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, 1998


[ ]      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.

              7,058,200 shares of common stock as of JULY 14, 1998.


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, 1998
         and May 31, 1998 (unaudited) ................................    3

         Statements of Operations for the three
         months ended May 31, 1997 and 1998 (unaudited) ..............    4

         Statements of Cash  Flows for the three months ended 
         May 31, 1997 and 1998 (unaudited) ...........................    5

         Notes to Unaudited Financial Statements .....................    6

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ...    9


PART II. OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K ............................   15


SIGNATURES ...........................................................   16


                                        2
<PAGE>


PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                                         C-PHONE CORPORATION
                                           BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                      February 28, 1998 May 31, 1998
                                                                      ----------------- ------------
<S>                                                                     <C>             <C>         
         ASSETS                                                                         (unaudited)
Current assets:
  Cash and cash equivalents                                             $  4,200,231    $  7,366,971
  Accounts receivable, net of allowance for doubtful                         346,684         270,614
    accounts of $173,227 at February 28, 1998 and
    $149,858 at May 31, 1998 (unaudited)
  Inventories                                                              1,641,528       1,924,838
  Prepaid expenses and other current assets                                   73,728          80,567
                                                                        ------------    ------------
          Total current assets                                             6,262,171       9,642,990
Property and equipment, net                                                  164,174         137,839
Other assets                                                                  42,686          31,474
                                                                        ------------    ------------
          Total assets                                                  $  6,469,031    $  9,812,303
                                                                        ============    ============

          LIABILITIES, PREFERRED STOCK AND
          SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable, trade                                               $    796,019    $    561,779
  Accrued expenses                                                           295,647         250,322
                                                                        ------------    ------------
          Total current liabilities                                        1,091,666         812,101

Series A Convertible Preferred Stock, $1,000 stated amount;                4,543,767       1,966,960
  5,000 shares designated; 4,500 and 1,924 shares issued and
  outstanding  at February 28, 1998 and May 31, 1998 (unaudited),
  respectively (Note 3(b))

Shareholders' equity:
  Common stock, $.01 par value; 20,000,000 shares authorized                  53,482          70,582
    at February 28, 1998 and May 31, 1998 (unaudited);
    5,348,234 and 7,058,200 shares issued and outstanding at
    February 28, 1998 and May 31, 1998 (unaudited), respectively
  Paid-in capital - common stock                                          18,038,006      26,063,755
  Paid-in capital - preferred stock                                        1,318,350         563,668
  Accumulated deficit                                                    (18,576,240)    (19,664,763)
                                                                        ------------    ------------
          Total shareholders' equity                                         833,598       7,033,242
                                                                        ------------    ------------
          Total liabilities, preferred stock and shareholders' equity   $  6,469,031    $  9,812,303
                                                                        ============    ============


              The accompanying notes are an integral part of the financial statements.
</TABLE>


                                        3
<PAGE>


                               C-PHONE CORPORATION
                            STATEMENTS OF OPERATIONS
                                   (unaudited)

                                                     Three Months Ended May 31,
                                                     --------------------------
                                                        1997           1998
                                                        ----           ----

Net sales                                            $   433,121    $   339,150
Other revenue                                              3,679         16,388
                                                     -----------    -----------

     Total revenue                                       436,800        355,538
                                                     -----------    -----------

Cost of goods sold                                       901,016        508,073
Cost of other revenue                                         --          8,202
                                                     -----------    -----------

     Total cost of revenue                               901,016        516,275
                                                     -----------    -----------

     Gross profit (loss)                                (464,216)      (160,737)
                                                     -----------    -----------

Operating expenses:
  Selling, general and administrative                  1,162,212        725,584
  Research, development and engineering                  280,739        209,067
                                                     -----------    -----------

     Total operating expenses                          1,442,951        934,651
                                                     -----------    -----------

     Operating loss                                   (1,907,167)    (1,095,388)

Interest expense                                            (312)            --
Interest income                                           42,411         52,743
                                                     -----------    -----------

     Net loss                                        $(1,865,068)   $(1,042,645)
                                                     ===========    ===========

Per-share data:
     Basic and diluted net loss per common share     $     (0.38)   $     (0.19)
                                                     ===========    ===========

Shares used in computing net loss per common share     4,918,908      5,807,623
                                                     ===========    ===========


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


                                        4
<PAGE>


                               C-PHONE CORPORATION
                            STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                                     Three Months Ended May 31,
                                                     --------------------------
                                                        1997           1998
                                                     -----------    -----------
Cash flows from operating activities:
  Net loss                                           $(1,865,068)   $(1,042,645)
  Adjustments to reconcile net loss to net
   cash used in operating activities:
      Depreciation and amortization                       26,597         32,926
      Bad debt expense                                    19,300         79,681
      Compensation expense of stock options                9,600          9,600
      Compensation expense of stock issued                14,220             --
      Changes in operating assets and liabilities:
        Accounts receivable                              (63,453)        (3,611)
        Inventories                                      204,347       (283,310)
        Prepaid expenses and other current assets        (33,397)        (6,839)
        Other assets                                      88,675         11,212
        Accounts payable                                 104,842       (234,240)
        Accrued expenses                                 (83,421)       (45,325)
                                                     -----------    -----------
          Net cash used in operating activities       (1,577,758)    (1,482,551)
                                                     -----------    -----------

Cash flows from investing activities:
  Equipment purchases                                    (32,454)        (6,591)
                                                     -----------    -----------
          Net cash used in investing activities          (32,454)        (6,591)
                                                     -----------    -----------

Cash flows from financing activities:
  Proceeds from exercise of stock options                 34,750        304,937
  Proceeds from private placement of common stock      4,369,518             --
  Proceeds from exercise of warrants                          --      4,350,945
  Payment of capital lease obligations                    (4,205)            --
                                                     -----------    -----------
          Net cash provided by financing activities    4,400,063      4,655,882
                                                     -----------    -----------

          Net increase in cash and cash equivalents    2,789,851      3,166,740
                                                     -----------    -----------

Cash and cash equivalents, beginning of period         1,398,049      4,200,231
                                                     -----------    -----------

Cash and cash equivalents, end of period             $ 4,187,900    $ 7,366,971
                                                     ===========    ===========

Supplemental disclosure of cash flow information:

  Interest paid                                      $       312    $        --
                                                     ===========    ===========



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

                                        5
<PAGE>

                               C-PHONE CORPORATION
                     NOTES TO UNAUDITED FINANCIAL STATEMENTS

                                  MAY 31, 1998


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-month  period  ended  May 31,  1998 are not  necessarily
         indicative  of the  results  that may be  expected  for the fiscal year
         ending February 28, 1999. 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, 1998.

2.       STOCK OPTIONS

         As of May 31, 1998,  options for 254,727 shares of the Company's common
         stock,  par value $.01 per share (the "Common Stock") were  outstanding
         under the  Company's  1994 Stock  Option Plan (the  "Plan")  (44,417 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 210,310
         of which are incentive stock options exercisable at prices ranging from
         $3.125 to $10.375 per share, depending upon the date of the grant), and
         options for 161,853  shares of Common Stock were  available  for future
         grants. Due to vesting provisions included in the options, only options
         representing  151,316 shares of Common Stock were exercisable as of May
         31, 1998.  The following  table  summarizes  certain  information  with
         respect to exercisable options:

                                                            Number of
                            Range of                         Options
                         Exercise Price                    Exercisable
                  ------------------------------       -------------------
                          $3.00 - $3.38                      43,593
                          $5.95 - $6.75                      14,001
                          $7.00 - $7.50                      91,390
                             $10.375                          2,332


3.       PREFERRED STOCK, WARRANTS AND CONTINGENT VALUE RIGHTS

         (a)  During the week of March 31, 1997, the Company completed a private
              placement  (the "March  Placement"),  through a  placement  agent,
              pursuant  to which the  Company  issued an  aggregate  of  833,667
              shares (the "Original Shares") of Common Stock to the participants
              (the "Investors") in the March 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 expired June 25, 1998, were  automatically  exercised at the
              time,  and from time to time,  as the  Original  Shares were first
              publicly  sold  through a  broker-dealer.  The terms of the Rights
              provided 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 would 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 equaled (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,  and (y) $2.00. All the Original Shares have been
              publicly resold and, pursuant to the terms of the Rights,  136,863
              additional  shares were issued as a result thereof.  

                                        6
<PAGE>

                               C-PHONE CORPORATION
                     NOTES TO UNAUDITED FINANCIAL STATEMENTS

                                  MAY 31, 1998

              In connection with the March  Placement,  the Company issued to an
              affiliate of the placement  agent warrants to acquire an aggregate
              of 150,000  shares of Common  Stock at an exercise  price of $9.60
              per share, which warrants expired without being exercised.

         (b)  On December 19, 1997,  the Company  completed a private  placement
              (the "December Placement") pursuant to which the Company issued to
              the several  participants  an  aggregate  of (i) 4,500 shares (the
              "Preferred   Shares")  of  the  Company's   Series  A  Convertible
              Preferred Stock (the "Preferred Stock"), par value $0.1 per share,
              with an initial stated value of $1,000 per share (which  increases
              at the rate of 5% per annum) (such amount,  as increased from time
              to  time,  the  "Stated  Value"),  (ii)  warrants  (the  "One-Year
              Warrants") to acquire up to 315,000  shares of Common  Stock,  and
              (iii)  warrants  (the  "Three-Year  Warrants")  to  acquire  up to
              135,000 shares of Common Stock.  The Company received net proceeds
              of approximately  $4,110,000 (after payment,  or accrual,  of fees
              (including  finders  fees) and related  expenses of  approximately
              $390,000). Each Preferred Share is convertible, from time to time,
              at the option of the holder,  into such number of shares of Common
              Stock as is  determined by dividing the Stated Value by the lesser
              of (x)  $7.3575,  and (y) 85% of the  average of the  closing  bid
              price during such three  consecutive  trading day period as may be
              selected by the holder during the 25-day trading period  preceding
              the  date of  conversion.  Any  outstanding  Preferred  Shares  on
              December  19, 1999  automatically  will be  converted  into Common
              Stock at the conversion price then in effect. The Preferred Shares
              are subject to  redemption  at the option of the holder if,  among
              other  things,  (i) the Company  fails to  maintain  an  effective
              registration  statement with respect to the shares of Common Stock
              issuable upon  exercise of the  Preferred  Shares for more than 30
              consecutive days or more than 60 days in any 12-month period, (ii)
              the Company  fails to maintain  the listing of the Common Stock on
              the  Nasdaq  National  Market  or  another  principal   securities
              exchange or automated  quotation  system,  or (iii) the  aggregate
              number of shares of Common  Stock then issued upon  conversion  of
              the Preferred Shares would equal 1,068,513 shares of Common Stock,
              unless the Company,  prior  thereto or within 75 days after notice
              from holders of two-thirds  of the Preferred  Shares (which notice
              had not yet been  received  as of July  10,  1998),  has  obtained
              approval for the issuance of any  necessary  additional  shares of
              Common Stock upon  conversion  of the then  outstanding  Preferred
              Shares.  If the  Company  does not  receive  approval to issue the
              additional shares of Common Stock and the holders of the Preferred
              Shares elect to exercise their redemption rights, the Company will
              be required to redeem the remaining  outstanding  Preferred Shares
              at an amount  equal to the greater of (x) 118% of the Stated Value
              of the  Preferred  Shares and (y) the  market  value of the Common
              Stock into which the Preferred Shares would have been converted on
              the date of redemption.  The One-Year  Warrants expire on December
              19,  1998,  have an  exercise  price of $8.05  per  share  and are
              redeemable  at the  option of the  Company  at a price of $.01 per
              warrant if the closing  price of the Common  Stock is greater than
              130%  of the  exercise  price  of  the  One-Year  Warrants  for 10
              consecutive  trading  days.  The  Three-Year  Warrants  expire  on
              December 19, 2000,  have an exercise  price of $9.10 per share and
              are not redeemable. In connection with the December Placement, the
              Company  paid a finders fee of $295,000 and issued to an affiliate
              of the  finder  warrants  (upon  the same  terms  as the  One-Year
              Warrants)  to acquire  an  aggregate  of 185,000  shares of Common
              Stock.

              Regulations  promulgated by the Securities and Exchange Commission
              require  that  all  issues  of  mandatorily  redeemable  stock  be
              excluded  from the  shareholders'  equity  section of the  balance
              sheet and be presented separately. One of the characteristics of a
              mandatorily  redeemable  stock is that it contains  conditions for
              redemption,  even if  remote,  which  are not  solely  within  the
              control of the issuer.  As set forth above,  the Preferred  Shares
              are  subject  to  redemption  at the  option of the  holder  under
              certain  circumstances.  Since there is the  possibility  that the
              occurrence  of an event  outside the control of the Company  could
              cause   redemption,   the  Preferred  Stock  has  been  classified
              separately from shareholders' equity on the balance sheet.

                                        7
<PAGE>


                               C-PHONE CORPORATION
                     NOTES TO UNAUDITED FINANCIAL STATEMENTS

                                  MAY 31, 1998

         (c)  On May 13, 1998,  the Company  reduced the  exercise  price of the
              warrants to purchase  200,000 shares of Common Stock issued in its
              1994 initial public  offering (the "1994  Warrants") from $8.40 to
              $6.00 per share in consideration  for (i) requiring payment of the
              exercise  price for the 1994  Warrants to be made in cash  (rather
              than  upon  surrender  of 1994  Warrants)  and (ii)  changing  the
              expiration  date thereof from August 18, 1999 to May 21, 1998.  On
              May 13,  1998,  the closing  sales  price of the Common  Stock was
              $9.75. The holders of the 1994 Warrants  exercised all of the 1994
              Warrants  by May  15,  1998.  In  addition,  as of May  31,  1998,
              One-Year Warrants (including the warrants issued to the finder) to
              purchase  325,000  shares of  Common  Stock at $8.05 per share and
              Three-Year  Warrants to purchase  60,000 shares of Common Stock at
              $9.10  per  share  also had been  exercised.  As a result  of such
              warrant  exercises,  during the three months,  ended May 31, 1998,
              the Company  received  net proceeds of  $4,350,945.  As of May 31,
              1998,  2,576 Preferred Shares had been converted into an aggregate
              of 1,067,217 shares of Common Stock.

4.       NET LOSS PER SHARE

         In February  1997,  the  Financial  Accounting  Standards  Board issued
         Statement of Financial  Accounting  Standards No. 128 ("SFAS No. 128"),
         "Earnings Per Share," which  established  new standards for computation
         of earnings per share.  SFAS No. 128 requires the  presentation  on the
         face  of the  income  statement  of  "basic"  earnings  per  share  and
         "diluted"  earnings per share.  Basic earnings per share is computed by
         dividing the net income (loss) available to common  shareholders by the
         weighted average number of outstanding  common shares.  The calculation
         of diluted  earnings per share is similar to the  calculation  of basic
         earnings  per share,  except  that the  denominator  includes  dilutive
         common stock  equivalents  such as stock options and  warrants.  Common
         stock  options and warrants are not included for the three months ended
         May 31, 1997 or 1998 as they would be  anti-dilutive.  The accretion of
         the 5% annual  increase in stated value of the  Preferred  Stock in the
         amount of $45,878 for the three months ended May 31, 1998 increased the
         net loss  attributable  to common  shareholders  to $1,088,523  for the
         purposes of the  calculation of net loss per share for the three months
         ended May 31, 1998.


                                        8
<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,
         1998, 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

                  The  Company  has  been,  and  is,  primarily  engaged  in the
engineering,  manufacturing  and  marketing  of a line of TV-based  and PC-based
video   conferencing   systems.   The  Company's   stand  alone  TV-based  video
conferencing  system  or "video  phone,"  which  operates  over  regular  analog
telephone  lines using a standard  television  set,  is marketed  under the name
C-Phone Home. In addition, in March 1998, the Company began limited shipments of
its DS 324  TV-based  video  phone,  which  operates  over both  analog and ISDN
digital  telephone  lines.  In May 1998, the Company  introduced  C-Phone ITV, a
TV-based  set  top  device  that  provides  Internet  access  using  a  standard
television  set and an analog  telephone  line.  The  Company's  PC-based  video
conferencing  systems,  which operate over digital networks,  are marketed under
the name  C-Phone(R).  From  time to time,  the  Company  also  has  engaged  in
contractual software development related to its products.

                  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,  the Company  shifted its primary focus from modems to
the  development  of C-Phone and,  during 1994, 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  its  video  conferencing   products,   and  expects  that  such
investments will continue in the foreseeable future.

                  The  Company's  products  are  marketed  through a variety  of
channels  depending  upon the product.  The  Company's  TV-based  video phone is
marketed to end users,  distributors,  and resellers  and to original  equipment
manufacturers  ("OEMs")  which  integrate  the product with other  equipment for
resale to specific industries such as health care and security services.  During
the year ended  February  28, 1998  ("Fiscal  1998"),  many retail  distributors
offered the end user the option to purchase the Company's  TV-based  video phone
on a  stand-alone  basis  or,  similar  to the  method  by which  most  cellular
telephones  are sold, at 


                                        9
<PAGE>


a lower price when purchased  with  telecommunications  services  offered by the
Company.  The  proceeds to the Company  from units sold under the latter  option
were less than the  Company's  cost of the product  and, as 36% of C-Phone  Home
sales were made under such  purchase  option in Fiscal 1998,  such sales and the
required  mark-down of related  inventory to reflect such sale price contributed
significantly  to the gross loss for that period.  However,  the  percentage  of
sales  under  this  option  has  decreased  to the  point  that the  Company  is
phasing-out the  telecommunications  option. The Company is currently  exploring
the market  opportunities for C-Phone ITV and is developing a marketing strategy
for this product. The Company believes that its TV-based products currently have
greater market potential than its PC-based products and, in light of the lack of
significant industry acceptance for PC-based desktop video conferencing products
operating over a LAN, and the Company's  limited  financial and other resources,
the  Company  has  decided  to shift its  resources  to its  TV-based  products,
although  the Company  will  continue to support  and provide  equipment  to its
existing  customer  base  for its  PC-based  products  and to new  customers  in
connection  with  specialized  applications,  if any,  relating to its  PC-based
products that may be presented to the Company.

                  As a result of the foregoing and the low volume of sales,  the
Company has  incurred  significant  losses  during the three  fiscal years ended
February 28, 1998 and the three months ended May 31, 1998.  The Company  expects
to continue to incur  significant  losses in the  foreseeable  future due to its
expenditures for product development and the  commercialization  of its TV-based
products.

RECENT EQUITY OFFERINGS

                  MARCH  1997  PRIVATE  PLACEMENT.  During the week of March 31,
1997, the Company completed a private placement (the "March Placement") pursuant
to which the Company  issued an  aggregate  of 833,667  shares of the  Company's
common stock, par value $.01 per share (the "Common Stock"), to the participants
in the March  Placement  and received net proceeds of  approximately  $4,370,000
(after  payment of fees and expenses of  approximately  $632,000).  Accompanying
each of such  shares  was the right,  under  certain  circumstances,  to receive
additional  shares of Common Stock in accordance with the terms of a "contingent
value right." Pursuant to the terms of such rights, 136,863 additional shares of
Common Stock  subsequently  were issued. In connection with the March Placement,
the Company issued to an affiliate of the placement agent warrants to acquire an
aggregate of 150,000  shares of Common  Stock at an exercise  price of $9.60 per
share, which warrants expired without being exercised.

                  DECEMBER 1997 PRIVATE PLACEMENT. In December 1997, the Company
completed a private placement (the "December  Placement")  pursuant to which the
Company issued an aggregate of (i) 4,500 shares (the "Preferred  Shares") of the
Company's  Series A Convertible  Preferred  Stock, par value $.01 per share (the
"Preferred  Stock")  with an initial  stated  value of $1,000  per share  (which
increases at the rate of 5% per annum) (such amount,  as increased  from time to
time, the "Stated Value"), (ii) warrants (the "One-Year Warrants") to acquire up
to 315,000 shares of Common Stock, and (iii) warrants (the "Three-Year Warrants"
and with the One-Year Warrants, collectively, the "1997 Warrants") to acquire up
to 135,000 shares of Common Stock, to the participants in the December Placement
and received  aggregate  proceeds of approximately  $4,110,000 (after payment of
fees and expenses of  approximately  $390,000).  In connection with the December
Placement, the Company paid a finders fee of $295,000 and issued to an affiliate
of the finder warrants (upon the same terms as the One-Year Warrants) to acquire
an  aggregate  of  185,000  shares of Common  Stock,  which  warrants  have been
exercised.

                  Each Preferred Share is convertible, from time to time, at the
option  of the  holder,  into  such  number  of  shares  of  Common  Stock as is
determined  by dividing the Stated Value by the lesser of (i) $7.3575,  and (ii)
85% of the  average of the  closing  bid price  during  such  three  consecutive
trading day period as may be  selected  by the holder  during the 25 trading day
period  preceding  the date of  conversion.  The  Preferred  Shares  cease to be
convertible  (the "19.99%  Limitation") if, at any time, the aggregate number of
shares of Common Stock then issued upon conversion of the Preferred Shares would
equal  1,068,513  shares of Common Stock (the  remaining  shares of Common Stock
then  issuable  upon  conversion  of the  Preferred  Shares  being  the  "Excess
Shares"),  unless, in accordance with the rules of The Nasdaq Stock Market, Inc.
("Nasdaq")  (on which the Common  Stock is traded),  the  Company  has  obtained
approval for the issuance of 


                                       10
<PAGE>


the Excess  Shares by a majority of the total votes cast on such proposal by the
holders of the then outstanding Common Stock (not including any shares of Common
Stock held by present or former holders of the Preferred Shares that were issued
upon  conversion  of  the  Preferred  Shares),  or  it  has  otherwise  obtained
permission from Nasdaq to allow such issuances. Any outstanding Preferred Shares
on December 19, 1999  automatically  will be converted  into Common Stock at the
conversion  price then in effect.  As of July 10, 1998,  2,576 of the  Preferred
Shares had been converted into 1,067,217  shares of Common Stock. As a result of
the  19.99%  Limitation,  the  remaining  Preferred  Shares  are  not  presently
convertible.

                  The One-Year  Warrants expire on December 19, 1998 and have an
exercise price of $8.05 per share (115% of the closing price of the Common Stock
on the NNM on the  trading day  immediately  preceding  the closing  date of the
December  Placement),   subject  to  adjustment  under  certain   circumstances,
including upon the issuance of shares of Common Stock (or securities convertible
or exchangeable into shares of Common Stock) at less than 80% of the then market
price on the NNM for the Common Stock.  The One-Year  Warrants are redeemable at
the option of the Company at a price of $.01 per warrant if the closing price of
the Common Stock on the NNM is greater  than 130% of the  exercise  price of the
One-Year Warrants then in effect for 10 consecutive trading days. The Three-Year
Warrants  expire on December  19,  2000 and have an exercise  price of $9.10 per
share (130% of the closing  price of the Common  Stock on the NNM on the trading
day immediately  preceding the closing date of the December Placement),  subject
to adjustment under certain circumstances, including upon the issuance of shares
of Common Stock (or securities convertible or exchangeable into shares of Common
Stock)  at less  than 80% of the  then  market  price on the NNM for the  Common
Stock. The Three-Year  Warrants are not redeemable.  As of May 31, 1998, 325,000
shares of Common  Stock had been  issued upon  exercise of One-Year  Warrants at
$8.05 per share  (including  the  warrants  issued to the finder in the December
Placement),  60,000 shares had been issued upon exercise of Three-Year  Warrants
at $9.10 per share and the Company  received  aggregate  proceeds of  $3,162,250
from the exercise thereof.

                  The  Preferred  Shares are subject to redemption at the option
of a holder if, among other  things,  (i) the  effectiveness  of a  Registration
Statement  for the  shares of  Common  Stock  issuable  upon  conversion  of the
Preferred  Shares lapses for more than 30 consecutive  days or more than 60 days
in any 12-month  period,  (ii) the Company  fails to maintain the listing of the
Common Stock on the NNM or another  principal  securities  exchange or automated
quotation system and such failure  continues for more than 30 days, or (iii) the
Preferred  Shares cease to be convertible  as a result of the 19.99%  Limitation
and the  Company has not,  prior  thereto,  or within 75 days after  notice from
holders  of  two-thirds  of the  Preferred  Shares  (which  notice  has not been
received as of July 10, 1998),  obtained  approval to issue additional shares of
Common  Stock.  The Company  intends to seek  approval  to issue the  additional
shares of Common Stock at its 1998 Annual Meeting of  Shareholders  scheduled to
be held on July 31, 1998. If the Company does not receive  approval to issue the
additional  shares of Common Stock and the holders of the Preferred Shares elect
to exercise their redemption  rights, the Company will be required to redeem the
remaining  outstanding Preferred Shares at an amount equal to the greater of (a)
118% of the Stated Value of the Preferred  Shares on the date of redemption  and
(b) the market value of the Common Stock into which the  Preferred  Shares would
have been converted on the date of redemption. If the redemption had occurred as
of July 10,  1998,  the Company  would have been  required to pay  approximately
$2,414,682 to redeem the remaining outstanding Preferred Shares. However, as the
actual  redemption  amount will be based on the Stated Value or the price of the
Common Stock in effect at the time of redemption,  the actual  redemption amount
could be higher or lower.  There can be no assurance  that the Company will have
the financial ability to redeem the Preferred Shares, if required  (although the
Company currently has such financial ability), and, even if the Company has such
ability,  such payment may materially  adversely affect the Company's  financial
condition and deplete its cash resources.

                  1994 WARRANT EXERCISES.  In connection with the Company's 1994
initial public  offering,  the Company had issued to the  representative  of the
underwriters,  warrants  expiring August 19, 1999 to purchase  200,000 shares of
Common  Stock at an  exercise  price of $8.40 per share.  On May 13,  1998,  the
Company  reduced the  exercise  price of such  warrants  to $6.00 per share,  in
consideration  for (i) requiring payment of the exercise price for such warrants
to be made in cash (rather than upon  surrender of warrants)  and (ii)  changing
the expiration


                                       11
<PAGE>


date thereof to May 21, 1998.  On May 13, 1998,  the closing  sales price of the
Common Stock was $9.75.  All of such warrants were exercised by May 13, 1998 and
the Company received aggregate proceeds of $1,200,000.

                  Further  information  with respect to the March  Placement and
the December  Placement is set forth in Item 6 -  "Management's  Discussion  and
Analysis or Plan of Operation - Recent Equity Offerings" of the Company's Annual
report on Form 10-KSB for the fiscal year ended February 28, 1998.

RESULTS OF OPERATIONS

THREE MONTHS  ENDED MAY 31, 1998 ("1ST  QUARTER 99") AS COMPARED TO THREE MONTHS
ENDED MAY 31, 1997 ("1ST QUARTER 98")

                  REVENUES.  Net sales  decreased 22% to $339,150 in 1st Quarter
99 from $433,121 in 1st Quarter 98,  reflecting the Company's change of focus to
its TV-based products from its PC-based products as a result of an industry-wide
slowdown in the  continued  acceptance of PC-based  desktop video  conferencing.
Sales of  PC-based  products  represented  17% of sales  for 1st  Quarter  99 as
compared to 75% of sales for 1st Quarter  98. The  decrease in PC-based  product
sales was partially offset by an increase in TV-based product sales.  During 1st
Quarter 99, the Company had other  revenue of $16,388  compared to $3,679 during
1st Quarter 98. As a result,  revenues  decreased 19% to $355,538 in 1st Quarter
99 from $436,800 in 1st Quarter 98.

                  COST OF  REVENUE.  Cost of revenue  consists  of cost of goods
sold and cost of other revenue. 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  other  revenue  consists  primarily  of  the
allocation  of  salaries  and  benefits  of  personnel  and the cost of  outside
services  directly related to such revenue.  Cost of goods sold decreased 44% to
$508,073 (150% of net sales) in 1st Quarter 99 from $901,016 (208% of net sales)
in 1st  Quarter 98. The  decrease in cost of goods sold and the  decrease in the
percentage  of cost of goods sold to net sales was the result of the decrease in
sales and the  decrease in the number of units of C-Phone Home sold at less than
cost with a  telecommunications  agreement.  The high cost of goods  sold to net
sales percentage reflects the high cost of manufacture of the Company's TV-based
products  in its  initial  production  stage and the  inability  to cover  fixed
manufacturing  costs at low  production  volumes.  The  cost of  other  revenues
($8,202)  in 1st  Quarter  99 was 50% of related  revenue.  The  Company  had no
similar costs in 1st Quarter 98.

                  GROSS  PROFIT  (LOSS).  The  gross  loss was  $160,737  in 1st
Quarter 99 (45% of revenues),  as compared to a gross loss of $464,216  (106% of
revenues) in 1st Quarter 98. The gross loss in 1st Quarter 99 was  primarily the
result of the low sales volume and the related high cost of goods sold discussed
above.

                  SELLING,  GENERAL  AND  ADMINISTRATIVE.  Selling,  general and
administrative  expenses  decreased  38% to $725,584  (204% of  revenues) in 1st
Quarter 99 from  $1,162,212  (266% of  revenues)  in 1st Quarter 98. The primary
reason for the decrease was a 70% decrease in selling and marketing  expenses to
approximately  $217,000  in 1st  Quarter 99 from  approximately  $719,000 in 1st
Quarter 98,  substantially  all of which  decrease was  directly  related to the
marketing  launch of C-Phone Home in 1st Quarter 98. The decrease in selling and
marketing  expenses was  partially  offset by an increased  reserve for bad debt
expenses  based  upon  the  Company's  historical  experience  with  the  retail
industry,  increased legal and accounting expenses, primarily as a result of the
complexities  related  to  the  addition  of  the  TV-based  product  line,  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 the Common
Stock. The Company expects that it will continue to incur  substantial  selling,
general  and  administrative  expenses  during  Fiscal  1999 as a result  of the
continued commercialization of the Company's TV-based products.

                  RESEARCH,  DEVELOPMENT AND ENGINEERING.  Research, development
and  engineering  expenses  decreased  26% to $209,067  (59% of revenues) in 1st


                                       12
<PAGE>


Quarter 99 from  $280,739  (64% of revenues) in 1st Quarter 98. The decrease was
primarily the result of the change in focus to the Company's  TV-based  products
from its PC-based  products and 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 decreased 43% to $1,095,388 in 1st Quarter 99 from
$1,907,167 in 1st Quarter 98.

                  INTEREST.  Interest  income  increased  24% to  $52,743 in 1st
Quarter 99 from $42,411 in 1st Quarter 98 as a result of interest  earned on the
higher average cash and cash equivalents due to the receipt of proceeds from the
December  Placement  and from the  exercise of  previously  issued  warrants and
options in May 1998, partially offset by the continued use of the Company's cash
and cash equivalents to fund operations.

                  INCOME TAXES.  The Company's losses for 1st Quarter 99 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.

LIQUIDITY AND CAPITAL RESOURCES

                  The Company has financed its recent operations  primarily from
the proceeds of the March Placement,  which raised net proceeds of approximately
$4,370,000,   and  the  December   Placement,   which  raised  net  proceeds  of
approximately  $4,110,000.  In addition,  during May 1998, the Company  received
approximately  $4,650,000  from the exercise of previously  issued  warrants and
options. See "Recent Equity Offerings."

                  At  May  31,  1998,   the  Company  had  working   capital  of
$8,8830,889 (an increase of $3,660,384 from $5,170,505 at February 28, 1998) and
cash and cash  equivalents  of $7,366,971 (as compared to $4,200,231 at February
28,  1998).  The  Company's  invested  funds  consisted  primarily  of overnight
repurchase agreements for discount notes issued by the United States Treasury or
United States government  agencies.  During 1st Quarter 99, operating activities
used $1,482,551 of net cash, primarily to fund operating  activities,  investing
activities  used  $6,591  of net cash for  equipment  purchases,  and  financing
activities  provided  $4,655,882  of net cash from the  exercise  of  previously
issued  warrants  and  options.  Due to the  technical  nature of the  Company's
business and the anticipated expansion of its video conferencing 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 March Placement,  the December  Placement and
the exercise,  in May 1998, of previously issued warrants and options,  together
with anticipated funds from operations, will be sufficient to meet the Company's
projected  operating  needs and capital  expenditures,  including  the continued
development and commercialization of its TV-based products, at least through the
end of fiscal year 1999. However, if any of the Company's TV-based products gain
significant  market  acceptance,  of which there can be no  assurance,  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 such products,  would require the
Company to obtain even more working capital.  The Company  anticipates that such
additional  funds  should be  available  through one or more  possible  sources,
including through (i) a private placement of (a) its debt securities,  including
debt securities  convertible  into Common Stock,  and/or (b) its Common Stock or
preferred stock, (ii) the exercise of the Company's  remaining  outstanding 1997
Warrants,  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 Common Stock.  Unless  adequate  income relating to sales of
TV-based  products  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 


                                       13
<PAGE>


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 TV-based  products
have 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 May 31,  1998,  the  Company  had no
material commitments for capital expenditures.

                  At  February  28,  1998,  the  Company  estimates  that it had
available net operating loss  carryforwards  of  approximately  $15,125,000  for
Federal   purposes  and  net  economic  loss   carryforwards   of  approximately
$15,337,000  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 Company's  products,  and components and  subassemblies
used by the  Company in its  products,  are  manufactured  outside of the United
States and represent 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  subassemblies.  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.

IMPACT OF YEAR 2000 ISSUE

                  Computer systems may experience problems handling dates beyond
the year 1999 because many  computer  programs use only two digits to identify a
year  in a date  field.  As the  Company's  products  do not  include  date/time
mechanisms in their  operating  software,  the Company's  products are Year 2000
complaint.

                  During Fiscal 1998, for operational purposes, the Company made
the decision to upgrade its internal  financial  software system,  which is Year
2000 compliant.  The Company has substantially  completed the  identification of
other  internal  computer-based  systems it uses which may require  upgrading to
insure operational continuity beyond December 31, 1999, and anticipates that the
cost of bringing  these  internal  minor  systems  into  compliance  will not be
material.  The  Company is  assessing  the  possible  effects  on the  Company's
operations of Year 2000 compliance related to key suppliers,  subcontractors and
customers. The Company's reliance on suppliers and subcontractors means that the
failure to address Year 2000  compliance  issues by these  parties could have an
impact on the  Company's  business,  although  the  Company  believes  that such
impact, if any, would not be material.


                                       14
<PAGE>


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

              A  Current  Report  on Form  8-K  (responding  to Item 5 -  "Other
              Events") was filed by the Company on May 14, 1998.


                                       15
<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, 1998        By:  /s/ Daniel P. Flohr
                               -------------------------------------------------
                                    Daniel P. Flohr
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)


Date: July 14, 1998        By:  /s/ Paul H. Albritton
                               -------------------------------------------------
                                    Paul H. Albritton
                                    Vice President and Chief Financial Officer
                                    (Principal Accounting and Financial Officer)


                                       16