  exercisable  at  prices
         ranging  from  $3.00 to $7.00  per  share,  depending  upon the date of
         grant, and 248,360 of which are incentive stock options  exercisable at
         prices  ranging  from $2.375 to $10.625 per share,  depending  upon the
         date of the grant), and options for 179,234 shares of common stock were
         available for future grants. Due to vesting provisions  included in the
         options,  only options representing 140,896 shares of common stock were
         exercisable  as of August 31,  1997.  The  following  table  summarizes
         certain information with respect to exercisable options:

                   Range of                                 Number of
                Exercise Price                         Options Exercisable
          --------------------------                  ----------------------
                $3.00 - $3.99                                56,007
                $6.00 - $6.99                                 1,833
                $7.00 - $7.99                                83,056
                                                            -------
                                                            140,896
                                                            =======


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   "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
         equals 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. As of September 30, 1997, 803,667 Original Shares had been first
         sold through a broker-dealer, and, pursuant to the terms of the


                                                                               6
<PAGE>

                               C-PHONE CORPORATION
                     NOTES TO UNAUDITED FINANCIAL STATEMENTS

                                 AUGUST 31, 1997


3.       WARRANTS  AND  CONTINGENT  VALUE  RIGHTS (Continued)

         Rights,  136,863  additional  shares  have  been or will be issued as a
         result  thereof.  As of such date, only 30,000 Original Shares continue
         to have the ability to exercise the Rights.

         In  connection  with the  1997  Placement,  the  Company  issued  to an
         affiliate  of the  placement  agent  warrants,  currently  expiring  on
         December 22, 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 August 31, 1997, the Company had outstanding warrants,
         expiring  August 18, 1999, to acquire an aggregate of 200,000 shares of
         common stock,  at an exercise price of $8.40 per share,  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. Shares
         issuable  upon  exercise  of common  stock  options and  warrants,  and
         contingent value rights,  are not included for the periods presented as
         they would be anti-dilutive.

5.       NEW  ACCOUNTING  PRONOUNCEMENTS

         The Company will adopt Statement of Financial  Accounting Standards No.
         128,  "Earnings Per Share" ("SFAS No. 128") on February 28, 1998.  SFAS
         No.  128  requires  the  Company  to change  its  method of  computing,
         presenting  and  disclosing   earnings  per  share  information.   Upon
         adoption,  all prior period data  presented will be restated to conform
         to the  provisions of SFAS No. 128. If the Company had adopted SFAS No.
         128 for the period ended  August 31, 1997,  the basic income per common
         share  would  be the  same as the  net  loss  per  share  shown  in the
         Statements of Operations included in Item 1 of Part I of this Quarterly
         Report on Form  10-QSB and, as the  computation  of diluted  income per
         common  share would be  anti-dilutive,  the  diluted  income per common
         share would be the same as the basic income per common share.

         In June 1997, the Financial Accounting Standards Board issued Statement
         of Financial  Accounting  Standards No. 130,  "Reporting  Comprehensive
         Income" ("SFAS No. 130").  SFAS No. 130  establishes  standards for the
         reporting and  displaying of  comprehensive  income and its  components
         (revenues, expenses, gains and losses) in a full set of general purpose
         financial statements. SFAS No. 130 requires the disclosure of an amount
         that  represents  total  comprehensive  income  and the  components  of
         comprehensive  income in a financial  statement.  The  pronouncement is
         effective for fiscal years  beginning  after  December 15, 1997, and is
         not  expected  to have a  material  impact on the  Company's  financial
         statements.

         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 No. 131").  SFAS No.
         131  establishes   standards  for  determining  an  entity's  operating
         segments  and  the  type  and  level  of  financial  information  to be
         disclosed in both annual and interim financial statements. SFAS No. 131
         also establishes  standards for related  disclosures about products and
         services,  geographic areas and major customers.  The  pronouncement is
         effective for periods  beginning  after  December 15, 1997,  and is not
         expected  to  have  a  material  impact  on  the  Company's   financial
         statements.


                                                                               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 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.

         During the week of March 31,  1997,  the  Company  completed  a private
placement (the "1997 Placement") of 833,667 shares of its common stock,  subject
to the  issuance,  for no further  consideration,  of  additional  shares of its
common  stock,  pursuant to which it  received  net  proceeds  of  approximately
$4,370,000.  See Note 3 to Notes to Unaudited Financial Statements.  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.


                                                                               8

<PAGE>


         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.  While, to
date,  approximately  90% of C-Phone  Home sales have been made under the latter
purchase  option,  that  percentage  has been  decreasing  steadily  and, with a
planned  expansion into catalog and  international  sales,  the Company believes
that future sales under such purchase option will be at a  significantly  lesser
percentage of total C-Phone Home sales.  However,  since a significant amount of
future sales may continue to be made under such purchase  option,  and since the
current  manufactured cost exceeds the net proceeds received by the Company from
the sale of a C-Phone  Home unit sold under  such  purchase  option,  until such
time,  if at all,  as (i) the  percentage  of sales under such  purchase  option
becomes insignificant,  (ii) the Company attains sufficient manufacturing volume
or can utilize  less costly  components  in the  manufacture  of C-Phone Home to
enable the Company to reduce its  manufactured  cost,  or (iii) profits from the
sale  of   telecommunications   services  exceed  the  difference   between  the
manufactured  cost and the sales  price of  C-Phone  Home  under  such  purchase
option,  the Company's sales of C-Phone Home under such purchase option will not
be profitable. As a result of the foregoing, the Company's activities since 1994
and the low volume of sales, the Company has incurred  significant losses during
the three fiscal  years ended  February 28, 1997 and the six months ended August
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  AUGUST 31,  1997 ("2ND  QUARTER  98") AS COMPARED TO THREE
MONTHS ENDED AUGUST 31, 1996 ("2ND QUARTER 97")

         REVENUES.  Revenues  decreased  51% to  $324,149 in 2nd Quarter 98 from
$667,288  in 2nd  Quarter  97,  as a result  of a 52%  decrease  in net sales to
$319,789 in 2nd Quarter 98 from $667,288 in 2nd Quarter 97. Management  believes
that this  decrease  in net sales  reflects  an  industry-wide  slowdown  in the
continued acceptance of PC-based desktop video conferencing.

         COST OF REVENUE.  Cost of revenue  consists  primarily of 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  decreased 12% to $418,406 (131% of net sales) in 2nd Quarter 98 from
$474,727  (71% of net sales) in 2nd  Quarter  97. The  decrease in cost of goods
sold was  primarily  related to the  decrease in net sales while the increase in
the  percentage of cost of goods sold to net sales was primarily  related to the
cost of manufacture  of C-Phone Home and the write-down of related  inventory to
its current net realizable  value based upon the historical  high  percentage of
sale of C-Phone Home units below manufactured cost when sold in conjunction with
telecommunications services. See "Overview."

         GROSS PROFIT  (LOSS).  The gross loss was $95,269 in 2nd Quarter 98, as
compared to a gross profit of $192,561  (29% of revenues) in 2nd Quarter 97. The
gross loss in 2nd  Quarter 98 was  primarily  the result of the  decrease in net
sales and the Company's marketing strategy for C-Phone Home.

         SELLING,    GENERAL   AND   ADMINISTRATIVE.    Selling,   general   and
administrative  expenses  increased 98% to $1,003,111  (309% of revenues) in 2nd
Quarter 98 from $506,017 (76% of revenues) in 2nd Quarter 97. The primary reason
for the  increase  was a 164%  increase  in selling  and  marketing  expenses to
approximately  $475,000  in 2nd  Quarter 98 from  approximately  $180,000 in 2nd
Quarter 97,  substantially  all of which  increase was  directly  related to the
marketing launch of C-Phone Home.  Other increases in expenses  directly related
to  C-Phone  Home were  increased  personnel  costs  resulting  from  additional
customer support and administrative personnel and increased reserve for bad debt
expenses as a result of the  historical  experience of the retail  industry.  In
addition,  other increases in  administrative  expenses were increased legal and
audit expenses primarily as a result of the complexities  related to the changes
in the Company's business,  the reallocation of duties of certain personnel from
research,  development and  engineering,  and increased  investor  relations and
other shareholder  expenses resulting from a significant  increase in the number
of holders of


                                                                               9

<PAGE>

record of the Company's  common stock. 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
continued commercialization of C-Phone Home.

         RESEARCH,  DEVELOPMENT  AND  ENGINEERING.   Research,  development  and
engineering  expenses  decreased 9% to $240,247 (74% of revenues) in 2nd Quarter
98 from $265,247 (40% of revenues) in 2nd Quarter 97. The decrease was primarily
the result of 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  131% to $1,338,627 in 2nd Quarter 98 from
$578,703 in 2nd Quarter 97.

         INTEREST.  Interest  income  increased 17% to $41,862 in 2nd Quarter 98
from $35,912 in 2nd Quarter 97 as a result of increased investments arising from
the net proceeds obtained from the 1997 Placement.

         INCOME TAXES.  The Company's  losses for 2nd Quarter 97 and 2nd Quarter
98 may be utilized as an offset  against future  earnings,  although there is no
assurance that future operations will produce taxable earnings.

SIX MONTHS  ENDED  AUGUST 31,  1997 ("SIX  MONTHS 98") AS COMPARED TO SIX MONTHS
ENDED AUGUST 31, 1996 ("SIX MONTHS 97")

         REVENUES.  Revenues  decreased  29% to  $760,949  in Six Months 98 from
$1,067,528  in Six  Months  97,  as a result of a 29%  decrease  in net sales to
$752,910 in Six Months 98 from $1,067,528 in Six Months 97. Management  believes
that this  decrease  in net sales  reflects  an  industry-wide  slowdown  in the
continued acceptance of PC-based desktop video conferencing.

         COST OF REVENUE.  Cost of revenue  consists  primarily of 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 53% to $1,319,422 (175% of net sales) in Six Months 98 from
$863,377 (81% of net sales) in Six Months 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  current  net  realizable  value  based  upon the
historical high percentage of sales of C-Phone Home units below the manufactured
cost when sold in conjunction with telecommunications services. See "Overview."

         GROSS PROFIT  (LOSS).  The gross loss was $559,485 in Six Months 98, as
compared to a gross  profit of $204,151  (19% of revenues) in Six Months 97. The
gross loss in Six Months 98 was  primarily  the  result of the  decrease  in net
sales of goods and the Company's marketing strategy for C-Phone Home.

         SELLING,    GENERAL   AND   ADMINISTRATIVE.    Selling,   general   and
administrative  expenses  increased 85% to $2,165,323  (285% of revenues) in Six
Months 98 from  $1,167,957  (109% of  revenues)  in Six Months  97. The  primary
reason for the increase was a 130% increase in selling and marketing expenses to
approximately  $1,194,000  in Six Months 98 from  approximately  $520,000 in Six
Months 97,  substantially  all of which  increase  was  directly  related to the
marketing launch of C-Phone Home.  Other increases in expenses  directly related
to  C-Phone  Home were  increased  personnel  costs  resulting  from  additional
customer support and administrative personnel and increased reserve for bad debt
expenses  based  upon the  historical  experience  of the  retail  industry.  In
addition,  other increases in  administrative  expenses were increased legal and
audit expenses, primarily as a result of the complexities related to the changes
in the Company's business,  the reallocation of duties of certain personnel from
research, development and engineering, and increased investor


                                                                              10

<PAGE>

relations and other shareholder  expenses resulting from a significant  increase
in the number of holders of record of the Company's  common  stock.  The Company
expects  that it  will  continue  to  incur  substantial  selling,  general  and
administrative  expenses  during  the Fiscal  1998 as a result of the  continued
commercialization of C-Phone Home.

         RESEARCH,  DEVELOPMENT  AND  ENGINEERING.   Research,  development  and
engineering expenses decreased 2% to $520,986 (68% of revenues) in Six Months 98
from $532,968 (50% of revenues) in Six Months 97. The decrease was primarily the
result of a decrease  in  personnel  costs  resulting  from a partial  change in
duties of certain  personnel to selling,  general and  administrative  offset by
development and engineering  expenses related to the development of enhancements
to C-Phone  Home.  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  117% to  $3,245,794 in Six Months 98 from
$1,496,774 in Six Months 97.

         INTEREST. Interest income increased 1% to $84,273 in Six Months 98 from
$83,668 in Six Months 97 as a result of  increased  investment  arising from the
net proceeds obtained from the 1997 Placement.

         INCOME TAXES.  The Company's losses for Six Months 97 and Six Months 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  from the
proceeds 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 August 31, 1997,  the Company had working  capital of $3,703,952 (an
increase  from  $2,318,766  at February 28, 1997) and cash and cash  equivalents
(including  short-term  investments) of $2,441,829 (as compared to $1,398,049 at
February 28, 1997).  The Company's  invested  funds consist  primarily of United
States  Treasury  Bills and  obligations of United States  government  agencies.
During  Six  Months  98,  operating  activities  used  $3,311,766  of net  cash,
primarily to fund operating activities, investing activities used $37,215 of net
cash for equipment  purchases,  and financing  activities provided $4,392,761 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 calendar  1997. The Company has commenced the planning
process to raise additional working capital.  The Company  anticipates that such
funds should be available through one or more possible sources,  including (i) a
private  placement of (a) its debt  securities,  (b)  authorized,  but unissued,
shares of its common stock or preferred  stock,  and/or (c) its debt  securities
which  would be  convertible  into such  shares,  (ii)  through  the  receipt of
proceeds  from the  possible  exercise of  outstanding  warrants to purchase the
Company's  common stock,  if the market price of the common stock were to exceed
the exercise price of such warrants, of which there can be no assurance,  and/or
(iii) a public offering of its authorized, but unissued, shares of common stock.
If C-Phone Home gains 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


                                                                              11

<PAGE>


commercialization of C-Phone Home, would require the Company to obtain even more
working capital through a possible offering of its 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  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 relating to 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.

         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 owns its  manufacturing  equipment
free from  encumbrances.  As of August 31,  1997,  the  Company  had no material
commitments for capital expenditures.

         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.


                                                                              12

<PAGE>



PART II. OTHER INFORMATION

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         On  August  8,  1997,  the  Company  held  an  Annual  Meeting  of  its
shareholders,  at which time each of the six incumbent  directors of the Company
who had been  nominated by the Board of Directors for  re-election as a director
of the Company was re-elected as a director. The votes cast were as follows:

                                           FOR                    WITHHELD
                                           ---                    --------

         Daniel P. Flohr                4,807,971                  63,386
         Seymour L. Gartenberg          4,804,821                  66,536
         Tina L. Jacobs                 4,807,171                  64,186
         Donald S. McCoy                4,806,146                  65,211
         E. Henry Mize                  4,805,946                  65,411
         Stuart E. Ross                 4,806,671                  64,686


         At the Annual  Meeting  four  additional  proposals  were voted upon as
follows:

         (1)      Proposal to approve the issuance of up to 2,501,001  shares of
                  the Company's common stock upon exercise of "contingent  value
                  rights"  granted  to  investors  in the  Company's  March 1997
                  private placement:

                    For                   Against           Abstaining
                    ---                   -------           ----------

                  2,737,636               133,410             30,723


         (2)      Proposal to approve the amendment of the Company's Certificate
                  of Incorporation  to increase the authorized  number of shares
                  of common stock from ten million to twenty million:

                    For                   Against           Abstaining
                    ---                   -------           ----------

                  4,691,680               154,429             25,248


         (3)      Proposal to approve the amendment of the Company's Certificate
                  of  Incorporation  to authorize the Company to issue up to one
                  million shares of preferred stock:

                    For                   Against           Abstaining
                    ---                   -------           ----------

                  2,690,803               181,020             29,946


         (4)      Proposal to ratify Coopers & Lybrand L.L.P. as the independent
                  auditors  for the Company for the fiscal year ending  February
                  28, 1998:

                    For                   Against           Abstaining
                    ---                   -------           ----------

                  4,835,502               20,046              15,809



                                                                              13

<PAGE>



ITEM 5.  OTHER INFORMATION

         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. As previously disclosed,  the
holders of a majority of the 1994 Warrants may have had 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 the shares of common stock  issuable
upon exercise of the 1994 Warrants. On September 22, 1997, the then holders of a
majority of the 1994  Warrants,  most of whom are  officers of JLR,  waived such
repurchase  right for all of such holders and, in  consideration  therefor,  the
Company  extended  the  expiration  date  of the  warrants  issued  in the  1997
Placement to an affiliate of JLR from  September  23, 1997 to December 22, 1997.
See Note 3 to Notes to Unaudited Financial Statements included in Item 1 of Part
I of this Quarterly Report on Form 10-QSB.

         On August 12, 1997, the Company filed a Certificate of Amendment to its
Certificate  of  Incorporation  with the  Secretary of State of the State of New
York  increasing  the  authorized  number of  shares  of common  stock to twenty
million  and  authorizing  the  Company  to issue up to one  million  shares  of
preferred stock.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (A)      EXHIBITS

                  3.   Articles of Incorporation and By-laws

                       (a)     Certificate   of  Amendment  to   Certificate  of
                               Incorporation,  as filed  with the  Secretary  of
                               State  of the  State of New  York on  August  12,
                               1997.

                        27.    Financial Data Schedule

         (B)      REPORTS ON FORM 8-K

                  The Company  did not file a Current  Report on Form 8-K during
                  the quarter ended August 31, 1997.




                                                                              14

<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.

<TABLE>
<CAPTION>

                               C-PHONE CORPORATION



<S>                                     <C> 
Date: October 15, 1997                 By:  /s/ DANIEL P. FLOHR
                                           --------------------
                                                Daniel P. Flohr
                                                President and Chief Executive Officer
                                                (Principal Executive Officer)


Date: October 15, 1997                 By:  /s/ PAUL H. ALBRITTON
                                           ----------------------
                                                Paul H. Albritton
                                                Vice President and Chief Financial Officer
                                                (Principal Accounting and Financial Officer)
</TABLE>



                                                                              15