C-PHONE CORP
PRE 14A, 1997-05-30
TELEPHONE & TELEGRAPH APPARATUS
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                            SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
                                (AMENDMENT NO. )

Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|

check the appropriate box: 

|X| Preliminary Proxy Statement 
|_|  Confidential,  for Use of the Commission Only 
     (as permitted by Rule  14a-6(e)(2)) 
|_| Definitive Proxy Statement
|_| Definitive  Additional  Materials 
|_| Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12

                               C-PHONE CORPORATION
- --------------------------------------------------------------------------------
                (Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
     (Name of Person(s) Filing Proxy Statement if other than the Registrant)
               Payment of Filing Fee (Check the appropriate box):

|X|  No fee required.

|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

- --------------------------------------------------------------------------------
         1) Title of each class of securities to which transaction applies:

- --------------------------------------------------------------------------------
         2) Aggregate number of securities to which transaction applies:

- --------------------------------------------------------------------------------
         3) Per unit price or other  underlying  value of  transaction  computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):

- --------------------------------------------------------------------------------
         4) Proposed maximum aggregate value of transaction:

- --------------------------------------------------------------------------------
         5) Total fee paid:

|_|  Fee paid previously with preliminary materials.

|_| Check box if any part of the fee is offset as provided by Exchange  Act Rule
0-11(a)(2)  and  identify  the  filing  for  which the  offsetting  fee was paid
previously.  Identify the previous filing by registration  statement  number, or
the Form or Schedule and the date of its filing.

         1) Amount previously paid:

- --------------------------------------------------------------------------------
         2) Form, Schedule or Registration Statement No.:

- --------------------------------------------------------------------------------
         3) Filing Party:

- --------------------------------------------------------------------------------
         4) Date Filed:

<PAGE>

                               C-PHONE CORPORATION
                             6714 NETHERLANDS DRIVE
                        WILMINGTON, NORTH CAROLINA 28405


                    NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

                          TO BE HELD ON AUGUST 1, 1997


         The  Annual  Meeting  of  shareholders  of  C-Phone   Corporation  (the
"Company") will be held at the Landfall Park Hampton Inn & Suites, 1989 Eastwood
Road,  Wilmington,  North  Carolina  at 9:00 a.m.,  on August 1,  1997,  for the
following purposes:

         1.       To elect six directors to serve until the next Annual  Meeting
                  of  shareholders  and until their  respective  successors  are
                  elected and qualified;

         2.       To  approve  the  issuance  of up to  2,501,001  shares of the
                  Company's  common  stock upon  exercise of  "contingent  value
                  rights"  granted  to  investors  in the  Company's  March 1997
                  private placement;

         3.       To  approve  an  amendment  to the  Company's  Certificate  of
                  Incorporation  to increase the authorized  number of shares of
                  common stock from ten million shares of common stock to twenty
                  million shares of common stock;

         4.       To  approve  an  amendment  to the  Company's  Certificate  of
                  Incorporation  to  authorize  the  Company  to issue up to one
                  million shares of preferred stock;

         5.       To ratify the  selection  of Coopers & Lybrand  L.L.P.  as the
                  Company's  independent  accountants for the fiscal year ending
                  February 28, 1998; and

         6.       To transact  such other  business as properly  may come before
                  the Annual Meeting and any adjournments thereof.

         The Board of Directors has fixed the close of business on June 12, 1997
as the record date for  determining  shareholders  entitled to receive notice of
and to vote at the Annual Meeting and any adjournments thereof.



                                 By Order of the Board of Directors,


                                 Tina L. Jacobs,
                                 SECRETARY
June __, 1997


IMPORTANT:  THE  COMPANY  INVITES  YOU TO ATTEND THE  ANNUAL  MEETING IN PERSON.
HOWEVER,  WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL  MEETING,  PLEASE VOTE BY
COMPLETING,  SIGNING AND DATING THE ENCLOSED  PROXY AND RETURNING IT PROMPTLY TO
THE COMPANY IN THE ENCLOSED  SELF-ADDRESSED,  POSTAGE PREPAID  ENVELOPE.  IF YOU
ATTEND THE ANNUAL  MEETING,  YOU MAY REVOKE  YOUR PROXY AND VOTE YOUR  SHARES IN
PERSON.
<PAGE>

                               C-PHONE CORPORATION
                             6714 NETHERLANDS DRIVE
                        WILMINGTON, NORTH CAROLINA 28405

                                    ---------

                                 PROXY STATEMENT

                                    ---------

                       1997 ANNUAL MEETING OF SHAREHOLDERS


         This  Proxy   Statement  is  furnished  to   shareholders   of  C-Phone
Corporation,  a New York  corporation  (the  "Company"),  in connection with the
solicitation  of proxies by the Board of Directors of the Company (the "Board of
Directors")  for use at the Annual Meeting of  shareholders  of the Company (the
"Annual Meeting") to be held at 9:00 a.m. on August 1, 1997 at the Landfall Park
Hampton Inn & Suites, 1989 Eastwood Road,  Wilmington,  North Carolina,  and any
adjournments  thereof,  for the purposes set forth in the accompanying Notice of
Annual Meeting. This Proxy Statement, the attached Notice of Annual Meeting, the
accompanying  form of proxy and the Annual Report to shareholders for the fiscal
year  ended  February  28,  1997  ("Fiscal   1997")  are  first  being  sent  to
shareholders of the Company on or about June , 1997.

         Only  shareholders  of record at the close of business on June 12, 1997
(the  "Record  Date")  are  entitled  to notice  of,  and to vote at, the Annual
Meeting or any adjournment  thereof.  On the Record Date,  there were issued and
outstanding  5,202,856  shares of the Company's common stock, par value $.01 per
share (the  "Common  Stock").  All of such  shares are of one class,  with equal
voting  rights,  and each holder  thereof is entitled to one vote on all matters
voted on at the Annual Meeting for each share registered in such holder's name.

         Presence in person or by proxy of holders of 2,601,429 shares of Common
Stock  will  constitute  a quorum at the  Annual  Meeting.  Assuming a quorum is
present,  (i) directors  will be elected by a plurality of the votes cast at the
Annual Meeting by the holders of shares  entitled to vote, (ii) the proposals to
approve the amendments (the "Charter  Amendments") to the Company's  Certificate
of Incorporation (a) to increase the authorized number of shares of common stock
from ten  million  shares of common  stock to  twenty  million  shares of common
stock,  and  (b) to  authorize  the  issuance  of up to one  million  shares  of
preferred stock will require the  affirmative  vote of the holders of a majority
of all outstanding shares entitled to vote at the Annual Meeting,  and (iii) all
other matters to come before the Annual  Meeting,  including (a) the proposal to
approve the issuance of up to 2,501,001  shares (the "Rights  Shares") of Common
Stock upon exercise of  "contingent  value  rights"  granted to investors in the
Company's March 1997 private placement, and (b) ratification of the selection of
Coopers & Lybrand  L.L.P.,  as  independent  accountants  for the current fiscal
year, will require the  affirmative  vote of a majority of the votes cast at the
Annual Meeting by the holders of shares entitled to vote.

         If a  shareholder,  present  in  person or by  proxy,  abstains  on any
matter, the shareholder's  shares will not be voted on such matter.  Abstentions
may be specified on all proposals  submitted to a shareholder  vote,  other than
the election of directors. In accordance with New York law, abstentions will not
be counted in determining  the votes cast in connection with the approval of the
issuance  of  the  Rights  Shares  or  the  ratification  of  the  selection  of
independent accountants.  However, abstentions are considered in determining the
number of votes required to approve the Charter Amendments.  Thus, an abstention
from voting on such  matters has the same legal effect as a vote  "against"  the
matter, even though a shareholder may interpret such action  differently.  Votes
withheld in  connection  with the  election of one or more of the  nominees  for
director will not be counted as votes cast for such individuals.

         A proxy  submitted by a  shareholder  also may  indicate  that all or a
portion of the  shares  represented  by such  proxy are not being  voted by such
shareholder with respect to a particular matter.  This could occur, for example,
when a broker is not  permitted  to vote  shares  held in street name on certain
matters in the absence of instructions  from the beneficial owner of the shares.
Brokers who hold shares in street name have

                                       1
<PAGE>
the authority to vote on certain routine matters on which they have not received
instructions  from their  beneficial  owners.  Brokers  holding shares in street
name, who do not receive  instructions,  are entitled to vote on the election of
directors and  ratification of the  appointment of the independent  accountants,
since such  matters are  considered  to be routine,  but will not be entitled to
vote on the  proposals  to approve the  Charter  Amendments  or the  proposal to
approve the issuance of the Rights Shares, since such matters are not considered
to be routine. Under applicable New York law, "broker non-votes" on any proposal
(where a broker submits a proxy but does not have authority to vote a customer's
shares on such  proposal)  will be considered to be not entitled to vote on that
proposal and,  thus,  will not be counted in  determining  whether such proposal
receives the vote of the required  amount of shares present and entitled to vote
at the Annual  Meeting.  Since a broker is not  required  to vote shares held in
"street name" in the absence of  instructions  from the  beneficial  shareholder
and, in the absence of  instructions,  is not permitted to vote on the proposals
to approve the Charter  Amendments  and the  issuance  of the Rights  Shares,  a
shareholder's  failure  to  instruct  his  or  her  broker  may  result  in  the
shareholder's shares not being voted.

         A proxy, in the  accompanying  form, which is properly  executed,  duly
returned to the Company and not revoked,  will be voted in  accordance  with the
instructions contained thereon. If no specific instructions are indicated on the
proxy, the shares represented  thereby will be voted FOR the (i) election of the
persons  nominated  herein as  directors,  (ii)  approval of the issuance of the
Rights Shares,  (iii) approval of the Charter Amendments,  and (iv) ratification
of the  selection  of  Coopers & Lybrand  L.L.P.  as the  Company's  independent
accountants  for the current fiscal year; as well as FOR the transaction of such
other business as properly may come before the Annual Meeting.

         Each proxy granted may be revoked by the person granting it at any time
(i) by giving  written  notice to such effect to the  Secretary  of the Company,
(ii) by  execution  and  delivery of a proxy  bearing a later date,  or (iii) by
attendance and voting in person at the Annual  Meeting;  except as to any matter
upon which, prior to such revocation,  a vote shall have been cast at the Annual
Meeting pursuant to the authority  conferred by such proxy. The mere presence at
the  Annual  Meeting  of a  person  appointing  a  proxy  does  not  revoke  the
appointment.


                             PRINCIPAL SHAREHOLDERS

         Set forth below is  information,  as of June 12, 1997,  with respect to
the beneficial  ownership of the Common Stock by (i) each person or group who is
known  by  the  Company  to be the  beneficial  owner  of  more  than  5% of the
outstanding Common Stock, (ii) each of the current directors of the Company (who
also  constitute the nominees for election as directors at the Annual  Meeting),
(iii)  each of the  executive  officers  of the  Company  named in the  "Summary
Compensation  Table" below, and (iv) all executive officers and directors of the
Company,  as a group (eight  persons).  Except as indicated in the  footnotes to
this table,  the Company believes that the persons named in this table have sole
voting  and  investment  power  with  respect  to the  shares  of  Common  Stock
indicated.

<TABLE>
<CAPTION>
NAME                                 SHARES BENEFICIALLY OWNED        PERCENT OF CLASS
- ---------------                      -------------------------        ----------------
<S>                                             <C>                              <C>  
Daniel P. Flohr                                 1,156,745(1)                     22.2%
Tina L. Jacobs                                  1,156,745(1)                     22.2%
Dan Purjes                                        448,042(2)                      8.2%
Stuart E. Ross                                     38,333(3)                         *
Seymour L. Gartenberg                              25,000(4)                         *
E. Henry Mize                                      11,000(5)                         *
Donald S. McCoy                                     7,500(6)                         *
All executive officers and
 directors, as a group                          1,280,578(7)                     24.1%
</TABLE>

- --------------------------------
  *      less than 1%

                                        2
<PAGE>

(1)      Consists of (i) 767,854 shares owned directly by Mr. Flohr,  250,000 of
         which have been deposited in escrow to secure the timely fulfillment by
         the Company of certain of its  obligations  made in connection with the
         Company's  March 1997 private  placement (see "Approval of the Issuance
         of the Rights  Shares"),  (ii)  378,481  shares  owned  directly by Ms.
         Jacobs,  and (iii) 10,410  shares owned by a trust (the sole trustee of
         which is Mr.  Flohr's  mother) for the  benefit of Mr.  Flohr's and Ms.
         Jacobs' minor  daughter.  Mr. Flohr and Ms. Jacobs are husband and wife
         and their address is c/o C-Phone  Corporation,  6714 Netherlands Drive,
         Wilmington, North Carolina 28405.

(2)      Consists of (i) 111,521  shares  owned  directly  by Mr.  Purjes,  (ii)
         116,521  shares  issuable  upon  exercise  of  warrants  (issued by the
         Company in connection  with its 1994 initial public  offering) owned by
         Mr. Purjes, and (iii) 70,000 shares owned by WBM LLC and 150,000 shares
         issuable upon exercise of warrants (issued by the Company in connection
         with its March 1997 private  placement) owned by WBM LLC. WBM LLC is an
         affiliate of Josephthal Lyon & Ross Incorporated  ("JLR").  Mr. Purjes,
         the Chairman and Chief Executive Officer of JLR, is the managing member
         of WBM LLC.  Does not include (i) any Rights Shares which may be issued
         to Mr.  Purjes  or to WBM  LLC,  or  (ii)  any  of the  250,000  shares
         (referred  to in Note (1) above)  deposited by Mr. Flohr in escrow with
         JLR. See "Approval of the Issuance of the Rights  Shares." Mr.  Purjes'
         address is c\o Josephthal  Lyon & Ross  Incorporated,  200 Park Avenue,
         New York, New York 10166.

(3)      Consists of shares  issuable  upon  exercise of that portion of options
         granted  pursuant to the  Company's  1994 Stock Option Plan (the "Stock
         Option Plan") that are presently exercisable or are scheduled to become
         exercisable on or before September 3, 1997.

(4)      Consists of (i) 15,000  shares owned  directly by Mr.  Gartenberg,  and
         (ii) 10,000  shares  issuable  upon exercise of that portion of options
         granted   pursuant  to  the  Stock  Option  Plan  that  are   presently
         exercisable  or  are  scheduled  to  become  exercisable  on or  before
         September 3, 1997.

(5)      Consists  of (i) 1,000  shares  owned  directly by Mr.  Mize,  and (ii)
         10,000 shares issuable upon exercise of that portion of options granted
         pursuant to the Stock Option Plan that are presently exercisable or are
         scheduled to become exercisable on or before September 3, 1997.

(6)      Consists of shares  issuable  upon  exercise of that portion of options
         granted   pursuant  to  the  Stock  Option  Plan  that  are   presently
         exercisable  or  are  scheduled  to  become  exercisable  on or  before
         September 3, 1997.

(7)      Consists of (i) the shares  referred to in notes (1), (3), (4), (5) and
         (6) to this  table,  (ii) 7,000  shares  owned  directly  by  executive
         officers of the Company, and (iii) 35,000 shares issuable upon exercise
         of that portion of options granted to such executive  officers pursuant
         to  the  Stock  Option  Plan  that  are  presently  exercisable  or are
         scheduled to become exercisable on or before September 3, 1997.

         The Company does not know of any arrangements,  including any pledge by
any person of securities of the Company,  the operation of which at a subsequent
date may result in a change in control of the Company.

         Based  solely  upon a  review  of  Forms  3,  4 and 5  filed  with  the
Securities and Exchange Commission and the Company under the Securities Exchange
Act of 1934  (the  "Exchange  Act")  and a  review  of  written  representations
received  by the  Company,  no person who at any time  during  Fiscal 1997 was a
director,  executive  officer  or  beneficial  owner  of  10%  or  more  of  the
outstanding  shares of Common Stock failed to file, on a timely  basis,  reports
required by Section 16(a) of the Exchange Act, except that (i) Stuart E. Ross, a
Director and executive officer of the Company, inadvertently filed late a Form 4
for November 1996 reporting one transaction involving the acquisition of options
to purchase  Common Stock  granted  pursuant to the Stock Option Plan,  and (ii)
David DeSimone, an executive officer of the Company,  inadvertently filed late a
Form 3 for September 1996 reporting his initial ownership of Common Stock and an
option to purchase Common Stock granted pursuant to the Stock Option Plan.

                                        3
<PAGE>
                              ELECTION OF DIRECTORS
                           (ITEM 1 ON THE PROXY CARD)

DIRECTORS AND NOMINEES

         The Company's By-Laws provide for a Board of Directors of not less than
three  directors.  The Board of  Directors  has fixed the number of directors at
six.  The persons  named in the  accompanying  form of proxy,  unless  otherwise
instructed,  intend to vote the shares of Common Stock  covered by valid proxies
FOR the election of the six persons named in the following  table,  each of whom
has been  designated  by the Board of  Directors  as a nominee  for  election as
director.  In the  event  that  any of such  persons  does  not  continue  to be
available for election, the persons named in the accompanying form of proxy will
have  discretionary  power to vote for a substitute and will have  discretionary
power to vote or  withhold  their  vote  for any  additional  nominees  named by
shareholders.  There  are no  circumstances  presently  known  to the  Board  of
Directors  which  would  render  any of the  following  persons  unavailable  to
continue to serve as a director, if elected.
<TABLE>
<CAPTION>

      NAME                          AGE              POSITIONS WITH THE COMPANY
      ----                          ---              --------------------------

<S>                                  <C>             <C>
Daniel P. Flohr                      42              Chairman of the Board, President and Chief Executive
                                                      Officer; and Director since March 1986

Tina L. Jacobs                       37              Executive Vice President, Chief Operating Officer,
                                                      Secretary and Treasurer; and Director since March 1986

Stuart E. Ross                       37              Vice President and Director of Engineering;
                                                      and Director since December 1993

E. Henry Mize                        55              Director since June 1994

Seymour L. Gartenberg                66              Director since August 1994

Donald S. McCoy                      66              Director since September 1995
</TABLE>

         The business  experience of each of the foregoing  persons,  during the
past five years, is as follows:

         DANIEL P. FLOHR  co-founded  the Company in March 1986 with Ms.  Jacobs
and has  served  as the  President  and a  director  for more than the past five
years.

         TINA L. JACOBS  co-founded the Company in March 1986 with Mr. Flohr and
has served as an  executive  officer and a director  for more than the past five
years.

         STUART E. ROSS joined the Company in January  1994,  after acting as an
independent consulting engineer to the Company, through New Potato Technologies,
Inc. ("NPT"), during the initial development of the Company's video conferencing
products.  For more than five years prior thereto, Mr. Ross was the principal of
NPT,  an  engineering  consulting  and  creative  design  firm  specializing  in
electronic  media,  software  design,  consumer  electronics and  communications
systems.

         E. HENRY MIZE has been a private  investor  since  1992.  For more than
five years prior thereto, Mr. Mize was employed by Philip Morris USA, a consumer
goods company, and had been its Vice President, Regional Sales for the Northeast
and Southeast United States.

         SEYMOUR  L.  GARTENBERG  has been a  business  consultant  and  private
investor  since  1991 and  President  of The City  College  Fund,  a  non-profit
organization  located in New York City,  since October 1993. Until he retired in
1991, Mr. Gartenberg had been employed by Sony Music Entertainment Inc. (and its
predecessors, CBS Records Inc. and CBS/Records Group, a division of CBS Inc.), a
multinational  record  company,  as Executive  Vice President for more than five
years prior thereto.

                                        4
<PAGE>

         DONALD  S.  MCCOY  has  been  a  technology   assessment  and  planning
consultant,  specializing in the field of consumer electronics for more than the
past five years. Dr. McCoy was Vice President,  Technology of CBS Inc. from 1983
to 1987 and general manager of the CBS Technology Center from 1979 to 1987.

         All directors hold office until the next Annual Meeting of shareholders
of the Company and until their  successors  are elected and  qualified  or until
their  earlier  resignation.  Except with respect to Mr.  Flohr and Ms.  Jacobs,
there are no family  relationships  among the directors or executive officers of
the Company.

         In connection with the Company's  August 1994 initial public  offering,
the Company  agreed to use its best  efforts,  until August  1997,  to cause one
individual,  if designated by Josephthal Lyon & Ross Incorporated  ("JLR"),  the
managing  underwriter of such offering,  to be elected to the Company's Board of
Directors.  To  date,  JLR has not  exercised  its  right to  designate  such an
individual.

         The business and affairs of the Company are managed under the direction
of the Board of Directors.  The Board has  responsibility for establishing broad
corporate policies and for the overall  performance of the Company,  rather than
day-to-day  operating  details.  Members  of the  Board  of  Directors  are kept
informed of the Company's business by various reports and documents sent to them
at least quarterly, as well as by reports presented at meetings of the Board and
its Committees by executive officers and other employees of the Company.

         The  Board of  Directors  has an  Audit  Committee  and a  Compensation
Committee,  the  members  of  which  serve  at the  discretion  of the  Board of
Directors.  The Audit  Committee,  which  currently  consists of Mr.  Gartenberg
(Chairman), Ms. Jacobs, Dr. McCoy and Mr. Mize, among other things, confers with
the independent accountants and financial officers of the Company, recommends to
the Board of Directors the  independent  accountants to be selected to audit the
Company's annual financial statements and approves any special assignments given
to such accountants. The Compensation Committee, which currently consists of Mr.
Mize (Chairman),  Mr. Gartenberg and Dr. McCoy, among other things,  reviews the
compensation   levels   of  the   Company's   executive   officers   and   makes
recommendations  to the Board of  Directors  regarding  salaries  and  incentive
programs.  The Compensation Committee also administers the Stock Option Plan and
make grants thereunder.

         During  Fiscal  1997,  there  were  eight  meetings  of  the  Board  of
Directors,  five meetings of the Compensation Committee and four meetings of the
Audit Committee.  During this period, each director attended at least 75% of the
total number of all  meetings of the Board of  Directors  held during the period
that he or she served as a director and of the committees thereof on which he or
she served.

         The Board of Directors does not have a separate  nominating  committee.
The Board of Directors will consider  nominees  recommended by shareholders  for
election  as  director  at the  1998  Annual  Meeting,  provided  that  any such
recommendation  is  submitted  in writing by  February  28, 1998 to the Board of
Directors, c/o the Secretary of the Company, 6714 Netherlands Drive, Wilmington,
North Carolina  28405,  accompanied  by a description of the proposed  nominee's
qualifications  and other relevant  biographical  information and the consent of
the proposed nominee to serve.

         The Company currently pays its non-employee  directors an annual fee of
$5,000 and reimburses  them for  out-of-pocket  expenses  incurred in connection
with their services as directors.  The Company's non-employee directors (Seymour
L.  Gartenberg,  E. Henry Mize and Donald S. McCoy) were  granted  non-qualified
options to purchase 5,000 shares of Common Stock under the Stock Option Plan, at
the time they were first elected to the Board of Directors.  During Fiscal 1997,
the Company  determined  that,  in addition to their  initial  grant of options,
non-employee  directors  should  receive an annual  grant of  options  for 2,500
shares of Common Stock for each year of service. As a result, Mr. Gartenberg and
Mr Mize, who had been serving as directors since 1994, each received  additional
options to purchase 5,000 shares of Common Stock,  and Dr. McCoy,  who was first
elected to the Board in 1995,  received  additional  options to  purchase  2,500
shares  of  Common  Stock.  All  of the  options  granted  in  Fiscal  1997  are
exercisable at $3.00 per share, the fair market value of the Common Stock at the
date of grant. It is anticipated that, after the 1997 Annual Meeting,  grants of
non-qualified  options to purchase 2,500 shares of Common Stock  (exercisable at
the fair market value of

                                        5

<PAGE>

the Common  Stock at the date of grant) under the Stock Option Plan will be made
to the  non-employee  directors  elected  by the  shareholders  to the  Board of
Directors at the 1997 Annual Meeting.

EXECUTIVE OFFICERS OF THE COMPANY

         Executive  officers of the Company are  appointed  by, and serve at the
discretion of, the Board of Directors.  In addition to Mr. Flohr, Ms. Jacobs and
Mr. Ross, whose business  experience is set forth above, the executive  officers
of the Company are as follows:

<TABLE>
<CAPTION>
               NAME                 AGE             POSITIONS WITH THE COMPANY
               ----                 ---             --------------------------

<S>                                 <C>             <C>
         Paul H. Albritton          54              Vice President and Chief Financial Officer

         David DeSimone             42              Vice President, Marketing and Sales
</TABLE>

         PAUL H. ALBRITTON has been Vice President and Chief  Financial  Officer
of the  Company  since May 1994.  From 1992  until he joined  the  Company,  Mr.
Albritton was  self-employed  as a business  consultant  and, in such  capacity,
consulted for the Company  during April 1994. For more than the five years prior
to 1992,  Mr.  Albritton  was  employed  by  Acton  Corporation  (now  Sunstates
Corporation),  a public company  engaged in automobile  insurance  underwriting,
manufacturing  and  certain  other  businesses,  where  he  was  Executive  Vice
President and a director.

         DAVID  DESIMONE has been Vice  President of Marketing  and Sales of the
Company  since  September  1996.  From 1981  until he joined  the  Company,  Mr.
DeSimone  was  employed  by  MCI  Telecommunications   Corporation,  a  national
long-distance  telecommunications services company, and had been its Director of
Marketing  for the  Integrated  Client  Services  Division from 1994 to 1996 and
Regional Sales Manager for Business Markets from 1992 until 1994.

EXECUTIVE COMPENSATION

         The following table sets forth information concerning  compensation for
services in all capacities  awarded or paid to or earned by the Company's  chief
executive  officer and the other executive  officers of the Company who received
cash compensation  from the Company  aggregating at least $100,000 during Fiscal
1997.
<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE

                                                                                   LONG-TERM COMPENSATION
                                                      ANNUAL COMPENSATION(1)               AWARDS
                                                      -------------------                  ------

NAME AND                                  FISCAL                                    NUMBER OF SECURITIES
PRINCIPAL POSITION                         YEAR                       SALARY       UNDERLYING OPTIONS (#)
- ------------------                         ----                       ------       ----------------------

<S>                                        <C>                        <C>               <C>
Daniel P. Flohr(2)                         1997                       $130,000               --
  President and Chief                      1996                       $130,000               --
  Executive Officer                        1995                       $140,769               --

Tina L. Jacobs(3)                          1997                       $110,000               --
  Executive Vice President and             1996                       $110,000               --
  Chief Operating Officer                  1995                       $120,772               --

Stuart E. Ross(4)                          1997                       $100,000           30,850 shares(5)
  Vice President and                       1996                       $100,000           10,000 shares(5)
  Director of Engineering                  1995                       $100,000           25,000 shares(5)
</TABLE>

- -------------------------

                                        6

<PAGE>

(1)      During each of the three  fiscal years ended  February  28,  1997,  the
         Company provided certain  personal  benefits to its executive  officers
         which  benefits  to any such  individual  did not  exceed the lesser of
         $50,000 or 10% of the cash compensation received by such individual.

(2)      Pursuant to an amendment to Mr. Flohr's employment agreement, effective
         August 26, 1994,  his annual base salary was reduced  from  $150,000 to
         $130,000.  In  addition,  for  Fiscal  1997,  Mr.  Flohr  was given the
         opportunity   to  receive  a  minimum  bonus  of  $100,000  if  certain
         performance goals were achieved (which did not occur).  See "Employment
         Contracts  and   Termination   of  Employment   and   Change-in-Control
         Arrangements."

(3)      Pursuant to an amendment to Ms. Jacobs' employment agreement, effective
         August 26, 1994,  her annual base salary was reduced  from  $130,000 to
         $110,000.  In  addition,  for  Fiscal  1997,  Ms.  Jacobs was given the
         opportunity   to  receive  a  minimum  bonus  of  $100,000  if  certain
         performance goals were achieved (which did not occur).  See "Employment
         Contracts  and   Termination   of  Employment   and   Change-in-Control
         Arrangements."

(4)      See   "Employment   Contracts  and   Termination   of  Employment   and
         Change-in-Control Arrangements."

(5)      Represents incentive stock options granted under the Stock Option Plan.
         See "Stock Option Plan."


STOCK OPTION PLAN

STOCK OPTIONS GRANTED IN FISCAL 1997

         The following table sets forth information concerning individual grants
of stock  options  made during  Fiscal 1997 to each of the  Company's  executive
officers named in the Summary  Compensation  Table who received a grant of stock
options  during  Fiscal 1997.  The Company did not grant any stock  appreciation
rights during Fiscal 1997.
<TABLE>
<CAPTION>

                                NUMBER OF                % OF TOTAL
                                SECURITIES               OPTIONS
                                UNDERLYING               GRANTED TO              EXERCISE
                                OPTIONS                  EMPLOYEES IN            PRICE
 NAME                           GRANTED (#)              FISCAL YEAR             ($/SH)              EXPIRATION DATE
 ----                           -----------              -----------             ------              ---------------

<S>                             <C>                           <C>                <C>                <C>
Stuart E. Ross                  10,850 shares(1)              7.2%               $3.125              November 11, 2001
                                20,000 shares(2)             13.2%               $3.375              August 8, 2001
</TABLE>

- ------------------------

(1)  The options  were  granted  pursuant to the Stock  Option Plan by the Stock
     Option Committee on November 6, 1996, are incentive stock options,  have an
     option  price equal to the fair market  value on the date of grant and vest
     one year after the date of grant.


(2)  The options  were  granted  pursuant to the Stock  Option Plan by the Stock
     Option  Committee on August 1, 1996, are incentive  stock options,  have an
     option  price equal to the fair market  value on the date of grant and vest
     in three substantially equal annual installments  commencing one year after
     the date of grant.

STOCK OPTIONS HELD AT THE END OF FISCAL 1997

         The  following  table sets forth the total  number of  exercisable  and
un-exercisable  stock options held by each of the Company's  executive  officers
named  in the  Summary  Compensation  Table  who held any  stock  options  as of
February 28, 1997. No options to purchase  Common Stock were exercised by any of
the Company's  executive  officers during Fiscal 1997 and no stock  appreciation
rights were outstanding during Fiscal 1997.


                                        7
<PAGE>
<TABLE>
<CAPTION>

                                        NUMBER OF SECURITIES                           VALUE OF UNEXERCISED
                                   UNDERLYING UNEXERCISED OPTIONS                      IN-THE-MONEY OPTIONS
                                        AT FEBRUARY 28, 1997                           AT FEBRUARY 28, 1997
                                        ---------------------                          --------------------

    NAME                     EXERCISABLE            UNEXERCISABLE             EXERCISABLE           UNEXERCISABLE
    ----                     -----------            -------------             -----------           -------------

<S>                          <C>                    <C>                         <C>                   <C>     
Stuart E. Ross               20,000 shares          45,850 shares               $34,167               $200,827
</TABLE>


DESCRIPTION OF STOCK OPTION PLAN

         The Stock  Option  Plan was  adopted by the Board of  Directors  of the
Company on August 16, 1994 and approved by shareholders of the Company on August
4, 1995. The Board of Directors  adopted certain  amendments to the Stock Option
Plan on November 28, 1995 and August 1, 1996. The Stock Option Plan, as amended,
authorizes  the  issuance,  within ten years from the date of its  adoption,  of
options  covering up to 500,000 shares of Common Stock (subject to adjustment in
certain circumstances) to directors,  executive officers and other key employees
of,  and  consultants  to,  the  Company.  As of May 30,  1997,  options  for an
aggregate of 17,156  shares of Common Stock  granted under the Stock Option Plan
had been  exercised,  options for 292,710  shares of Common  Stock,  at exercise
prices  ranging  from $2.375 to $10.625 per share,  were  outstanding  under the
Stock  Option Plan and 190,134  shares of Common  Stock were  available  for the
grant of future  options  under the Stock Option Plan.  The Stock Option Plan is
intended to provide an incentive to continued  employment or association of such
key  employees and other  individuals  by enabling them to acquire a proprietary
interest  in the Company and by  offering  comparable  incentives  to enable the
Company better to attract,  compete for and retain highly qualified individuals,
as well as to associate  the interests of such persons with those of the Company
and its shareholders.

         Options  granted  under the Stock Option Plan may be either  "Incentive
Stock  Options" as that term is defined in Section 422 of the  Internal  Revenue
Code of 1986,  or  options  which do not  qualify  as  Incentive  Stock  Options
("Non-Qualified Stock Options").

         Incentive  Stock  Options  may be  granted  only  to  employees  of the
Company. An Incentive Stock Option must expire within ten years from the date it
is granted  (five years in the case of such options  granted to a holder of more
than 10% of the  outstanding  Common Stock).  Incentive  Stock Options are first
exercisable not earlier than one year from the date of grant. The exercise price
of an Incentive  Stock Option must be at least equal to the fair market value of
the Common Stock on the date such Incentive  Stock Option is granted (or 110% of
the fair market value of the Common Stock in the case of such options granted to
a holder of more than 10% of the outstanding  Common Stock).  To the extent that
the  aggregate  fair  market  value of the Common  Stock  with  respect to which
Incentive Stock Options are exercisable for the first time by an optionee during
any  calendar   year  exceeds   $100,000,   such  options  will  be  treated  as
Non-Qualified Stock Options.

         The  Company  may issue  Non-Qualified  Stock  Options  under the Stock
Option Plan to executive  officers,  directors  and key employees of the Company
and advisors and consultants to the Company. The exercise price of Non-Qualified
Stock  Options  must be at least  equal to the fair  market  value of the Common
Stock on the date such  Options are granted and will have such  expiration  date
and vesting  schedule as determined by the Stock Option Committee at the time of
grant.

         Prior to its  amendment in August 1996,  the Stock Option Plan provided
for  a  one-time  grant  to  each  non-employee   director  of  the  Company  of
Non-Qualified Stock Options to purchase 5,000 shares of Common Stock at the time
when he or she was first elected to the Board of Directors.  Such  Non-Qualified
Stock  Options  have an exercise  price  equal to the fair  market  value of the
Common  Stock on the date of  grant,  vest one year  after the date of grant and
expire ten years after the date of grant.

         Payment of the exercise  price upon  exercise of an option must be paid
in cash or, if  permitted by the  applicable  option  agreement,  by delivery of
shares of Common Stock, currently exercisable options to acquire

                                        8

<PAGE>
Common Stock or other property valued at its then fair market value. Options are
not  transferable  by the  optionee,  other than by will or  applicable  laws of
descent  and  distribution.  In the  event  of  termination  of  the  optionee's
relationship with the Company other than for cause, the optionee's  options will
expire on the earlier of stated  expiration  or three  months  after the date of
termination  (except in the case of death,  disability or  retirement,  in which
event the  period is  extended  to 12  months).  Upon a change in control of the
Company, all outstanding options become immediately exercisable in full.

EMPLOYMENT  CONTRACTS  AND  TERMINATION  OF  EMPLOYMENT  AND   CHANGE-IN-CONTROL
ARRANGEMENTS

         Daniel  Flohr serves as President  and Chief  Executive  Officer of the
Company  pursuant  to an  employment  agreement,  dated as of March 1, 1994,  as
amended, at an annual base salary of $130,000.  Pursuant to this agreement,  Mr.
Flohr was entitled to receive incentive  compensation for Fiscal 1997 if certain
performance  goals (which were not achieved)  were  attained.  It is anticipated
that the  Compensation  Committee  of the Board of Directors  will  establish an
incentive bonus arrangement,  based upon the Company attaining certain levels of
performance, for Fiscal 1998; however, neither the amount of such incentive, nor
the levels of performance to be attained,  has yet been determined.  Mr. Flohr's
employment  agreement  is  automatically   renewed  annually  unless  notice  of
non-renewal is given by either party at least six months prior to the end of the
then current term. In the event that Mr. Flohr's employment is terminated by the
Company for any reason without cause and prior to expiration of the then current
term,  Mr. Flohr would be entitled to receive,  in one lump sum,  the  aggregate
base salary that he would have received had he been employed  through the end of
the then current term.

         Tina Jacobs  serves as Executive  Vice  President  and Chief  Operating
Officer of the Company pursuant to an employment agreement, dated as of March 1,
1994,  as  amended,  at an annual  base  salary of  $110,000.  Pursuant  to this
agreement,  Ms. Jacobs was entitled to receive incentive compensation for Fiscal
1997 if certain performance goals (which were not achieved) were attained. It is
anticipated  that the  Compensation  Committee  of the Board of  Directors  will
establish  an  incentive  bonus  arrangement,  based upon the Company  attaining
certain levels of performance,  for Fiscal 1998; however,  neither the amount of
such  incentive,  nor the levels of  performance  to be  attained,  has yet been
determined.  Ms. Jacobs' employment agreement is automatically  renewed annually
unless notice of  non-renewal is given by either party at least six months prior
to the end of the then current term. In the event that Ms. Jacobs' employment is
terminated  by the Company for any reason  without cause and prior to expiration
of the then current term,  Ms. Jacobs would be entitled to receive,  in one lump
sum,  the  aggregate  base  salary  that she would  have  received  had she been
employed through the end of the then current term.

         Stuart Ross serves as Director of Engineering  of the Company  pursuant
to  an  employment   agreement,   dated  as  of  December  30,  1993,  which  is
automatically  renewed  at the  end of  each  calendar  year  unless  notice  of
non-renewal  is given by either  party at least 90 days  prior to the end of the
then current year.  Mr. Ross' annual base salary was increased  from $100,000 to
$115,000,  effective  May 7, 1997.  In the event that Mr.  Ross'  employment  is
terminated by the Company without cause,  Mr. Ross would continue to receive his
salary for a period equal to the lesser of (i) two months,  and (ii) the balance
of the term of his employment  agreement.  Mr. Ross'  employment  agreement also
provides  that,  for a period  of  three  years  following  his  termination  of
employment,  he will not, in any capacity,  compete with the Company.  In August
1996,  the  Company  granted  Mr.  Ross an option  expiring on August 1, 2001 to
purchase 20,000 shares of Common Stock at an exercise price of $3.375 per share,
which  option vests in three equal  annual  installments  beginning on August 1,
1997 and expires on August 1, 2001. In November  1996,  the Company  granted Mr.
Ross an additional option expiring on November 6, 2001 to purchase 10,850 shares
of Common Stock at an exercise price of $3.125 per share,  which option vests on
November 6, 1997 and expires on November 6, 2001. See "Stock Option Plan."

         David  DeSimone  serves as Vice President of Marketing and Sales of the
Company  pursuant  to a two-year  employment  agreement,  dated as of August 15,
1996,  at an  annual  base  salary  of  $100,000.  At  the  commencement  of his
employment with the Company,  and to assist him in his relocation to Wilmington,
North Carolina,  Mr. DeSimone  received a  non-accountable  relocation  expenses
payment of  $35,000.  Pursuant  to his  employment  agreement,  Mr.  DeSimone is
entitled  to receive  incentive  compensation  for Fiscal  1998 and Fiscal  1999
ranging  from (i)  $30,000,  if net  sales of the  Company  (excluding  sales of
C-Phone Home) for Fiscal

                                        9

<PAGE>


1998 reach $4 million,  to (ii) $300,000 if such net sales reach $15 million. If
net sales exceed $15 million,  the  Compensation  Committee  will  determine the
appropriate  level  of  incentive  compensation.   Pursuant  to  his  employment
agreement,  Mr. DeSimone was also entitled to incentive  compensation for Fiscal
1997 of up to $100,000 if certain performance goals were achieved (which did not
occur).  In addition,  Mr. DeSimone was granted (i) an option to purchase 30,000
shares at an exercise  price of $2.375 per share,  which  option  vests in three
equal annual  installments  beginning September 3, 1997 and expires September 3,
2001,  (ii) an option (which has  terminated) to purchase 5,000 shares of Common
Stock at an exercise price of $2.375 per share if the Company  achieved  certain
performance  goals (which did not occur),  and (iii) an option to purchase 5,000
shares of Common  Stock at an exercise  price of $2.375 per share,  which option
will vest on  September 3, 1997,  if the Company  achieves  certain  performance
goals during the first six months of Fiscal 1998.  In addition,  the Company has
agreed to issued to Mr. DeSimone, during Fiscal 1998 and Fiscal 1999, options to
acquire at least an additional  10,000  shares of Common  Stock,  subject to the
Company achieving,  in such fiscal years,  performance goals to be determined by
the Compensation Committee. Mr. DeSimone's employment agreement is automatically
renewed  annually unless notice of non-renewal is given by either party at least
90 days  prior  to the end of the  then  current  term.  In the  event  that Mr.
DeSimone's  employment is terminated by the Company without cause,  Mr. DeSimone
would continue to receive his salary for a period equal to the lesser of (i) two
months,  and  (ii) the  balance  of the term of his  employment  agreement.  Mr.
DeSimone's  employment  agreement  also provides that, for a period of two years
following his termination of employment,  he will not, in any capacity,  compete
with the Company.

         The Company  maintains a $1,500,000 key person  insurance policy on the
life of Mr. Flohr,  of which the Company is the  beneficiary  for $1,000,000 and
Ms.  Jacobs (Mr.  Flohr's  wife) is the  beneficiary  for  $500,000.  Ms. Jacobs
reimburses  the Company  for the cost of her pro rata share of the  policy.  The
Company also maintains a $500,000 key person insurance policy on the life of Mr.
Ross, of which the Company is the sole beneficiary.

CERTAIN TRANSACTIONS

         Mr. Flohr and Ms. Jacobs own the Company's  Wilmington,  North Carolina
facility,  including the land on which the facility is located,  and lease it to
the Company  pursuant to a triple net lease.  The Company is responsible for all
costs and expenses,  including  applicable taxes,  relating to the facility.  In
April 1996, the Company exercised the first of two successive three-year options
to extend the lease term until  April 30,  1999.  In  accordance  with the lease
terms, effective May 1, 1996, the annual base rent was increased from $60,000 to
$75,360 (the fair market rental value of the facility as of the beginning of the
renewal  term).  In addition,  Mr. Flohr and Ms. Jacobs allow the Company to use
approximately  9,000 square feet of a 1.4 acre  adjacent  tract of land owned by
them  as  a  parking  area  for  the  Company's  employees  and  customers,   in
consideration for which the Company provides minimal  maintenance of the parking
area and  pays  $330 per year of real  estate  taxes on the  tract of land.  The
Company  believes  that  the  terms  and  conditions  of the  lease  are no less
favorable to the Company than those available from  unaffiliated  third parties.
The facility is being fully  utilized and Mr. Flohr and Ms.  Jacobs have offered
to construct  an  additional  building to the  Company's  specifications  on the
adjacent tract, and to lease such building, when constructed,  to the Company on
terms similar to the existing lease,  including at a rental no greater than fair
market value at the commencement of the lease term.


                           APPROVAL OF THE ISSUANCE OF
                                THE RIGHTS SHARES
                           (ITEM 2 ON THE PROXY CARD)

BACKGROUND

         During the week of March 31,  1997,  the  Company  completed  a private
placement  (the "March 1997 private  placement"),  through JLR as the  placement
agent,  pursuant to which the Company  issued an aggregate of 833,667  shares of
Common  Stock  (the  "Original  Shares")  to  the  investors  (the  "Investors")
participating  therein.  Accompanying each of the Original Shares was the right,
under certain circumstances, to receive

                                       10

<PAGE>

additional  shares of Common Stock in accordance with the terms of a "contingent
value right" (the "Rights").  The Company sold the Original Shares and Rights at
a price of $6.00 per Original  Share and received net proceeds of  approximately
$4,370,000 (after payment of fees and expenses of approximately $632,000), which
has been, and will be, used for working capital,  including for the marketing of
the Company's TV-based video phone,  C-Phone Home(TM),  and funding  anticipated
increases in inventories and  receivables  related to the  commercialization  of
C-Phone Home.

         The Investors  have the right to register,  under the Securities Act of
1933 (the "1933  Act"),  the  Original  Shares  and the  shares of Common  Stock
issuable upon exercise of the Rights (the "Rights  Shares").  In accordance with
the terms of such registration  right, the Company prepared at its expense,  and
filed on April 16, 1997 with the Securities and Exchange Commission (the "SEC"),
a registration  statement on Form S-3 (the  "Registration  Statement") under the
1933 Act covering the Original  Shares and the maximum  number of Rights Shares.
The  Company  has  agreed to use its  reasonable  best  efforts  to (i) have the
Registration  Statement  declared  effective by the SEC,  and (ii)  maintain the
Registration  Statement  current  for the lesser of one year after the date that
the  Registration  Statement is declared  effective (the "Effective  Date"),  or
until the  securities  included  in the  Registration  Statement  have been sold
thereunder.  In connection with the March 1997 private placement,  Daniel Flohr,
President  and Chief  Executive  Officer of the  Company,  delivered  to JLR, as
escrow  agent for the  Investors,  an  aggregate of 250,000 of his own shares of
Common  Stock,  which shares will be forfeited at the rate of 1,000 shares a day
if the  Effective  Date does not occur on or before July 19,  1997;  and, in the
event that the Effective  Date does not occur on or before October 17, 1997, the
remaining escrowed shares will be forfeited.

         In  consideration  for JLR's  services as placement  agent in the March
1997 private placement, the Company (i) paid JLR a fee of $450,180 (or 9% of the
gross  proceeds  received  by the  Company  in the  placement),  (ii)  agreed to
reimburse JLR for up to $25,000 of its out-of-pocket  expenses, and (iii) issued
to WBM LLC, an affiliate of JLR,  warrants  (the "1997  Warrants") to acquire an
aggregate of 150,000  shares of Common  Stock at an exercise  price of $9.60 per
share (120% of the closing bid price for the Common Stock on The Nasdaq National
Market  on the  trading  day  immediately  prior  to the  first  closing  of the
placement).  The 1997 Warrants  expire 90 days after the Effective  Date and the
shares of Common Stock  issuable  upon  exercise of the 1997  Warrants have been
included in the Registration Statement.

TERMS OF THE RIGHTS

         The Rights are  automatically  exercised at the time,  and from time to
time,  as the Original  Shares are first  publicly  sold through a broker dealer
after the  Effective  Date,  and expire one year after the Effective  Date.  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, without
the payment of any  additional  consideration,  such number of Rights  Shares as
equals  (i) $8.00  divided by the  Adjusted  Price,  minus  (ii) one;  where the
Adjusted  Price will equal the greater of (x) the average  closing bid price per
share of Common  Stock on The Nasdaq  National  Market for the ten trading  days
immediately  preceding  the date of sale of the Original  Shares,  or (y) $2.00.
Although  the  average  closing  bid  price of the  Common  Stock on The  Nasdaq
National  Market since the closing of the March 1997 private  placement  through
May 30, 1997 has not been below $8.00 per share,  it is  theoretically  possible
(if all the Original  Shares are sold during such one-year period at a time when
the  Adjusted  Price is $2.00)  that the  Company  will be  required to issue an
additional  2,501,001 Rights Shares.  The holders of the Rights,  and the Rights
Shares  issuable  upon  exercise  thereof,  are not  entitled to any  preemptive
rights.

REASONS FOR THE PROPOSAL

         The rules of The Nasdaq National  Market require that a company,  whose
common  stock is  listed  on The  Nasdaq  National  Market,  obtain  shareholder
approval  prior to the issuance by such company of  additional  shares of common
stock, in a transaction (or series of related transactions), other than a public
offering,  when (i) the number of shares of comon stock being  issued  equals or
exceeds 20% or more of the number of shares of common stock  outstanding  before
such  transaction  (or series of related  transactions),  and (ii) the shares of
common  stock are being sold at a price per share which is less than the greater
of the per share book value


                                       11

<PAGE>

or the  per  share  market  value  of the  common  stock  as of the  time of the
transaction.  On March 31,  1997,  when the first  closing  under the March 1997
private placement occurred,  the last reported sale price of the Common Stock on
The Nasdaq National Market was $8.50 per share,  and during the week immediately
prior  thereto,  the highest  reported  last sale price of the Common  Stock was
$9.188  per share.  The  issuance  of any  Rights  Shares in excess of a nominal
amount,  when  combined  with the number of Original  Shares  issued in the 1997
Placement,  will exceed 20% of the number of shares of Common Stock  outstanding
immediately  prior to the  March  1997  private  placement.  As a result  of the
foregoing,  and in order for the Company's Common Stock to continue to be listed
on The Nasdaq  National  Market,  the Company is required to obtain  shareholder
approval prior to the issuance of the Rights Shares.

         If the  proposal  to approve the  issuance of the Rights  Shares is not
approved by the shareholders of the Company,  and the Rights Shares are required
to be issued in accordance  with the terms of the Rights,  the Company will fail
to meet the continued  listing  requirements of The Nasdaq National Market,  and
the Company  anticipates  that the Common  Stock will be removed from listing on
The Nasdaq  National  Market.  The Company has agreed with the  Investors in the
March 1997  private  placement to (i) include a proposal to approve the issuance
of the Rights Shares in these proxy materials,  and (ii) use its best efforts to
cause the Company's Board of Directors to recommend (and not withdraw)  approval
of such proposal to the Company's shareholders.

         The Company  entered  into,  and  consummated,  the March 1997  private
placement based on a determination  by its Board of Directors that the Company's
then level of cash and cash  equivalents was inadequate to permit the Company to
continue in  existence  for a  sustained  period.  While the Board of  Directors
considered the potential  disadvantages  of the possible  issuance of the Rights
Shares,  including (i) the  potential  dilution of the voting power per share of
Common Stock,  (ii) the potential  dilution of the Common Stock book value,  and
(iii) the potential negative impact on earnings per share of Common Stock, after
lengthy and extensive  negotiations  with several  investment  banking firms and
potential  investors,  the Board of Directors determined that it was in the best
interests  of the Company and its  shareholders  for the Company to proceed with
the March 1997 private placement based on the Board's belief that the March 1997
private placement offered the most favorable terms then available to the Company
given  the then  existing  market  conditions  and the  Company's  then need for
additional cash resources.

REQUIRED VOTE

         The  approval  of the  issuance of the Rights  Shares will  require the
affirmative  vote of a majority  of the votes cast at the Annual  Meeting by the
holders of shares entitled to vote.

         THE BOARD OF DIRECTORS  RECOMMENDS THAT THE  SHAREHOLDERS  VOTE FOR THE
APPROVAL OF THE ISSUANCE OF THE RIGHTS SHARES.


     APPROVAL OF THE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
           TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
                           (ITEM 3 ON THE PROXY CARD)

BACKGROUND

         On May 8, 1997, the Board of Directors unanimously adopted,  subject to
shareholder  approval at the Annual  Meeting,  an amendment  (the "Common  Stock
Amendment") to the Company's  Certificate of Incorporation  (the  "Certificate")
which  would  increase  the number of shares of Common  Stock  which the Company
would be authorized to issue.

         The Company's Certificate currently authorizes the issuance of up to 10
million shares of Common Stock. As of May 30, 1997,  there were 5,202,856 shares
of Common  Stock  outstanding,  2,501,001  shares of Common  Stock  reserved for
issuance upon exercise of the Rights,  482,844  shares of Common Stock  reserved
for issuance  upon  exercise of stock  options  granted or  available  for grant
pursuant to the Stock Option Plan,

                                       12

<PAGE>

and 350,000  shares of Common  Stock  reserved  for  issuance  upon  exercise of
currently  outstanding  warrants.  As a result,  only 1,463,299 shares of Common
Stock are unreserved and available for future issuance.

REASONS FOR THE PROPOSED AMENDMENT

         The Board of  Directors  believes  that  approval  of the Common  Stock
Amendment to increase  the number of  authorized  but unissued  shares of Common
Stock is in the best interests of the Company and its shareholders,  as it would
permit the  Company to have  additional  shares of Common  Stock  available  for
issuance to meet the Company's  future business needs as they arise. The Company
has no  present  arrangements,  agreements,  understandings  or  plans  for  the
issuance  or use  of the  additional  shares  of  Common  Stock  proposed  to be
authorized by the Common Stock Amendment;  however, if C-Phone Home gains market
acceptance (of which there can be no assurance),  the Company's pricing strategy
and the very substantial  investment which would then be required by the Company
for manufacturing,  inventory build-up and marketing expenditures related to the
commercialization  of C-Phone Home, may require the Company to obtain additional
working  capital  before the end of the current  calendar  year. The Company has
commenced  the  planning  process to raise such  funds.  The Board of  Directors
believes that the availability of additional shares of Common Stock will provide
the  Company  with the  flexibility  to issue  shares of  Common  Stock for such
purpose,  as well as for a variety of other  proper  corporate  purposes  as the
Board of Directors may deem  advisable  without  further action by the Company's
shareholders,  except as may be required by law,  regulation or the requirements
of The Nasdaq National Market, on which the Common Stock is listed.  These other
purposes  could  include,  among other  things,  the purchase of  property,  the
acquisition  of other  companies,  the use of shares of Common Stock for various
equity  compensation  and other  employee  benefit plans and the  declaration of
Common Stock dividends or distributions.

TERMS OF THE PROPOSED AMENDMENT

         The  Board of  Directors  of the  Company  is  proposing  to amend  the
Certificate  to increase  the number of shares of Common  Stock from ten million
shares of common stock to twenty million  shares of common stock.  If the Common
Stock  Amendment  is  approved  by  the  shareholders,  Article  FOURTH  of  the
Certificate would be amended to read in its entirety substantially as follows:

         "FOURTH:  The aggregate  number of shares which the  Corporation  shall
         have authority to issue is twenty million (20,000,000) shares of common
         stock, $.01 par value."

EFFECTS OF THE PROPOSED AMENDMENT

         Depending upon the  circumstances in which additional  shares of Common
Stock are issued,  the overall  effects of such  issuance  may be to render more
difficult  or to  discourage  a  merger,  tender  offer,  proxy  contest  or the
assumption  of  control  by a holder of a large  block of  Common  Stock and the
removal of  incumbent  management.  Management  of the Company is not  currently
aware of any possible  takeover  attempts of the  Company,  and the Common Stock
Amendment is not in response to any effort by any party to accumulate the Common
Stock or to obtain  control of the Company by means of a merger,  tender  offer,
solicitation  in  opposition  to  management  or  otherwise.  The  Common  Stock
Amendment is not part of a plan to recommend a series of similar  amendments  to
the shareholders and, except as set forth below under "Approval of the Amendment
to the Company's Certificate of Incorporation to Authorize Preferred Stock", the
Board of Directors does not contemplate  recommending  the adoption of any other
amendments to the Certificate  which could be construed to affect the ability of
third parties to take over or change the control of the Company.

         Holders of Common Stock are not entitled to preemptive  rights,  and to
the extent that any additional shares of Common Stock or securities  convertible
into  Common  Stock  may be  issued on other  than a pro rata  basis to  current
shareholders,  the  present  ownership  portion of current  shareholders  may be
diluted.  Based on the Certificate and the Company's  By-laws and the applicable
provisions of the New York Business  Corporation Law,  shareholders will have no
dissenters'  or similar  rights with respect to the adoption of the Common Stock
Amendment or upon the issuance of any shares of Common Stock thereunder.

                                       13

<PAGE>

         If the  proposal  set forth below under the  caption  "Approval  of the
Amendment to the Company's  Certificate of Incorporation to Authorize  Preferred
Stock" also is  approved  by the  shareholders  at the Annual  Meeting,  Article
FOURTH will be replaced by the text set forth below under such caption.

REQUIRED VOTE

         The approval of the Common  Stock  Amendment  requires the  affirmative
vote by the  holders of a majority  of all  outstanding  shares of Common  Stock
entitled to vote at the Annual Meeting.

         THE BOARD OF DIRECTORS  RECOMMENDS THAT THE  SHAREHOLDERS  VOTE FOR THE
APPROVAL OF THE COMMON STOCK AMENDMENT.


     APPROVAL OF THE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
                          TO AUTHORIZE PREFERRED STOCK
                           (ITEM 4 ON THE PROXY CARD)

BACKGROUND

         On May 8, 1997, the Board of Directors unanimously approved, subject to
shareholder approval at the Annual Meeting, an amendment to the Certificate (the
"Preferred Stock  Amendment")  which would authorize the Company to issue,  from
time to time, as determined by the Board of Directors,  up to one million shares
of  preferred  stock,  par value $.01 per share  (the  "Preferred  Stock").  The
Certificate  currently  does not  authorize  the issuance of shares of Preferred
Stock.

REASONS FOR THE PROPOSED AMENDMENT

         The Board of  Directors  believes  that the  approval of the  Preferred
Stock  Amendment is advisable  and in the best  interests of the Company and its
shareholders,  as it would permit the Company to have shares of Preferred  Stock
available  for  issuance to meet the  Company's  future  business  needs as they
arise. The Company has no present  arrangements,  agreements,  understandings or
plans for the  issuance or use of the shares of Preferred  Stock  proposed to be
authorized by the Preferred Stock Amendment;  however, as previously  mentioned,
if C-Phone Home gains market  acceptance  (of which there can be no  assurance),
the  commercialization  of  C-Phone  Home,  may  require  the  Company to obtain
additional  working  capital  before the end of the current  calendar  year. The
Company  anticipates that such funds should be available through the sale of its
securities.  Depending  upon  market  conditions  existing  at such time and the
Company's then financial condition,  among other factors, the Company may not be
able to effect an offering of its shares of Common Stock or such an offering may
not be in the best  interests  of the Company and its  shareholders  due,  among
other reasons,  to the dilutive  nature thereof on existing  shareholders.  As a
result,  it may be necessary  or  desirable to effect an offering of  securities
senior to or  convertible  into shares of Common Stock or securities  which have
rights not otherwise afforded to the holders of Common Stock. The purpose of the
Preferred  Stock  Amendment  is to give the  Company  the  flexibility  to issue
Preferred Stock, if the Board of Directors determines that such action is in the
best  interests of the Company and its  shareholders,  as an alternate  means of
financing.  The Board of Directors  believes that the  availability of shares of
Preferred Stock will provide the Company with the flexibility to issue shares of
Preferred  Stock  for such  purpose,  as well as for a variety  of other  proper
corporate  purposes as the Board of Directors may deem advisable without further
action  by  the  Company's  shareholders,  except  as may be  required  by  law,
regulation  or the  requirements  of The Nasdaq  National  Market,  on which the
Common Stock is listed. These other purposes could include,  among other things,
the purchase of property,  the  acquisition  of other  companies  and the use of
shares of Preferred  Stock for various  equity  compensation  and other employee
benefit plans.

TERMS OF THE PROPOSED AMENDMENT

         If the Preferred Stock Amendment is approved by  shareholders,  and the
Common Stock  Amendment  described above under "Approval of the Amendment to the
Company's Certificate of Incorporation to Increase

                                       14

<PAGE>

the Number of Authorized  Shares of Common  Stock" is also so approved,  Article
FOURTH of the Certificate would be amended to read in its entirety substantially
as follows:

                  "FOURTH:   (a)  The  aggregate  number  of  shares  which  the
         Corporation  shall have the  authority to issue is  twenty-one  million
         (21,000,000) shares, which shall consist of twenty million (20,000,000)
         shares  of common  stock,  $.01 par value  ("Common  Shares"),  and one
         million   (1,000,000)   shares  of  preferred  stock,  $.01  par  value
         ("Preferred  Shares").  Except as otherwise provided in accordance with
         this  Certificate  of  Incorporation,  the  Common  Shares  shall  have
         unlimited  voting rights,  with each Common Share being entitled to one
         vote, and the right to receive the net assets of the  Corporation  upon
         dissolution, with each Common Share participating on a pro rata basis.

                    (b) The Board of Directors is authorized,  from time to time
         and  without  shareholder  action,  to  provide  for  the  issuance  of
         Preferred  Shares in one or more series not  exceeding in the aggregate
         the  number of  Preferred  Shares  authorized  by this  Certificate  of
         Incorporation,  as amended  from time to time;  and to  determine  with
         respect to each such  series the voting  powers,  if any (which  voting
         powers, if granted, may be full or limited), designations,  preferences
         and relative,  participating,  option or other special rights,  and the
         qualifications, limitations or restrictions relating thereto, including
         without limiting the generality of the foregoing (i) the voting rights,
         if any, relating to Preferred Shares of any series (which may be one or
         more votes per share or a  fraction  of a vote per share or no vote per
         share,  which may vary over time and which may be applicable  generally
         or only  upon  the  happening  and  continuance  of  stated  events  or
         conditions),  (ii) the rate of  dividend,  if any, to which  holders of
         Preferred Shares of any series may be entitled (which may be cumulative
         or  noncumulative),  (iii) the rights of holders of Preferred Shares of
         any series in the event of  liquidation,  dissolution  or winding up of
         the affairs of the Corporation,  (iv) the rights, if any, of holders of
         Preferred  Shares of any series to convert or exchange  such  Preferred
         Shares  of such  series  for  shares  of any  other  class or series of
         capital stock, or for any other securities,  property or assets, of the
         Corporation or any subsidiary (including the determination of the price
         or prices or the rate or rates  applicable to such rights to convert or
         exchange and the adjustment thereof, and the time or times during which
         a particular price or rate shall be applicable), (v) whether or not the
         Preferred  Shares of any series  shall be  redeemable  and,  if so, the
         terms and  conditions of such  redemption,  including the date or dates
         upon or after which they shall be redeemable,  and the amount per share
         payable in case of  redemptions,  which amount may vary under different
         conditions  and at  different  dates,  and (vi)  whether any  Preferred
         Shares of any series  shall be  redeemed  pursuant to a  retirement  or
         sinking  fund  or  otherwise  and  the  terms  and  conditions  of such
         obligation.

                    (c) Before the Corporation  shall issue any Preferred Shares
         of any series,  a  Certificate  of  Amendment  to this  Certificate  of
         Incorporation fixing the voting powers, designations,  preferences, the
         relative,  participating,  option  or  other  rights,  if any,  and the
         qualifications,  limitations and restrictions,  if any, relating to the
         Preferred Shares of such series,  and the number of Preferred Shares of
         such series  authorized by the Board of Directors to be issued shall be
         filed  with  the  Department  of  State  of the  State  of New  York in
         accordance with the New York Business  Corporation Law and shall become
         effective  without any  shareholder  action.  The Board of Directors is
         further authorized to increase or decrease (but not below the number of
         Preferred  Shares of any series then  outstanding) the number of shares
         of such series subsequent to the issuance of shares of such series."

         In the  event  that  the  Preferred  Stock  Amendment  is  approved  by
shareholders  and the Common Stock Amendment  described above under "Approval of
the  Amendment to the Company's  Certificate  of  Incorporation  to Increase the
Number of Authorized  Shares of Common Stock" is not so approved,  the following
paragraph (a) would be substituted for paragraph (a) of proposed  Article FOURTH
set forth immediately above:

               "(a) The aggregate  number of shares which the Corporation  shall
         have the  authority  to issue is eleven  million  (11,000,000)  shares,
         which shall consist of ten million (10,000,000) shares of common stock,
         $.01 par value ("Common Shares"), and one million (1,000,000) shares of
         preferred

                                       15

<PAGE>

         stock,  $.01  par  value  ("Preferred  Shares").  Except  as  otherwise
         provided in accordance  with this  Certificate  of  Incorporation,  the
         Common  Shares shall have  unlimited  voting  rights,  with each Common
         Share  being  entitled  to one vote,  and the right to receive  the net
         assets of the  Corporation  upon  dissolution,  with each Common  Share
         participating on a pro rata basis."

EFFECTS OF THE PROPOSED AMENDMENT

         The proposed Preferred Stock Amendment will give the Board of Directors
the express  authority,  without  further action of the  shareholders,  to issue
shares of  Preferred  Stock  from time to time in one or more  series and to fix
before  issuance with respect to each series (i) the  designation and the number
of  shares  to  constitute  each  series,   (ii)  the  liquidation   rights  and
preferences,  if any,  (iii) the dividend  rights  (which could be senior to the
Common  Stock)  and  interest  rates,  if any,  (iv)  the  rights  and  terms of
redemptions,  (v) whether the shares of Preferred Stock are to be convertible or
exchangeable into shares of Common Stock or other securities of the Company, and
the rates  thereof,  (vii) any  limitation  on the payment of  dividends  on the
Common Stock while any shares of  Preferred  Stock are  outstanding,  (viii) the
voting power, if any, of the shares of Preferred Stock in addition to the voting
rights  provided by law, which voting power may be general or special,  and (ix)
such other provisions as will not be inconsistent with the Certificate.  All the
shares of any one series of Preferred  Stock will be identical in all  respects.
Holders of any series of Preferred Stock, when and if issued,  may have priority
claims to dividends and to any distribution upon liquidation of the Company, and
may have other preferences over the Common Stock, including a preferential right
to elect directors in the event that Preferred Stock dividends (if the Preferred
Stock carries a dividend) are not paid for a specified period.

         The specific terms of any Preferred Stock to be authorized  pursuant to
the Preferred Stock Amendment will depend  primarily on market  conditions,  and
other factors existing at the time of issuance. The Board of Directors currently
has no plans,  understandings  or agreements for issuing any shares of Preferred
Stock, and does not intend to issue any Preferred  Stock,  except on terms which
it deems to be in the best  interests of the Company and its  shareholders.  The
Board of Directors has considered the potential disadvantages to the issuance of
Preferred Stock (such as the negative impact a Preferred Stock dividend may have
on the Company's  earnings per share,  if any, the  liquidating  preference  the
Preferred  Stock would have over the Common Stock and the potential  dilution of
any shareholders' equity to the extent that Preferred Stock, when and if issued,
may be redeemable  or  convertible  into Common  Stock);  however,  the Board of
Directors  believes that the  advantages of future  flexibility  afforded by the
ability to issue Preferred Stock outweigh the disadvantages, and would be in the
best interests of the Company and its shareholders.

         It is not possible to state the precise effects of the authorization of
the  Preferred  Stock upon the rights of the  holders of Common  Stock until the
Board of Directors  determines to issue  Preferred Stock and sets the respective
preferences,  limitations  and  relative  rights of the holders of each class or
series of Preferred  Stock so issued.  However,  such effects  might include (i)
reduction  of the amount  otherwise  available  for payment of  dividends on the
Common Stock, to the extent dividends are payable on any issued Preferred Stock,
(ii) restrictions on dividends on the Common Stock, (iii) dilution of the voting
power of the Common  Stock to the  extent  that the  Preferred  Stock has voting
rights,  (iv) conversion of the Preferred Stock into Common Stock at such prices
as the Board  determines,  which  could  include  issuance  at or below the fair
market value or original issue price of the Common Stock, and (v) the holders of
Common Stock not being  entitled to  participate  in the  Company's  assets upon
liquidation until satisfaction of any liquidation  preference granted to holders
of the Preferred Stock.

         Depending upon the circumstances in which shares of Preferred Stock are
issued,  the overall effects of such issuance may be to render more difficult or
to discourage a merger, tender offer, proxy contest or the assumption of control
by a holder  of a large  block of  Common  Stock and the  removal  of  incumbent
management.  The Board of Directors,  when it deems it in the best  interests of
the Company and its  shareholders,  also could authorize  holders of a series of
Preferred  Stock to vote  either  separately  as a class or with the  holders of
Common Stock, on any merger, sale or exchange of assets by the Company or on any
other extraordinary corporate transaction. The issuance of new shares also could
be used to dilute the stock  ownership  of a person or entity  seeking to obtain
control of the Company, should the Board of Directors

                                       16

<PAGE>

consider the action of such entity or person not to be in the best  interests of
the shareholders and the Company. In addition,  the mere existence of a class of
authorized  Preferred  Stock could have the effect of  discouraging  unsolicited
takeover attempts.  As stated above,  management of the Company is not currently
aware of any possible takeover attempts of the Company,  and the Preferred Stock
Amendment is not in response to any effort by any party to obtain control of the
Company  by means of a merger,  tender  offer,  solicitation  in  opposition  to
management or otherwise.  The Preferred Stock Amendment is not part of a plan to
recommend a series of similar  amendments to the shareholders and, except as set
forth above under  "Approval of the  Amendment to the Company's  Certificate  of
Incorporation to Increase the Number of Authorized Shares of Common Stock",  the
Board of Directors does not contemplate  recommending  the adoption of any other
amendments to the Certificate  which could be construed to affect the ability of
third parties to take over or change the control of the Company.

         Holders of Common Stock will not be entitled to preemptive  rights with
respect to any issuance of shares of Preferred  Stock.  Based on the Certificate
and the Company's By-laws and the applicable provisions of the New York Business
Corporation  Law,  shareholders  will have no dissenters' or similar rights with
respect to the adoption of the Preferred Stock Amendment or upon the issuance of
shares of Preferred Stock thereunder.

REQUIRED VOTE

         The approval of the Preferred Stock Amendment  requires the affirmative
vote by the  holders of a majority  of all  outstanding  shares of Common  Stock
entitled to vote at the Annual Meeting.

         THE BOARD OF DIRECTORS  RECOMMENDS THAT THE  SHAREHOLDERS  VOTE FOR THE
PREFERRED STOCK AMENDMENT.


                      SELECTION OF INDEPENDENT ACCOUNTANTS
                           (ITEM 5 ON THE PROXY CARD)

         The Board of Directors has  selected,  subject to  ratification  by the
shareholders of the Company at the Annual Meeting, the firm of Coopers & Lybrand
L.L.P.  as  the  independent   accountants  to  audit  the  Company's  financial
statements  for its fiscal  year ending  February  28,  1998.  Coopers & Lybrand
L.L.P.  has served as the independent  accountants for the Company for more than
the past five years and is,  therefore,  familiar with the affairs and financial
procedures  of the Company.  A  representative  of Coopers & Lybrand  L.L.P.  is
expected to be present at the Annual Meeting,  will have the opportunity to make
a statement  if such  representative  desires to do so and will be  available to
respond to appropriate questions.

         The  ratification  of the  selection  of  Coopers & Lybrand  L.L.P.  as
independent  accountants  for the current  fiscal year requires the  affirmative
vote of a majority of the votes cast on the matter at the Annual  Meeting by the
holders of shares entitled to vote.

         THE  BOARD  OF  DIRECTORS  RECOMMENDS  THAT THE  SHAREHOLDERS  VOTE FOR
RATIFICATION  OF THE  SELECTION  OF COOPERS & LYBRAND  L.L.P.  AS THE  COMPANY'S
INDEPENDENT ACCOUNTANTS.


               SHAREHOLDERS' PROPOSALS FOR THE 1998 ANNUAL MEETING

         A shareholder  who desires to include a proposal in the proxy  material
relating to the 1998 Annual Meeting of  shareholders  of the Company must submit
the same in writing,  so as to be received at the principal  executive office of
the Company (to the attention of the  Secretary) on or before  February 28, 1998
for such proposal to be considered for inclusion in the proxy statement for such
Annual  Meeting.  Such  proposal  must also meet the other  requirements  of the
Securities and Exchange Commission relating to shareholder proposals required to
be included in the Company's proxy statement.

                                       17

<PAGE>

                                  OTHER MATTERS

         The  Board  of  Directors  does not know of any  other  business  to be
presented for  consideration  at the Annual Meeting.  If other matters  properly
come before the Annual Meeting,  the persons named in the  accompanying  form of
proxy intend to vote thereon in accordance with their best judgment.

         The  Company  will bear the cost of the Annual  Meeting and the cost of
soliciting proxies in the accompanying form,  including the cost of mailing this
proxy statement.  In addition to solicitation by mail,  directors,  officers and
regular employees of the Company (none of whom will be additionally  compensated
for such services) may solicit  proxies by telephone or otherwise.  Arrangements
will be made with brokerage firms and other custodians, nominees and fiduciaries
to  forward  forms of proxy  and proxy  materials  to their  principals  and the
Company  will  reimburse  them  for  their  reasonable  expenses  in  connection
therewith.

         This  Proxy   Statement   incorporates  by  reference  the  information
contained  in  Item  6 -  "Management's  Discussion  and  Analysis  or  Plan  of
Operations" and Item 7 - "Financial  Statements" of the Company's  Annual Report
on Form 10-KSB  ("Form  10-KSB")  for the fiscal year ended  February  28, 1997,
which is  included in the  Company's  1997 Annual  Report to  Shareholders.  THE
COMPANY  WILL  FURNISH,  WITHOUT  CHARGE,  TO EACH  PERSON  WHOSE PROXY IS BEING
SOLICITED,  UPON  WRITTEN  REQUEST,  A COPY OF ITS  FORM  10-KSB  INCLUDING  THE
FINANCIAL  STATEMENTS,  NOTES  TO THE  FINANCIAL  STATEMENTS  AND THE  FINANCIAL
SCHEDULES  CONTAINED  THEREIN.  Copies  of any  exhibits  thereto  also  will be
furnished upon the payment of a reasonable  duplicating charge. Written requests
for copies of any such materials should be directed to Paul H. Albritton,  Chief
Financial Officer,  C-Phone  Corporation,  6714 Netherlands  Drive,  Wilmington,
North Carolina 28405.

                                    By Order of the Board of Directors


                                    Tina L. Jacobs
                                    SECRETARY
June --, 1997



         PLEASE  DATE,  SIGN AND  RETURN  THE  ENCLOSED  PROXY AT YOUR  EARLIEST
CONVENIENCE IN THE ENCLOSED ENVELOPE.  NO POSTAGE IS REQUIRED FOR MAILING IN THE
UNITED STATES.

                                       18
<PAGE>

                               C-PHONE CORPORATION
            PROXY - ANNUAL MEETING OF SHAREHOLDERS - AUGUST __, 1997
                 (SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS)

         The  undersigned  shareholder of C-Phone  Corporation  (the  "Company")
hereby  constitutes  and  appoints  Daniel P. Flohr,  Tina L. Jacobs and Paul H.
Albritton, and each of them, the attorneys and proxies of the undersigned,  with
full  power  of  substitution,  to  represent  and  to  vote  on  behalf  of the
undersigned all of the shares of the Company's Comon Stock which the undersigned
is  entitled  to vote at the Annual  Meeting of  shareholders  to be held at the
Landfall  Park  Hampton Inn & Suites,  1989  Eastwood  Road,  Wilmington,  North
Carolina on August 1, 1997, at 9:00 a.m., and at any adjournments  thereof, upon
the  following  proposals  which are more fully  described in the notice of, and
proxy statement for, the Annual Meeting.

<TABLE>
<CAPTION>
(1)      Election of Directors      FOR all nominees listed below (except    |_|         WITHHOLD AUTHORITY    |_|
                                    as marked to the contrary below)                     to vote for all nominees

               DANIEL P. FLOHR, SEYMOUR L. GARTENBERG, TINA L. JACOBS, DONALD S. MCCOY, E. HENRY MIZE, STUART E. ROSS

   (INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)

                                                                      ---------------------------


<S> <C>                                                                                 <C>   <C>     <C>  <C>        <C>   <C>
(2) Proposal to approve the issuance of the Rights Shares.                               |_|   FOR    |_|   AGAINST   |_|   ABSTAIN

(3) Proposal to approve the amendment to the Company's Certificate of Incorporation      |_|   FOR    |_|   AGAINST   |_|   ABSTAIN
    to authorize ten million additional shares of Common Stock.

(4) Proposal to approve the amendment to the Company's Certificate of Incorporation to   |_|   FOR    |_|   AGAINST   |_|   ABSTAIN
    authorize the issuance of up to one million shares of preferred stock.

(5) Proposal to ratify the selection of Coopers & Lybrand L.L.P. as the Company's        |_|   FOR    |_|   AGAINST   |_|   ABSTAIN
    independent accountants for the fiscal year ending February 28, 1998.

    EACH OF THE  FOREGOING  MATTERS  HAS BEEN  PROPOSED  BY THE  COMPANY  AND IS
    INDEPENDENT AND NOT CONDITIONED ON THE APPROVAL OF ANY OTHER MATTER.

(6) In their discretion, upon such other matters as properly may come before the
    Annual Meeting.
</TABLE>

                  (Continued and to be signed on reverse side.)

<PAGE>

         Said attorneys and proxies,  or their substitutes (or if only one, that
one) at said Annual Meeting,  and any adjournments  thereof, may exercise all of
the powers hereby given. Any proxy heretofore given is hereby revoked.

         Receipt  is   acknowledged   of  the   Notice  of  Annual   Meeting  of
shareholders, the Proxy Statement accompanying said Notice and the Annual Report
to shareholders for the fiscal year ended February 28, 1997.

         THIS  PROXY,  WHEN  PROPERLY  EXECUTED,  WILL BE  VOTED  IN THE  MANNER
DIRECTED  HEREIN BY THE UNDERSIGNED  SHAREHOLDER.  IF NO DIRECTION IS MADE, THIS
PROXY  WILL BE  VOTED  FOR THE  ELECTION  OF  DIRECTORS  AND  EACH OF THE  ABOVE
PROPOSALS.

         IN WITNESS WHEREOF, the undersigned has signed this proxy.

                                     Dated:                               , 1997
                                           ------------------------------

                                     -------------------------------------
                                     Shareholder(s) signature

                                     -------------------------------------
                                     Shareholder(s) signature


                                     NOTE:  Signature(s)  of shareholder  should
                                     correspond  exactly with the name(s)  shown
                                     hereon.  If shares are held  jointly,  both
                                     holders should sign. Attorneys,  executors,
                                     administrators,   trustees,   guardians  or
                                     others signing in a representative capacity
                                     should  give  their  full  titles.  Proxies
                                     executed  in  the  name  of  a  corporation
                                     should   be   signed   on   behalf  of  the
                                     corporation   by  its  president  or  other
                                     authorized officer.


I DO |_| DO NOT |_| EXPECT TO ATTEND THE ANNUAL MEETING.


NOTE:  This proxy,  properly  filled in,  dated and  signed,  should be returned
promptly in the enclosed envelope.


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