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 NOVEMBER 30, 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.

            5,342,568 shares of common stock as of January 12, 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 November 30, 1997 (unaudited)                               3

             Statements of Operations for the three and nine
             months ended November 30, 1996 and 1997 (unaudited)             4

             Statements of Cash Flows for the nine months
             ended November 30, 1996 and 1997 (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                               14


SIGNATURES                                                                  15






                                        2

<PAGE>



PART I.           FINANCIAL INFORMATION

ITEM 1.           FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                               C-PHONE CORPORATION
                                 BALANCE SHEETS

                                                                      February 28, 1997          November 30, 1997
                                                                      -----------------          -----------------
                                 ASSETS                                                             (unaudited)
<S>                                                                      <C>                       <C>         
Current assets:
  Cash and cash equivalents                                              $  1,398,049              $  1,369,118
  Accounts receivable, net of allowance for
   doubtful accounts of $120,000 and $160,124
   at February 28, 1997 and at November 30, 1997 (unaudited)                  422,042                   384,427
  Inventories                                                               1,341,931                 1,651,123
  Prepaid expenses and other current assets                                    82,066                    89,696
                                                                         ------------              ------------
    Total current assets                                                    3,244,088                 3,494,364
Property and equipment, net                                                   251,913                   199,151
Other assets                                                                  154,246                    52,632
                                                                         ------------              ------------
    Total assets                                                         $  3,650,247              $  3,746,147
                                                                         ============              ============

                                  LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable, trade                                                $    587,877              $    760,400
  Accrued expenses                                                            325,938                   248,645
  Current obligations under capital leases                                     11,507                        --
                                                                         ------------              ------------
    Total current liabilities                                                 925,322                 1,009,045
                                                                         ------------              ------------

Shareholders' equity:
  Common stock,  $.01 par value; 20,000,000 shares authorized;
    4,355,393 and 5,342,268 shares issued and outstanding at February
    28, 1997 and November 30, 1997 (unaudited), respectively,                  43,554                    53,423
  Paid-in capital                                                          13,530,208                17,978,280
  Accumulated deficit                                                     (10,848,837)              (15,294,601)
                                                                         ------------              ------------
    Total shareholders' equity                                              2,724,925                 2,737,102
                                                                         ------------              ------------
    Total liabilities and shareholders' equity                           $  3,650,247              $  3,746,147
                                                                         ============              ============
</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 November 30,          Nine months ended November 30,
                                  ------------------------------------        ------------------------------
                                      1996                     1997                1996             1997
                                  -----------              -----------         -----------      -----------
<S>                               <C>                      <C>                 <C>              <C>        
Net sales                         $   332,955              $   449,514         $ 1,400,483      $ 1,202,424

Other revenue                         149,485                   12,968             149,485           21,007
                                  -----------              -----------         -----------      -----------

     Total revenue                    482,440                  462,482           1,549,968        1,223,431
                                  -----------              -----------         -----------      -----------

Cost of goods sold                    299,921                  662,925           1,163,298        1,982,347

Cost of other revenue                  74,429                    7,647              74,429            8,659
                                  -----------              -----------         -----------      -----------

     Total cost of revenue            374,350                  670,572           1,237,727        1,991,006
                                  -----------              -----------         -----------      -----------

     Gross profit (loss)              108,090                 (208,090)            312,241         (767,575)
                                  -----------              -----------         -----------      -----------

Operating expenses:

  Selling, general
   and administrative                 512,696                  861,752           1,680,653        3,027,075

  Research, development
   and engineering                    235,155                  234,394             768,123          755,380
                                  -----------              -----------         -----------      -----------

     Total operating expenses         747,851                1,096,146           2,448,776        3,782,455
                                  -----------              -----------         -----------      -----------

     Operating loss                  (639,761)              (1,304,236)         (2,136,535)      (4,550,030)

Interest expense                         (566)                       0              (2,059)            (447)

Interest income                        29,458                   20,440             113,126          104,713
                                  -----------              -----------         -----------      -----------

     Net loss                     $  (610,869)             $(1,283,796)        $(2,025,468)     $(4,445,764)
                                  ===========              ===========         ===========      ===========

Per-share data:

     Net loss per share           $     (0.14)             $     (0.24)        $     (0.47)     $     (0.86)
                                  ===========              ===========         ===========      ===========

     Weighted average number of
      common shares and
      common share equivalents
      outstanding                   4,347,293                5,342,046           4,347,293        5,154,770
                                  ===========              ===========         ===========      ===========
</TABLE>


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


                                        4
<PAGE>
<TABLE>
<CAPTION>

                               C-PHONE CORPORATION
                            STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                                                    Nine Months Ended November 30,
                                                                 -----------------------------------
                                                                    1996                    1997
                                                                 -----------             -----------
<S>                                                              <C>                     <C>         
Cash flows from operating activities:
  Net loss                                                       $(2,025,468)            $(4,445,764)
  Adjustments to reconcile net loss to net
   cash used in operating activities:
      Depreciation and amortization                                   99,158                  90,730
      Provision for doubtful accounts                                 41,941                  40,124
      Compensation expense of stock options                               --                  32,800
      Compensation expense of stock issued                                --                  14,220
      Changes in operating assets and liabilities:
        Accounts receivable                                           12,554                  (2,509)
        Inventories                                                 (140,182)               (309,192)
        Prepaid expenses and other current assets                     58,079                  (7,630)
        Other assets                                                 (11,585)                101,614
        Accounts payable                                              (2,203)                172,523
        Accrued expenses                                                 949                 (77,293)
                                                                 -----------             -----------
          Net cash used in operating activities                   (1,966,757)             (4,390,377)
                                                                 -----------             -----------
Cash flows from investing activities:
  Equipment purchases                                                (65,587)                (37,968)
  Purchase of short term investments                              (1,647,371)                     --
  Maturities of short investments                                  3,708,591                      --
                                                                 -----------             -----------
          Net cash provided by (used in) investing activities      1,995,633                 (37,968)
                                                                 -----------             -----------
Cash flows from financing activities:
  Proceeds from exercise of stock options                                 --                  41,403
  Net proceeds from private placement of common stock                     --               4,369,518
  Payment of capital lease obligations                               (12,024)                (11,507)
                                                                 -----------             -----------
          Net cash (used in) provided by financing activities        (12,024)              4,399,414
                                                                 -----------             -----------

          Net increase (decrease) in cash and cash equivalents        16,852                 (28,931)
Cash and cash equivalents, beginning of period                     1,852,820               1,398,049
                                                                 -----------             -----------
Cash and cash equivalents, end of period                         $ 1,869,672             $ 1,369,118
                                                                 ===========             ===========

Supplemental disclosure of cash flow information:
  Interest paid                                                  $     2,059             $       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

                                NOVEMBER 30, 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 nine
     month periods ended November 30, 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 November  30, 1997,  options for 353,427  shares of common stock were
     outstanding under the Company's 1994 Stock Option Plan (the "Plan") (72,417
     of which are non-qualified options exercisable at prices ranging from $3.00
     to $7.8125  per share,  depending  upon the date of grant,  and  281,010 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 126,868 shares of common stock were available for future grants. Due to
     vesting  provisions  included in the  options,  only  options  representing
     175,534  shares of common stock were  exercisable  as of November 30, 1997.
     The  following  table  summarizes  certain   information  with  respect  to
     exercisable options:

                   Range of                                  Number of
                Exercise Price                          Options Exercisable
          --------------------------                   ----------------------
                $2.375- $3.99                                  87,308
                $6.00 - $6.99                                   2,167
                $7.00 - $7.99                                  86,059
                                                               ------
                                                              175,534

3.   WARRANTS  AND  CONTINGENT  VALUE  RIGHTS

     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 of common stock
     (the "Original  Shares") 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 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 November 30, 1997, 803,667 Original Shares had been first sold
     through a broker-dealer,  and, pursuant to the terms of the Rights, 136,863
     additional  shares have been issued as a result  thereof.  As of such date,
     only 30,000  Original  Shares  continue to have the ability to exercise the
     Rights.


                                        6
<PAGE>

                               C-PHONE CORPORATION
                     NOTES TO UNAUDITED FINANCIAL STATEMENTS

                                NOVEMBER 30, 1997

3.   WARRANTS  AND  CONTINGENT  VALUE  RIGHTS (Continued)

     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.  The Company has
     agreed to extend the expiration  date of the warrants to February 28, 1998,
     conditioned  upon  receipt  from  certain  of the  current  holders of such
     warrants of the waiver of certain "cashless" exercise rights they have with
     respect to the  warrants  expiring  August 18,  1999.  In  addition  to the
     foregoing, the Company has 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  November
     30,  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.

6.   SUBSEQUENT EVENT

     On December  19,  1997,  the Company  completed  a private  placement  (the
     "December  Placement")  pursuant  to which the  Company  issued to  several
     investors an aggregate of (a) 4,500 shares (the "Preferred  Shares") of the
     Company's Series A Convertible Preferred Stock (the "Preferred Stock") with
     an initial  stated value of $1,000 per shares (which  increases at the rate
     of 5% per annum) (such amount,  as increased from time to time, the "Stated
     Value"),  (b) warrants to acquire up to an  aggregate of 315,000  shares of
     common stock of the Company (the  "Common  Stock") at an exercise  price of
     $8.05 per share (the "One-Year Warrants") and (c) warrants to acquire up to
     an  aggregate  of  135,000  shares of Common  Stock at $9.10 per share (the
     "Three-Year Warrants").  The Company received net proceeds of approximately
     $4,130,000 (after payment, or accrual, of fees (including finders fees) and
     related expenses of approximately $370,000).

                                        7
<PAGE>
                               C-PHONE CORPORATION
                     NOTES TO UNAUDITED FINANCIAL STATEMENTS

                                NOVEMBER 30, 1997


6.   SUBSEQUENT EVENT (continued)

     Each Preferred Share is convertible,  from time to time in whole or in part
     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 (a) $7.3575 and
     (b)  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, 1998  automatically will be converted into
     Common Stock at the conversion price then in effect.  The One-Year Warrants
     expire on December 19, 1998 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 for 10  consecutive  trading days.
     The Three-Year Warrants expire on December 19, 2000 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  One-Year  Warrants to
     acquire an aggregate of 185,000 shares of Common Stock.

     The Company has agreed, at its expense,  to prepare and file a registration
     statement on Form S-3 under the  Securities Act of 1933 with respect to the
     shares of Common Stock issuable upon  conversion of the Preferred Stock and
     the exercise of the One-Year Warrants and Three-Year Warrants.

     The pro forma  balances as of November  30,  1997,  assuming  the  December
     Placement had been completed as of such date, would have reflected cash and
     cash equivalents of $5,499,118 and would have reflected total shareholders'
     equity of $6,867,102.


                                        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,
     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 and, since 1996, the development and  commercialization 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 "March 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.  On December
19, 1997, the Company completed a private  placement (the "December  Placement")
of 4,500 shares of its Series A Convertible Preferred Stock pursuant to which it
received  net  proceeds  of  approximately  $4,130,000.  See  Note 6 to Notes to
Unaudited  Financial  Statements.  The  Company has used and 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.


                                        9
<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  50% of C-Phone  Home sales have been made under the latter
purchase option, that percentage has been decreasing steadily with the expansion
into catalog and international sales and the Company believes that, with planned
sales of co-branded units, future sales under such purchase option will be at an
even significantly lesser percentage of total C-Phone Home sales. However, since
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  Company  is able  to  significantly  reduce  its
manufactured cost, or (ii) 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 nine  months  ended  November  30,  1997.  The  Company  expects to
continue  to incur  significant  losses  in the  foreseeable  future  due to its
significant  expenditures for product development and the  commercialization  of
C-Phone Home.

RESULTS OF OPERATIONS

THREE  MONTHS ENDED  NOVEMBER  30, 1997 ("3RD  QUARTER 98") AS COMPARED TO THREE
MONTHS ENDED NOVEMBER 30, 1996 ("3RD QUARTER 97")

              REVENUES.  Net sales  increased  35% to $449,514 in 3rd Quarter 98
from $332,955 in 3rd Quarter 97 as a result of increased  sales of C-Phone Home.
Other  revenue  decreased  91% to $12,968 in 3rd Quarter 98 from $149,485 in 3rd
Quarter 97 as a result of decreased  revenue  from  software  development.  As a
result, revenues decreased 4% to $462,482 in 3rd Quarter 98 from $482,440 in 3rd
Quarter 97.

              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 increased 121% to
$662,925  (147% of net sales) in 3rd Quarter 98 from $299,921 (90% of net sales)
in 3rd  Quarter  97.  The  increase  in both  the  cost of  goods  sold  and the
percentage of cost of goods to net sales was primarily related to an increase in
net sales of C-Phone Home, the cost of manufacture of C-Phone Home at low volume
levels,  and the  write-down of related  inventory to its current net realizable
value based upon the historical  percentage of sales of C-Phone Home units below
manufactured cost when sold in conjunction with telecommunications services. See
"Overview."  The cost of other  revenues  ($7,647)  in 3rd Quarter 98 was 59% of
related  revenue  while  similar  costs  ($74,429)  in 3rd Quarter 97 was 50% of
related revenue.

              GROSS  PROFIT  (LOSS).  The gross loss was $208,090 in 3rd Quarter
98, as compared to a gross  profit of $108,090  (22% of revenues) in 3rd Quarter
97. The gross loss in 3rd Quarter 98 was primarily the result of the decrease in
other revenue and the Company's marketing strategy for C-Phone Home.

              SELLING,   GENERAL  AND  ADMINISTRATIVE.   Selling,   general  and
administrative  expenses  increased  68% to $861,752  (186% of  revenues) in 3rd
Quarter 98 from  $512,696  (106% of  revenues)  in 3rd  Quarter  97. The primary
reason for the increase was a 88% increase in selling and marketing  expenses to
approximately  $375,000  in 3rd  Quarter 98 from  approximately  $200,000 in 3rd
Quarter 97,  substantially  all of which  increase was  directly  related to the
marketing  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 accounting
expenses  primarily as a result of the  complexities  related to the addition of
the C-Phone Home 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 record of the Company's common stock. The Company


                                       10
<PAGE>

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  were  $234,394  (51% of  revenues)  in 3rd  Quarter 98 as
compared  to  $235,155  (49% of  revenues)  in 3rd  Quarter  97. A  decrease  in
personnel costs  resulting from a partial change in duties of certain  personnel
to selling,  general and  administrative was offset by increased costs primarily
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  103% to $1,304,236 in 3rd Quarter 98 from
$639,761 in 3rd Quarter 97.

              INTEREST.  Interest income decreased 31% to $20,440 in 3rd Quarter
98 from  $29,458  in 3rd  Quarter  97 as a result  of the  continued  use of the
Company's cash and cash equivalents to fund operations.

              INCOME  TAXES.  The  Company's  losses for 3rd  Quarter 97 and 3rd
Quarter 98 may be utilized as an offset against future earnings,  although there
is no assurance that future operations will produce taxable earnings.


NINE MONTHS  ENDED  NOVEMBER  30,  1997  ("NINE  MONTHS 98") AS COMPARED TO NINE
MONTHS ENDED NOVEMBER 30, 1996 ("NINE MONTHS 97")

              REVENUES.  Net sales decreased 14% to $1,202,424 in Nine Months 98
from  $1,400,483 in Nine Months 97 reflecting an  industry-wide  slowdown in the
continued acceptance of PC-based desktop video conferencing  partially offset by
a  increase  in net sales of  C-Phone  Home in 3rd  Quarter  98.  Other  revenue
decreased  86% to $21,007 in Nine Months 98 from $149,485 in Nine Months 97 as a
result of decreased  revenue from software  development.  As a result,  revenues
decreased 21% to $1,223,431 in Nine Months 98 from $1,549,968 in Nine Months 97.

              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 increased 70% to
$1,982,347  (165% of net sales) in Nine  Months 98 from  $1,163,298  (83% of net
sales) in Nine 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  percentage  of
sales of C-Phone Home units below the manufactured cost when sold in conjunction
with  telecommunications  services.  See  "Overview." The cost of other revenues
($8,659)  in Nine  Months 98 was 41% of  related  revenue  while  similar  costs
($74,429) in Nine Months 97 was 50% of related revenue.

              GROSS  PROFIT  (LOSS).  The gross loss was $767,575 in Nine Months
98, as compared to a gross  profit of $312,241  (20% of revenues) in Nine Months
97. The gross loss in Nine Months 98 was primarily the result of the decrease in
net sales,  the decrease in other revenue and the Company's  marketing  strategy
for C-Phone Home.

              SELLING,   GENERAL  AND  ADMINISTRATIVE.   Selling,   general  and
administrative  expenses  increased 80% to $3,027,075 (247% of revenues) in Nine
Months 98 from  $1,680,653  (108% of  revenues)  in Nine  Months 97. The primary
reason for the increase was a 136% increase in selling and marketing expenses to
approximately  $1,572,000 in Nine Months 98 from approximately  $666,000 in Nine
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


                                       11
<PAGE>


in  administrative  expenses  were  increased  legal  and  accounting  expenses,
primarily as a result of the complexities related to the addition of the C-Phone
Home  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 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 $755,380 (62% of revenues) in Nine Months
98 from $768,123 (50% of revenues) in Nine 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  partially
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  113% to $4,550,030 in Nine Months 98 from
$2,136,535 in Nine Months 97.

              INTEREST.  Interest income decreased 7% to $104,713 in Nine Months
98 from  $113,126  in Nine  Months  97 as a result of the  continued  use of the
Company's cash and cash  equivalents to fund operations  partially offset by the
net proceeds obtained from the March Placement.

              INCOME  TAXES.  The  Company's  losses for Nine Months 97 and Nine
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,  the March  Placement,  which raised net proceeds of  approximately
$4,370,000,   and  the  December   Placement,   which  raised  net  proceeds  of
approximately $4,130,000 on December 19, 1997.

              At  November  30,  1997,  the  Company  had  working   capital  of
$2,485,319 (an increase from  $2,318,766 at February 28, 1997) and cash and cash
equivalents  (including  short-term  investments)  of $1,369,118 (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 Nine Months 98,  operating  activities  used $4,390,377 of net
cash, primarily to fund operating activities,  investing activities used $37,968
of  net  cash  for  equipment  purchases,   and  financing  activities  provided
$4,399,414 of net cash primarily from the March 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 March  Placement and the December  Placement,
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 C-Phone Home, through the end of
the third quarter of calendar 1998.  However,  if C-Phone Home gains 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 C-Phone Home,  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 or preferred  stock,  (ii)
the exercise of the Company's outstanding common stock purchase 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


                                       12
<PAGE>


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 November 30, 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.


                                       13

<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

                      The  Company  did not file a  Current  Report  on Form 8-K
                      during the quarter  ended  November 30,  1997;  although a
                      report on Form 8-K (responding to Item 5 - "Other Events")
                      was filed by the Company on December 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.


                                        C-PHONE CORPORATION



Date: January 14, 1998          By: /s/ DANIEL P. FLOHR
                                    --------------------------------------------
                                    Daniel P. Flohr
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)


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


                                       15