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                                UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                            Washington, DC 20549

                                 FORM 10-K/A
                              (Amendment No. 2)

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

                 For the fiscal year ended December 31, 2003

                       Commission file number 0-15938

                       FARMSTEAD TELEPHONE GROUP, INC.
           (Exact name of registrant as specified in its charter)

Delaware                               06-1205743
(State or other jurisdiction of        (I.R.S. Employer Identification No.)
incorporation or organization)

22 Prestige Park Circle, East Hartford, CT        06108-3728
(Address of principal executive offices)          (Zip Code)

     Registrant's telephone number, including area code: (860) 610-6000

            Securities registered under Section 12(b) of the Act:

    Title of each class              Name of each Exchange on which registered
    Common Stock, $.001 par value    American Stock Exchange

      Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act 
of 1934 during the preceding 12 months (or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days. 
Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 
405 of Regulation S-K is not contained herein, and will not be contained, 
to the best of registrant's knowledge, in definitive proxy or information 
statements incorporated by reference in Part III of this Form 10-K or any 
amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as 
defined in Rule 12b-2 of the Act). 
Yes [ ] No [X]

The aggregate market value of the voting and non-voting common equity held 
by non-affiliates, computed by reference to the closing price on the last 
business day of the registrant's most recently completed second fiscal 
quarter, was $1,822,159.

As of February 29, 2004, the registrant had 3,311,601 shares of $0.001 par 
value Common Stock outstanding.


  


                     DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement to be filed with the 
Securities and Exchange Commission in connection with the Annual Meeting of 
Stockholders to be held June 10, 2004 are incorporated by reference into 
Part III, Items 10 through 14 hereof. Certain exhibits filed with this 
registrant's prior registration statements and forms 10-K are incorporated 
by reference into Part IV of this Report.

                              EXPLANATORY NOTE

This Amendment No. 2 on Form 10-K/A is being filed to amend the form of 
certifying language contained in Exhibits 31.1 and 31.2 to registrant's 
Form 10-K for the year ended December 31, 2003, filed March 26, 2004 (the 
"Original 10-K"), and as initially amended on Form 10-K/A Amendment No.1 
filed January 25, 2005, as required by SEC Release number 33-8238. This 
Amendment No. 2 on Form 10-K/A does not otherwise alter the disclosures set 
forth in the Original 10-K. 

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                              TABLE OF CONTENTS




                                   PART I

                                                                         Page
                                                                         ----

                                                                       
ITEM 1.   BUSINESS                                                         3
ITEM 2.   PROPERTIES                                                       7
ITEM 3.   LEGAL PROCEEDINGS                                                7
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS              7

                                   PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS                                              7
ITEM 6.   SELECTED FINANCIAL DATA                                          9
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS                              9
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      19
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                     19
ITEM 9A.  CONTROLS AND PROCEDURES                                         19

                                  PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT              19
ITEM 11.  EXECUTIVE COMPENSATION                                          19
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT AND RELATED STOCKHOLDER MATTERS                      20
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                  20
ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES                          20

                                   PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
          ON FORM 8-K                                                     20

SIGNATURES                                                                21



  2


PART I
ITEM 1.  BUSINESS

GENERAL

      Farmstead Telephone Group, Inc. ("Farmstead", the "Company", "we", or 
"our") was incorporated in Delaware in 1986. We are principally engaged as 
a provider of new and used Avaya, Inc. ("Avaya") business 
telecommunications parts, complete systems, and services. We provide used 
"Classic Avaya(TM) " telecommunications equipment pursuant to an "Authorized 
Remarketing Supplier Program" with Avaya, under which we are one of only 
five companies nationwide so authorized. We also offer Avaya's full-line of 
new telecommunications parts and complete systems as an Avaya-certified 
"Gold Dealer". Our service revenues are under the aegis of our "2 Star" 
Avaya Services Agreement. Our product offerings are primarily customer 
premises-based private switching systems and peripheral products, including 
voice messaging products. We also provide telecommunications equipment 
installation, repair and refurbishing, short-term rental, inventory 
management, and related value-added services. A portion of our revenues is 
also derived from the sale of Avaya maintenance contracts. We sell our 
products and services to large and mid-size, multi-location businesses, as 
well as to small businesses, government agencies, and other equipment 
resellers.

      Effective February 1, 2001, we entered into a joint venture agreement 
with TriNET Business Trust ("TriNET"), forming a limited liability 
corporation operating under the name of InfiNet Systems, LLC ("InfiNet"). 
Under the agreement, we had a 50.1% ownership interest, and TriNET had a 
49.9% ownership interest. Based in East Hartford, Connecticut, InfiNet was 
organized for the purpose of selling new Avaya telecommunications systems 
primarily to customers within the State of Connecticut and various counties 
in the State of New York. Effective January 1, 2002, we acquired TriNET's 
49.9% ownership interest in InfiNet. During 2002, however, we changed our 
business strategy concerning the use of InfiNet, downsizing its operating 
activities by eliminating its entire workforce and fulfilling systems sales 
orders directly through Farmstead, which acquired its own systems dealer 
license in 2002. As a result, InfiNet has since been inactive.

      Our revenue has declined significantly over the past three years. 
Revenue for the years ended December 31, 2003, 2002 and 2001 was $14.68 
million, $19.15 million and $33.34 million, respectively. The decline in 
revenue is attributable primarily to the effect of general economic 
conditions prevailing in the United States and resulting reduced business 
spending on enterprise communications equipment. The decline in revenue has 
also been the prime contributor to our net losses for the years ended 
December 31, 2003, 2002 and 2001 of $709,000, $2,530,000 and $1,708,000, 
respectively. Accordingly, we have tried to reduce our losses and return to 
profitability through cost reductions and by broadening our product 
offerings. Our current strategy is to become less dependent on parts sales, 
and become more of a systems and applications solutions provider. We will 
expand our product offerings beyond traditional voice communications 
products by offering Internet Protocol, or IP, telephony products and 
unified communications products including voice messaging. Because we 
believe that business capital spending on enterprise communications 
equipment will not significantly improve over the short-term, we expect to 
have continued pressure on our ability to increase revenues over current 
levels.

PRODUCTS

      EQUIPMENT
      ---------

      We sell a wide range of Avaya's traditional voice telephony parts and 
systems, including Avaya's most advanced enterprise voice communications 
system marketed under the DEFINITY(R) and MultiVantage product lines. These 
server based product lines provide reliable voice communication and offer 
integration with an enterprise's data networks. They support a wide variety 
of voice and data applications such as call and customer contact centers, 
messaging and interactive voice response. This product also facilitates the 
ongoing transition at many enterprises from traditional voice telephony 
systems to advanced systems that integrate voice and data traffic and 
deploy increasingly sophisticated communications applications, including 
"voice over internet protocol (VOIP)", popularized with Avaya's IP Office 
product family. For smaller enterprises or small locations of larger ones, 
we offer Avaya's, medium to small user voice communications products, 
marketed under the MERLIN MAGIX(TM), SPIRIT(R) and PARTNER(R) 
Communications Systems product families. We also offer Avaya voice 
messaging and unified messaging products such as OCTEL(R) Messaging and 
INTUITY(tm) AUDIX(R) Messaging, as well as the latest messaging release 
called Modular Messaging.


  3


      Equipment sales consist of both sales of complete systems and 
software applications, and sales of new and refurbished parts (commonly 
referred to as "aftermarket" sales). Refurbished products are primarily 
sold under the Classic Avaya(TM) label pursuant to a licensing agreement 
with Avaya. Aftermarket parts primarily consist of telephone sets and 
circuit packs, and other system accessories such as headsets, consoles, 
speakerphones and paging systems. Equipment sales revenues accounted for 
approximately 88%, 90% and 93% of total revenues in 2003, 2002 and 2001, 
respectively.

      SERVICES AND OTHER REVENUE
      --------------------------

      We are committed to respond to our customers' service or project-
oriented telecommunications needs, and believe these services help 
differentiate us from our competitors, as well as contribute to longer-
lasting customer relationships and incremental equipment sales. Services 
include: 

      Installation Services: We use Avaya and, to a lesser degree, other 
equipment installation companies on a subcontract basis to install 
telecommunication parts and systems nation-wide, as well as to perform 
equipment moves, adds and changes.

      Repair and Refurbishing: We perform fee-based telecommunications 
equipment repair and refurbishing services. Until 2003, these services were 
provided through a combination of our in-house refurbishing center and the 
use of subcontract repair shops. The in-house work primarily consisted of 
cleaning, buffing and minor repairs, while major repairs of equipment, 
including repair of circuit boards, was outsourced. By the end of 2003, we 
had outsourced all equipment repair and refurbishing services to outside 
repair shops. 

      Equipment Rentals: We provide rentals of equipment on a month-to-
month basis, servicing those customers that have temporary, short-term 
equipment needs.

      Other Services: Our technical staff currently provides system 
engineering and configuration, project management, and technical "hot line" 
telephone support services. 

      Other Revenue: A portion of our revenues is derived from the sale of 
Avaya communications equipment maintenance contracts. In these transactions 
we act as a sales agent of Avaya, and the service obligations are borne 
entirely by Avaya. 

      Our combined service and other revenues accounted for 12%, 10% and 7% 
of total revenues in 2003, 2002 and 2001, respectively. The largest 
individual component, installation services, accounted for 9%, 8% and 6% of 
total revenues in 2003, 2002 and 2001, respectively. 

RELATIONSHIP WITH AVAYA INC.

      Avaya is one of the leading providers of communications products in 
the United States. Avaya provides support to the telecommunications 
equipment aftermarket by offering installation and maintenance services for 
its products purchased by end-users through equipment resellers. Equipment 
resellers like us may also, with various restrictions, utilize Avaya 
documentation, technical information and software. Avaya also generally 
provides up to a one-year warranty on its products. Avaya generally 
provides maintenance of Avaya equipment sold by us. 

      Our relationship with Avaya is on three main fronts. First, we are a 
part of Avaya's Authorized Remarketing Supplier ("ARS") aftermarket program 
as an ARS Dealer (the "ARS Agreement"), selling Classic Avaya(TM) products 
to end-users nationwide. The ARS Agreement expires December 31, 2004; 
however it shall automatically renew for an additional one-year term unless 
written notice is given by either party of its intent not to renew thirty 
days in advance of the termination date. Classic Avaya(TM) products are 
defined as used Avaya PBX system and key system parts that have been 
refurbished under Avaya quality standards, and sold with a Classic Avaya 
label. We are currently one of only five appointed ARS Dealers, none of 
whom has been granted an exclusive territory. The ARS Agreement also allows 
us to sell certain new Avaya PBX products and voice processing products to 
end-users, including government agencies. Second, we are an Avaya-certified 
Gold Dealer, authorized to sell new voice and data systems and 
applications. And third, Farmstead is a "2 Star" Services partner selling 
Avaya installation, maintenance, and moves, adds and changes (MAC) 
products.


  4


      Under the ARS Agreement with Avaya, we are required to pay fees to 
Avaya based upon a percentage (currently 6.5%) of the sales price of 
Classic Avaya(TM) products sold by us. We also required to pay fees to 
Avaya based upon a percentage (currently 15%) of the sales price of Classic 
Avaya(TM) products sold through the Company's call center. The Company 
recorded in cost of revenues approximately $323,000, $507,000 and $1,341,000 
of fee expense in 2003, 2002 and 2001, respectively. 

      We believe that our relationship with Avaya is satisfactory. Avaya is 
currently considering replacing the ARS program with a successor program 
which would allow the ARS companies, as well as non-ARS companies, to 
purchase refurbished "Classic Avaya" equipment directly from Avaya. We 
cannot predict whether the ARS program will continue throughout 2004 or 
what the terms and conditions of any successor program might be or how it 
might impact us. We believe that should the ARS program not be renewed, it 
will not have a material adverse impact on our ability to sell refurbished 
equipment.

MARKETING AND CUSTOMERS

      We market our product offerings nationally through a direct sales 
staff, which includes salespersons located along the Eastern seaboard, and 
other areas of the country. Since 1999, we have also marketed Avaya 
products through a call center operation. Our customers range from large 
and mid-sized, multi-location corporations, to small companies, and to 
equipment wholesalers, dealers, and government agencies and municipalities. 
End-user customers accounted for approximately 91%, 83% and 86% of our 
total revenues in 2003, 2002 and 2001, respectively, while sales to dealers 
and other resellers accounted for approximately 9%, 17% and 14% of revenues 
during the same respective periods. We have thousands of customers and, 
during the years ended December 31, 2003, 2002 and 2001, no single customer 
accounted for more than 10% of revenues. We do not consider our business to 
be seasonal. 

COMPETITION

      We operate in a highly competitive marketplace. Over the years, our 
marketplace has become subject to more rapid technological change as 
communications systems have been evolving from stand-alone voice systems to 
more highly integrated, software-driven systems. Since we principally sell 
Avaya products, our competitive position in the marketplace is highly 
dependent upon Avaya's ability to continue to be a market leader in the 
product lines that we sell. Our competitors principally include Avaya and 
other new equipment manufacturers that similarly compete against Avaya 
products, including Nortel Networks Corporation, Siemens 
Aktiengesellschaft, Alcatel S.A. and NEC Corporation along with their local 
and regional dealers, and other Avaya business partners. In the sale of 
Classic Avaya(TM) products, we compete with the other Avaya-designated ARS 
Dealers. We believe that key competitive factors in our market are price, 
timeliness of delivery, service and product quality and reliability. Due to 
the reduction in business capital spending on telecommunications products, 
which has developed in the U.S. over the past few years, competitive 
pressures have intensified. We also anticipate intensified competition from 
larger companies having substantially greater technical, financial and 
marketing resources, as well as larger customer bases and name recognition. 
As the industry further develops voice and data converged products, we 
anticipate encountering a broader variety of competitors, including new 
entrants from related computer and communication industries. 

SUPPLIERS

      Our agreement with Avaya requires us to purchase new equipment from a 
designated "master distributor", and accordingly we have used Catalyst 
Telecom ("Catalyst") as our primary supplier over the last several years. 
The performance of this distributor in meeting our product and delivery 
demands has been satisfactory to date. Should there be an adverse change in 
Catalyst's performance, we would have the ability to contract with another 
"master distributor" to supply us with new Avaya telecommunications 
equipment.

      We acquire used equipment from a variety of sources, depending upon 
price and availability at the time of purchase. These sources include other 
secondary market equipment dealers, leasing companies and end-users. The 
equipment so acquired may be in a refurbished state and ready for resale, 
or it may be purchased "as-is", requiring repair and/or refurbishing prior 
to its resale. We are not dependent upon any single supplier for used 
equipment. The Company believes that the availability of used equipment in 
the marketplace is presently sufficient to enable the Company to meet its 
customers' used equipment delivery requirements.


  5


PATENTS, LICENSES AND TRADEMARKS

      No patent is considered material to our continuing operations. 
Pursuant to agreements in effect with Avaya, we may utilize, during the 
term of these agreements, certain Avaya designated trademarks, insignia and 
symbols in our advertising and promotion of Avaya products. We operate 
under a license agreement with Avaya, in which we were granted a non-
exclusive license to use the Classic Avaya(TM) trademark in connection with 
the refurbishing, marketing and sale of Avaya products sold under the ARS 
Agreement. Under this agreement, we are required to pay fees to Avaya based 
upon a percentage of the sales price of Classic Avaya(TM) products that we 
sell. For more information on these fees, refer to the above section 
"Relationship With Avaya Inc." The license agreement expires December 31, 
2004; however it shall automatically renew for an additional one-year term 
unless written notice is given by either party of its intent not to renew 
thirty days in advance of the termination date.

RESEARCH AND DEVELOPMENT

      We did not incur any research and development expenses during the 
three years ended December 31, 2003, and research and development 
activities are not material to our business.

BACKLOG

      The backlog of unshipped orders believed to be firm was approximately 
$397,000 at December 31, 2003, compared to $1,010,000 at December 31, 2002. 
We expect this entire backlog to ship and be recognized as revenue during 
the current fiscal year.

EMPLOYEES

      At December 31, 2003, we had 60 full-time employees. Our employees 
are not represented by any organized labor union and are not covered by any 
collective bargaining agreements.

WEBSITE ACCESS TO SEC FILINGS

      We maintain an Internet website at www.farmstead.com . We make 
available free of charge through our Internet website our annual report on 
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and 
amendments to those reports filed or furnished pursuant to Section 13(a) or 
15(d) of the Exchange Act as soon as reasonably practicable after we 
electronically file such material with, or furnish it to, the SEC.

EXECUTIVE OFFICERS OF THE REGISTRANT




                                      First
                                    Became An
                                    Executive
       Name              Age (1)    Officer in                     Position(s) Held
---------------------    -------    ----------    --------------------------------------------------

                                         
George J. Taylor, Jr.      61          1984       Chairman of the Board, President, Chief Executive
                                                  Officer

Michael R. Johnson         57          2001       Executive Vice President

Robert G. LaVigne          52          1988       Executive Vice President, Chief Financial Officer,
                                                  Secretary, Treasurer


  As of January 1, 2004.



      George J. Taylor, Jr., Chairman of the Board of Directors and Chief 
Executive Officer of the Company (including its predecessors) since 1984, 
and President since 1989. Member of the Compensation Committee of the Board 
of Directors (until February 24, 1998). President of Lease Solutions, Inc. 
(formerly Farmstead Leasing, Inc.), a business products and automobile 
leasing company, from 1981 to 1993. Vice President - Marketing and Sales 
for National Telephone Company from 1977 to 1981. Mr. Taylor was one of the 
founders of the National Association of Telecommunication Dealers, has been 
a member of, or advisor to, its Board of Directors since its inception in


  6


1986, and for two years served as its President and Chairman. Brother of 
Mr. Hugh M. Taylor, a Director of the Company.

      Michael R. Johnson, Executive Vice President since August, 2001. 
Sales Vice President, Avaya Inc. from 2000 to 2001; Vice President - Global 
Accounts, Lucent Technologies, from 1996 to 2000. From 1979 though 1996, 
Mr. Johnson held various product management and sales management positions 
with AT&T Corporation. While employed by Avaya, Lucent and AT&T, Mr. 
Johnson was assigned sales management responsibilities covering many of 
their largest commercial customers located in New York.

      Robert G. LaVigne, Executive Vice President since July 1997. Chief 
Financial Officer, Corporate Secretary and Treasurer since 1988. Vice 
President - Finance & Administration from 1988 until July 1997. Director of 
the Company from 1988 to 2001. Controller of Economy Electric Supply, Inc., 
a distributor of electrical supplies and fixtures, from 1985 to 1988. 
Corporate Controller of Hi-G, Inc., a manufacturer of electronic and 
electromechanical components, from 1982 to 1985. Certified Public 
Accountant.

ITEM 2.  PROPERTIES

      As of December 31, 2003, we occupied two buildings in East Hartford, 
CT, aggregating 49,897 square feet of office and warehouse space under 
lease contracts expiring December 31, 2004. The leases contain two, three-
year renewal options. We also lease 1,700 square feet of office space in 
New York, NY under a non-cancelable lease expiring March 31, 2005. This 
lease contains one, two-year renewal option.

      We are currently in the process of renegotiating our East Hartford, 
CT building leases. Effective April 1, 2004, we expect to enter into an 
agreement to terminate without penalty our existing lease on one of the 
buildings containing 15,137 square feet of warehouse space. We also expect 
to enter into a new lease agreement on the building containing our 
principal offices and distribution center, replacing the existing lease. 
Under the new agreement, we expect to lease approximately 25,000 square 
feet for a period of ten years and nine months commencing April 1, 2004. We 
will have the option to terminate this lease effective December 31, 2009, 
and the lease will contain one five-year renewal option. If new or 
additional space is required, we believe that adequate facilities are 
available at competitive prices in the immediate areas of our current 
operations.

ITEM 3.  LEGAL PROCEEDINGS

      From time to time we are involved in legal proceedings arising in the 
ordinary course of business. There is no litigation pending that could 
have, individually or in the aggregate, a material adverse effect on our 
financial position, results of operations or cash flows. 

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

      No matter was submitted to a vote of security holders in the fourth 
quarter of the fiscal year covered by this report. 

                                   PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      Our Common Stock is traded on the American Stock Exchange, under the 
symbol "FTG". The following securities were traded on the American Stock 
Exchange under the following symbols until June 30, 2002, at which time 
they expired and were delisted: Warrants issued in our 1987 initial public 
offering ("IPO Warrants") - "FTG.WS"; Redeemable Class A Common Stock 
Purchase Warrants - "FTG.WS.A"; Redeemable Class B Common Stock Purchase 
Warrants - "FTG.WS.B". The following sets forth the range of quarterly high 
and low sales prices for these securities, for the two years ended December 
31, 2003 (there was no trading in periods where no prices are indicated):


  7





                               Common Stock                    IPO Warrants
                       -----------------------------    ----------------------------
                           2003            2002             2003            2002
                       ------------    -------------    ------------    ------------
      Quarter Ended    High     Low    High      Low    High     Low    High     Low
       ------------    ----    ----    -----    ----    ----    ----    ----    ----

                                                        
      March 31         $.35    $.21    $ .92    $.66       -       -       -       -
      June 30           .71     .26     1.14     .57       -       -    $.01    $.01
      September 30      .85     .41      .79     .21       -       -       -       -
      December 31       .82     .57      .37     .21       -       -       -       -



                              Class A Warrants                Class B Warrants
                       -----------------------------    ----------------------------
                           2003            2002             2003            2002
                       ------------    -------------    ------------    ------------
      Quarter Ended    High     Low    High      Low    High     Low    High     Low
       ------------    ----    ----    -----    ----    ----    ----    ----    ----

                                                        
      March 31            -       -        -       -       -       -    $.04    $.04
      June 30             -       -     $.02    $.01       -       -     .02     .02
      September 30        -       -        -       -       -       -       -       -
      December 31         -       -        -       -       -       -       -       -


      There were 3,311,601 and 3,298,958 common shares outstanding at 
December 31, 2003 and 2002, respectively. There were 183,579 IPO Warrants, 
1,137,923 Class A Warrants and 1,137,923 Class B Warrants outstanding at 
the time of their June 30, 2002 expiration. As of December 31, 2003 there 
were 509 holders of record of the common stock representing approximately 
2,400 beneficial stockholders, based upon the number of proxy materials 
distributed in connection with our 2003 Annual Meeting of Stockholders. We 
have paid no dividends and do not expect to pay dividends in the 
foreseeable future as we intend to retain earnings to finance the growth of 
our operations. Pursuant to a revolving credit agreement with Business 
Alliance Capital Corporation, we are prohibited from declaring or paying 
any dividends or making any other distribution on any of the shares of our 
capital stock, without the prior consent of the lender.

                    EQUITY COMPENSATION PLAN INFORMATION

      Securities authorized for issuance under equity compensation plans as 
of December 31, 2003:




                                                                                    Number of securities
                                                                                    remaining available
                                       Number of                                    for future issuance
                                       securities to be        Weighted-average     under equity
                                       issued upon             exercise price of    compensation plans
                                       exercise of             outstanding          (excluding securities
                                       outstanding options,    options, warrants    reflected in column
                                       warrants and rights     and rights           (a))
      Plan Category                            (a)                    (b)                    (c)
      ---------------------------------------------------------------------------------------------------

                                                                                 
      Equity compensation plans
       approved by security holders         1,870,706                $1.73                1,137,500

      Equity compensation plans
       not approved by security
       holders                                  -                      -                      -
      ---------------------------------------------------------------------------------------------------
      Total                             1,870,706                    $1.73                1,137,500
      ===================================================================================================



  8


ITEM 6.  SELECTED FINANCIAL DATA




(In thousands, except per share amounts)                   Years ended December 31
--------------------------------------------------------------------------------------------------
                                              2003        2002        2001        2000       1999

                                                                            
Revenues                                    $14,680     $19,150     $33,339     $42,786    $32,871
Income (loss) from continuing operations       (709)     (2,530)     (1,708)      1,753         57
Income (loss) from continuing operations
 per common share:
  Basic and diluted                            (.21)       (.77)       (.52)        .54        .02
Total Assets                                  5,291       5,873      10,342      15,494     15,657
Long term debt                                    -           -           -       1,726      4,578
Stockholders' equity                          3,291       4,029       6,531       8,202      6,417
Dividends paid                                    -           -           -           -          -
--------------------------------------------------------------------------------------------------


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements

      The discussions set forth below and elsewhere in this Annual Report 
on Form 10-K contain certain statements, based on current expectations, 
estimates, forecasts and projections about the industry in which we operate 
and management's beliefs and assumptions, which are not historical facts 
and are considered forward-looking statements within the meaning of the 
Private Securities Litigation Reform Act of 1995 (the "Act"). Forward-
looking statements include, without limitation, any statement that may 
predict, forecast, indicate, or imply future results, performance, or 
achievements, and may contain the words "believe", "will be", "will 
continue", "will likely result", "anticipates", "seeks to", "estimates", 
"expects", "intends", "plans", "predicts", "projects", and similar words, 
expressions or phrases of similar meaning. Our actual results could differ 
materially from those projected in the forward-looking statements as a 
result of certain risks, uncertainties and assumptions, which are difficult 
to predict. Many of these risks and uncertainties are described under the 
heading "Risk, Uncertainties and Other Factors That May Affect Future 
Results" below. All forward-looking statements included in this document 
are based upon information available to us on the date hereof. We undertake 
no obligation to update publicly any forward-looking statements, whether as 
a result of new information, future events or otherwise. In addition, other 
written or oral statements made or incorporated by reference from time to 
time by us or our representatives in this report, other reports, filings 
with the Securities and Exchange Commission ("SEC"), press releases, 
conferences, or otherwise may be forward-looking statements within the 
meaning of the Act. 

Overview

      For the year ended December 31, 2003, we reported a net loss of 
$709,000 or $.21 per share on revenues of $14,680,000. This compares with a 
net loss of $2,530,000 or $.77 per share on revenues of $19,150,000 
recorded for the year ending December 31, 2002. The net loss for 2002 
included (i) a $455,000 charge to fully reserve for all deferred tax 
assets; (ii) $333,000 in inventory valuation charges and (iii) a $101,000 
charge to write off all recorded goodwill arising from the acquisition of 
InfiNet. 

      The 23% decline in sales revenues in 2003 was again a reflection of 
the continued softness in corporate buying in the telecommunications 
equipment sector. There have, however, been some signs of improvement in 
our industry as evidenced by improved operating results from some of the 
key manufacturers, and we are encouraged by an increase in sales quotation 
activities. Our overall strategy has been to properly size our business in 
relation to current revenue run-rates, while preserving our key technical 
resources that are critical to maintaining and growing a systems and 
services business. We have remained in a somewhat defensive posture, 
attempting to offset the financial impact of a reduced revenue stream by 
reducing, more tightly controlling, and deferring where possible, operating 
costs and expenses. As a result, despite the year-over-year revenue 
decline, we managed to reduce our comparative net loss by 72% (57% 
excluding the 2002 charges noted above). We accomplished this through (i) 
increasing our profit margins from 19% to 26% through new revenue 
opportunities such as selling Avaya maintenance contracts, personnel 
reductions, improved product buying and outsourcing equipment repair 
operations; and (ii) reducing our selling, general and administrative 
expenses by 21% year-over-year. 


  9


      Having made substantial progress in reducing costs and increasing 
profit margins, our primary business focus for the near term will center on 
strategies to increase sales revenues. We believe that our return to 
profitability will now be driven more so by increasing sales levels than 
from further cost reductions. To that end, we have been hiring additional 
experienced salespersons to provide more coverage of existing and potential 
customers located within the market areas that we serve; broadening our 
product offerings; and increasing the marketing of our products and 
capabilities, including our on-line electronic ordering system. However, 
should there be a continuation of operating losses, we will implement 
further cost and infrastructure reduction measures as deemed necessary, 
which may hinder the execution of our long-term growth plans. As further 
described in the Liquidity and Capital Resources section below, our current 
cash position and borrowing capacity could be a limiting factor to our 
growth, particularly if operating losses continue or, if growth is 
predominantly in the systems products since under our current loan 
agreement, we are prohibited from borrowing against receivables generated 
by systems sales until such time as the systems are installed. Under these 
circumstances, we could deplete our cash, borrowing availability and/or 
require a higher credit line. However, as of December 31, 2003, we had $3.1 
million in working capital and no bank debt. Additional information on our 
results of operations and financial condition for the year ended December 
31, 2003 follows below.

Results of Operations

Year Ended December 31, 2003 Compared To 2002




      Revenues

                                               Year Ended December 31,
                                          --------------------------------
      (Dollars in thousands)                 2003      %       2002      %
      --------------------------------------------------------------------

                                                           
      End-user equipment sales            $11,561     79    $14,116     74
      Equipment sales to resellers          1,368      9      3,205     17
      --------------------------------------------------------------------
      Total equipment sales                12,929     88     17,321     91
      --------------------------------------------------------------------

      Services                              1,520     10      1,799      9
      Other revenue                           231      2         30      -
      --------------------------------------------------------------------
      Total services and other revenue      1,751     12      1,829      9
      --------------------------------------------------------------------
      Consolidated revenues               $14,680    100    $19,150    100
      ====================================================================


      Equipment Sales. Total equipment sales for the year ended December 
31, 2003 were $12,929,000, down $4,392,000 or 25% from the comparable 2002 
period. The decrease consisted of a $2,555,000 or 18% decline in end-user 
sales, and a $1,837,000 or 57% decline in equipment sales to resellers 
("wholesale sales"). End-user sales consist of both parts sales (new and 
refurbished), and systems sales (complete systems and system upgrades). 

      We attribute these sales declines in part to a continuing soft market 
for telecommunications equipment and to the following: (1) the turnover of 
sales personnel during the past year and the concurrent hiring and training 
of new salespersons and; (2) increased competition for sales, which has 
resulted in increased sales price discounting in order to capture business. 
During 2003, we have continued a strategy of diversifying our product 
offerings by marketing the sale of complete telecommunications systems to 
our customer base. This is a growth strategy, designed to augment our long-
established aftermarket parts business that continues as our primary source 
of revenues. Our goal is to balance our sales effort to sell systems, parts 
and services. For the year ended December 31, 2003 system sales were 
$3,127,000, up 18% from the prior year period. 

      Significant portions of our equipment sales revenues are derived from 
"Business Partner" relationships with Avaya. For the past several years, 
Avaya has been pursuing a strategy of more fully utilizing its dealer 
channel as a revenue source. Through our relationships with various Avaya 
sales personnel, we are often referred Classic Avaya parts business by 
Avaya. Such referrals however, have been subject to fluctuation as Avaya's 
direct sales business fluctuates.

      Services and Other Revenue. For the year ended December 31, 2003, 
service revenues were $1,520,000, down $279,000 or 16% from 2002, primarily 
attributable to lower installation revenues. For the year ended December 
31, 2003, other revenue was $231,000, up $201,000 from 2002. Other revenue 
consisted primarily of commissions earned from selling Avaya maintenance 
contracts. In these transactions we act as a sales agent of Avaya, and the 


  10


service obligations are borne entirely by Avaya. During 2003 we have 
increased our focus on selling these contracts as part of our strategy to 
develop new and profitable sources of revenue for the Company. 

      We continue to remain cautious about the near term levels of capital 
spending for telecommunications products in the US. There have, however, 
been some signs of improvement in our industry as evidenced by improved 
operating results from some of the key manufacturers, and we are encouraged 
by an increase in sales quotation activities. Revenue generation from all 
product lines and sales channels is the primary focus of management, and 
strategies being implemented include increasing the size and experience 
level of our sales force, increased marketing of our on-line ordering 
process, and other direct-marketing approaches. 

      Cost of Revenues and Gross Profit. Total cost of revenues for the 
year ended December 31, 2003 was $10,794,000, down $4,733,000 or 30% from 
the comparable 2002 period. The gross profit for the year ended December 
31, 2003 was $3,886,000, up $263,000 or 7% from the comparable 2002 period. 
As a percentage of revenue, the gross profit margin was 26% for 2003, 
compared to 19% for the comparable 2002 period. 

      Our gross profit margins are dependent upon a variety of factors 
including (1) product mix - gross margins can vary significantly among 
parts sales, system sales and our various service offerings. The parts 
business, for example, involves hundreds of parts that generate 
significantly varying gross profit margins depending upon their 
availability, competition, and demand conditions in the marketplace; (2) 
customer mix - we sell parts to both end-users and to other equipment 
resellers. In our partnering relationship with Avaya, certain customers 
receive pre-negotiated discounts from Avaya which could lower our gross 
margins as we do business with these customers; (3) the level and amount of 
discounts and purchase rebates available to us from Avaya and its master 
distributors and (4) the level of overhead costs in relation to sales 
volume. Overhead costs consist primarily of product handling, purchasing, 
and facility costs. The combined effect of all of these factors will result 
in varying gross profit margins from period to period. 

      Gross Profit Margins on Equipment Sales. For the year ended December 
31, 2003, the gross profit margin on equipment sales increased to 32% from 
25% in 2002. This was primarily attributable to (i) increased margins on 
both end-user and wholesale parts sales, due to product sales mix and lower 
inventory purchase costs; (ii) increased purchase discounts and system 
rebates from Avaya; and (iii) lower license fee expense.

      Gross Profit Margins on Services and Other Revenue. For the year 
ended December 31, 2003, the gross profit margin on services and other 
revenue decreased to 35%, from 40% in 2002. The decrease was attributable 
to the services component, which generated a 26% profit margin in 2003 
compared to a 39% profit margin in 2002. This decrease was attributable to 
installation service margins, which were 16% in 2003 compared to 33% in 
2002, principally due to a loss incurred on a large system installation. 
Excluding this particular installation, the profit margin would have been 
24%. Other revenues consisted of commissions earned from selling Avaya 
maintenance contracts, which generate a 100% profit margin. 

      Other Cost of Revenues: Other cost of revenues consists of product 
handling, purchasing and facility costs and expenses. For the year ended 
December 31, 2003, these expenses were $827,000, or 6% of equipment 
revenues, compared to $1,408,000 or 8% of equipment revenues in 2002. As a 
result of cost reduction initiatives, which included personnel reductions 
of 50%, and increased outsourcing of equipment repair operations, other 
cost of revenues were 41% lower in 2003 than 2002.

      Selling, General and Administrative ("SG&A") Expenses. SG&A expenses 
for the year ended December 31, 2003 were $4,561,000, down $1,192,000 or 
21% from the comparable 2002 period. SG&A expenses for the year ended 
December 31, 2003 were 31% of revenues, compared to 30% of revenues in 
2002. In response to lower sales levels, we have been actively managing our 
headcount and tightly controlling SG&A expenses. Approximately 56% of the 
decrease in SG&A expenses was attributable to a reduction in compensation 
expenses, resulting from an 11% reduction in the average number of 
employees and lower sales commissions. We also experienced reductions in 
travel, consulting, office, depreciation, and other employment related 
expenses, offset by higher bad debt and property tax expenses. We expect to 
continue the close monitoring of our expense levels going forward into 
2004. 

      Interest Expense and Other Income. Interest expense for the year 
ended December 31, 2003 was $28,000, compared to $24,000 for the comparable 
2002 period. The increase in interest expense was attributable to higher 
interest rates on borrowings as our credit facility moved from Wachovia 
Bank to Business Alliance Capital Corporation. Other income for the year 
ended December 31, 2003 was $7,000, consisting of interest earned on 


  11


invested cash, compared to $97,000 recorded in 2002. Other income in 2002 
included $82,000, from the sale of common stock of Anthem, Inc., which we 
received at no cost, as part of the conversion of Anthem Insurance 
Companies, Inc. from a mutual insurance company to a stock insurance 
company. The balance of other income for 2002 consisted primarily of 
interest earned on invested cash. 

      Provision for Income Taxes. The provision for income taxes for the 
year ended December 31, 2003 was $13,000, compared to $473,000 recorded in 
2002. The provision for income taxes in 2003 consisted entirely of 
estimated minimum state taxes. Tax expense in 2002 consisted of a provision 
of $18,000 for estimated state taxes and a $455,000 charge to increase the 
valuation allowance against our net deferred tax assets at December 31, 
2002. We maintain a full valuation allowance against our net deferred tax 
assets, which consist primarily of net operating loss and capital loss 
carryforwards, and timing differences between the book and tax treatment of 
inventory and other account valuations. Realization of these net deferred 
tax assets is dependent upon our ability to generate future taxable income. 

Year Ended December 31, 2002 Compared To 2001. For the year ended December 
31, 2002, we reported a net loss of $2,530,000 or $.77 per share on 
revenues of $19,150,000. This compares with a net loss of $1,708,000 or 
$.52 per share on revenues of $33,339,000 recorded for the year ending 
December 31, 2001. The net loss for 2002 included (i) a $455,000 charge to 
fully reserve for all deferred tax assets; (ii) $333,000 in inventory 
valuation charges and (iii) a $101,000 charge to write off all recorded 
goodwill arising from the acquisition of InfiNet. 




      Revenues

                                           Year Ended December 31,
                                      --------------------------------
      (Dollars in thousands)             2002      %       2001      %
      ----------------------------------------------------------------

                                                       
      End-user equipment sales        $14,146     74    $26,362     79
      Equipment sales to resellers      3,205     17      4,519     14
      Services                          1,799      9      2,458      7
      ----------------------------------------------------------------
      Consolidated revenues           $19,150    100    $33,339    100
      ================================================================


      Equipment Sales. During the year ended December 31, 2002, end-user 
equipment sales revenues, consisting of sales of both new and refurbished 
parts and systems sales, decreased by $12,216,000 or 46% from the 
comparable 2001 period. Additionally, equipment sales to resellers 
("wholesale sales") decreased by $1,314,000 or 29% from the comparable 2001 
period. Management attributes these sales declines primarily to the 
deteriorated market conditions in the U.S. economy which has resulted in 
reduced capital spending by businesses on telecommunications equipment. 
These conditions have, in turn, led to increased competition and downward 
pressure on sales prices. Another factor affecting sales levels has been 
the transitioning of our sales force. During 2002, we continued a strategy 
of developing a systems sales business, begun in 2001 with the formation of 
InfiNet, and continuing with Farmstead's appointment as a systems dealer by 
Avaya in January 2002. This is a growth strategy, designed to augment our 
long-established aftermarket parts business that continues as our primary 
source of revenues. This strategy necessitated the hiring of sales, service 
and technical design personnel experienced in systems and applications 
design and sales. As a result, we have increased our focus on selling new 
systems and system upgrades, which coupled with the turnover of certain 
experienced parts salespersons over the last two years, has contributed to 
the reduction in aftermarket parts sales. Management remains committed to 
the continuing growth of its systems business and is currently implementing 
strategies to increase its parts business, which will include the 
development of on-line ordering processes and other direct-marketing 
approaches.

      Significant portions of our sales revenues are derived from "Business 
Partner" relationships with Avaya. For the past several years, Avaya has 
been pursuing a strategy of more fully utilizing its dealer channel as a 
revenue source. Through our relationships with various Avaya sales 
personnel, we are often referred business by Avaya. Such referrals however, 
have been subject to fluctuation as Avaya's direct sales business itself 
fluctuates.

      Services. During the year ended December 31, 2002, service revenues 
decreased by $659,000 or 27% from the comparable 2001 period. The decrease 
was primarily attributable to lower installation revenues and secondarily 
to lower equipment rentals. Installation revenues are generated primarily 
from the sale of systems and system upgrades which as noted above, have 
been negatively affected by the market downturn.

      Cost of Revenues and Gross Profit. Total cost of revenues for the 
year ended December 31, 2002 was $15,527,000, a decrease of $11,154,000 or 
42% from the comparable 2001 period. The gross profit for the year ended 
December 31, 2002 was $3,623,000, a decrease of $3,035,000 or 46% from the 
comparable 2001 period. As a percentage of revenue, the gross profit margin 
was 19% for 2002, as compared to 20% for the comparable 2001


  12


period. These recorded gross profit margins were negatively affected by 
inventory valuation charges of $333,000 in 2002, and $1,443,000 in 2001 
necessitated by industry market conditions. Excluding these adjustments, 
the gross profit margin in each year would have been 20% for 2002 and 24% 
for 2001.

      Our gross profit margins are dependent upon a variety of factors 
including (1) product mix - gross margins can vary significantly among 
parts sales, system sales and our various service offerings. The parts 
business, for example, involves hundreds of parts that generate 
significantly varying gross profit margins depending upon their 
availability, competition, and demand conditions in the marketplace; (2) 
customer mix - we sell parts to both end-users and to other equipment 
resellers. In our partnering relationship with Avaya, certain customers 
receive pre-negotiated discounts from Avaya which could lower our gross 
margins as we do business with these customers; (3) the level and amount of 
discounts and purchase rebates available to us from Avaya and its master 
distributors and (4) the level of overhead costs in relation to sales 
volume. Overhead costs consist primarily of materials handling, purchasing, 
and facility costs. The combined effect of all of these factors will result 
in varying gross profit margins from period to period. 

      The reduction in gross profit dollars during the year ended December 
31, 2002 was primarily attributable to lower sales levels, for the reasons 
discussed above. The gross profit margin for 2002, excluding the effect of 
the inventory valuation charges noted above, was affected by (1) increased 
sales competition, and downward pressure on sales pricing in our 
aftermarket end-user parts sales channel; (2) increased wholesale sales as 
a percent of total sales revenues. Wholesale sales generate margins that 
are lower than end-user margins and for 2002 were 17% of revenue compared 
with 14% in 2001; and (3) overhead costs, consisting principally of higher 
overhead costs as a percent of revenues. As a partial offset, we recorded 
improved gross profit margins on both systems sales and installation 
services in 2002, as compared with the comparable prior year periods, and 
also benefited from license fee reductions implemented by Avaya during 
2002. 

      Selling, General and Administrative ("SG&A") Expenses. SG&A expenses 
for the year ended December 31, 2002 were $5,753,000, a decrease of 
$2,366,000 or 29% from the comparable 2001 period. SG&A expenses were 30% 
of revenues in 2002 as compared to 24% of revenues in 2001. Of the total 
decrease in SG&A, $909,000 was attributable to the downsizing of the 
operations of InfiNet. This was the result of the acquisition by Farmstead 
of its own systems dealer license in January 2002, and a change in strategy 
concerning the business use of InfiNet. As a result, InfiNet was inactive 
for most of 2002. The remaining $1,457,000 decrease in SG&A expenses was 
attributable to the operations of Farmstead and included (i) an $880,000 
(20%) reduction in payroll expenses as a result of lower employment levels 
than the prior year period, lower sales commissions due to lower sales 
levels, and management and director pay reductions; (ii) cost-reduction 
initiatives in response to lower sales levels, which has resulted in 
reduced marketing, travel, legal, consulting and other office and 
employment-related expenses; (iii) $201,000 in reduced bad debt expense 
resulting from a $33,000 reserve reduction due to better than expected 
receivable collections, a $15,234 bad debt recovery and lower sales volume 
and (iv) lower depreciation expense. In connection with the downsizing of 
InfiNet, we wrote off $101,000 of goodwill associated with its acquisition.

      Interest Expense, Other Income and Minority Interest. Interest 
expense for the year ended December 31, 2002 was $24,000, compared with 
$144,000 for the comparable 2001 period. The decrease in interest expense 
was attributable to both lower average borrowings and lower borrowing 
costs. 

      Other income for the year ended December 31, 2002 was $97,000, 
compared with $42,000 for 2001. Other income for 2002 included $81,727 
representing the net proceeds from the sale of common stock of Anthem, 
Inc., which we received at no cost, as part of the conversion of Anthem 
Insurance Companies, Inc. from a mutual insurance company to a stock 
insurance company, with the balance consisting primarily of interest earned 
on invested cash. Other income for the year ended December 31, 2001 
consisted primarily of interest earned on invested cash. 

      Minority interest in income of subsidiary of $128,000 for the year 
ended December 31, 2001, represented the 49.9% share of the net income of 
InfiNet earned by TriNET. Effective January 1, 2002, we acquired all of 
TriNET's ownership interest in InfiNet for an aggregate cash purchase price 
of $153,334.

      Provision for Income Taxes. We recorded tax expense of $473,000 for 
the year ended December 31, 2002, compared with tax expense of $17,000 for 
2001. Tax expense in 2002 consisted of a provision for estimated minimum 
state taxes of $18,000 and a $455,000 charge to increase the valuation 
allowance against the Company's net deferred tax assets at December 31, 
2002. Our net deferred tax assets consist primarily of net operating loss 
and


  13


capital loss carryforwards, and timing differences between the book and tax 
treatment of inventory and other asset valuations. Realization of these net 
deferred tax assets is dependent upon our ability to generate future 
taxable income. Given the significant losses that we incurred in 2002 and 
2001, management determined that it was prudent to provide a full valuation 
allowance against its net deferred tax assets. Tax expense in 2001 
consisted of estimated minimum required state taxes.

Liquidity and Capital Resources

      Working capital, defined as current assets less current liabilities, 
was $3,129,000 at December 31, 2003, a decrease of $616,000 or 16% from 
$3,745,000 at December 31, 2002. The working capital ratio was 3.1 to 1 at 
December 31, 2003, compared to 3.5 to 1 at December 31, 2002. Operating 
activities used $87,000 during 2003, compared to the use of $104,000 in 
2002. Net cash used by operating activities in 2003 consisted of a net loss 
of $709,000 adjusted for non-cash items of $267,000, and net cash generated 
by changes in operating assets and liabilities of $355,000. Net cash 
generated by changes in operating assets and liabilities was primarily 
attributable to improved collections on accounts receivable and planned 
reductions in inventory stocking levels. 

      Investing activities used $83,000 during 2003, compared to $257,000 
in 2002. Net cash used by investing activities in 2003 consisted of capital 
expenditures. Net cash used by investing activities in 2002 consisted of 
(i) the $153,000 purchase price for the acquisition of TriNET's 49.9% 
ownership interest in InfiNet, and (ii) $104,000 in capital expenditures. 
During 2002, we started the development of an e-business platform, to 
enable customers to transact business with us electronically. Capitalized 
costs as of December 31, 2003 amounted to $92,000, $48,000 of which was 
incurred in 2003. There are currently no material commitments for capital 
expenditures. Pursuant to our loan agreement with BACC, we are restricted 
from committing to capital expenditures in any fiscal year period in excess 
of $150,000without their prior approval.

      Financing activities provided $3,000 during 2003 from the issuance of 
12,643 shares of common stock to employees under our employee stock purchase 
plan ("ESPP"), compared to using $124,000 in 2002. Net cash used by financing 
activities in 2002 consisted of $37,000 in capital lease payments to fully 
pay-off a lease obligation, a $100,000 capital distribution to TriNET out of 
the accumulated earnings of InfiNet, and $13,479 from 26,379 common shares 
issued to employees under the ESPP. 

      On February 19, 2003 the Company entered into a one-year, $1.5 
million revolving loan agreement (the "BACC Agreement") with Business 
Alliance Capital Corporation ("BACC"), replacing a similar $500,000 credit 
facility with Wachovia Bank, National Association that was expiring 
February 28, 2003. Under the terms of the BACC Agreement, borrowings are 
advanced at 75% of eligible accounts receivable, as defined (primarily 
receivables that are less than 90 days old and, in the case of system 
sales, the receivable does not become "eligible" until the system has been 
installed), and at 25% of the value of eligible inventory, as defined 
(primarily inventory that was purchased pursuant to a firm customer order), 
provided that the amount advanced against eligible inventory shall not 
exceed $200,000 or 30% of all outstanding advances under the BACC 
Agreement. Interest is charged at the per annum rate of one and one-half 
percentage points (1.5%) above the prime rate, but not less than 5.75%, 
subject to a minimum interest charge based on an average daily loan balance 
of $250,000 regardless of the actual average loan balance. Under the BACC 
Agreement, the Company is charged an annual facility fee of 1% of the 
facility and a monthly servicing fee equal to .25% of the average 
outstanding loan balance, subject to a minimum average daily loan balance 
of $250,000. As additional security to BACC, the Company issued a $300,000 
standby letter of credit in favor of BACC, secured by cash, which can be 
drawn upon 90 days after an event of default. The BACC Agreement restricts 
the Company from the payment of dividends and limits capital expenditures 
during the term of the agreement to $150,000, without the consent of BACC. 
The BACC Agreement contains no specific financial covenants however, it 
defines certain circumstances under which the agreement can be declared in 
default and subject to termination, including among others if (i) there is 
a material adverse change in the Company's business or financial condition; 
(ii) an insolvency proceeding is commenced; (iii) the Company defaults on 
any of its material agreements with third parties; (iv) the Company fails 
to comply with the terms, representations and conditions of the agreement, 
and (v) there are material liens or attachments levied against the 
Company's assets. In the event the BACC Agreement is terminated prior to 
its expiration date, the Company shall pay a fee in an amount equal to 4% 
of the advance limit. 


  14


      On February 19, 2004, the BACC Agreement was extended for an 
additional one-year term with the following modifications: (i) the advance 
limit was increased to $1.7 million; and (ii) the amount which could be 
advanced against eligible inventory was increased to $400,000. 

      We are dependent upon generating positive cash flow from operations 
and upon our revolving credit facility to provide cash to satisfy working 
capital requirements. No assurances can be given that we will have 
sufficient cash resources to finance future growth. Historically, our 
working capital borrowings have increased during periods of revenue growth. 
This is because our cash receipts cycle is longer than our cash 
disbursements cycle. As our revenues from systems sales increases, as 
management expects, the cash receipts cycle may lengthen, unless we can 
consistently negotiate progress payments under our systems sales contracts. 
Under the current lending agreement, we are prohibited from borrowing 
against receivables generated by systems sales until the systems are 
installed. Under these circumstances, we could run out of availability 
and/or require a higher credit line. In order to obtain additional 
financing, we may first need to demonstrate improved operating performance. 
No assurances can be given that we will have sufficient cash resources to 
finance possible future growth, and it may become necessary to seek 
additional financing sources for such purpose.

Recent Accounting Pronouncement 

      In December 2003, the Financial Accounting Standards Board ("FASB") 
issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions 
and Other Postretirement Benefits, an Amendment of FASB Statements No. 87, 
88 and 106" ("SFAS No. 132"). SFAS No. 132 requires, for defined benefit 
pension plans and other defined postretirement benefit plans, additional 
disclosures regarding plan assets, investment strategy, measurement date, 
plan obligations, cash flows and components of net periodic benefit cost, 
effective upon issuance. The Company adopted the disclosure requirements 
under SFAS 132 for the year ended December 31, 2003. See Note 12 of the 
Notes to Consolidated Financial Statements included herein.

Critical Accounting Policies and Estimates 

      Our financial statements are prepared in accordance with accounting 
principles generally accepted in the United States of America. These 
accounting principles require management to make a number of assumptions 
and estimates about future events that affect the reported amounts of 
assets, liabilities, revenue and expenses in our consolidated financial 
statements and accompanying notes. Management bases its estimates on 
historical experience and various other assumptions about future events 
that are believed to be reasonable. These estimates are based on 
management's best knowledge of current events and actions that may impact 
the Company in the future. Actual results could differ from these 
estimates, and any such differences could be material to the financial 
statements. We believe that the following policies may involve a higher 
degree of judgment and complexity in their application and represent the 
critical accounting policies used in the preparation of our financial 
statements. 

      Revenue recognition: Revenue from sales of equipment is generally 
recognized when persuasive evidence of an agreement exists, shipment has 
occurred, the sales price is fixed and determinable, and collection of the 
resulting receivable is probable. Additionally, for sales of systems where 
installation requirements are our responsibility, revenue is recognized on 
the equipment portion of the transaction upon shipment of the equipment, 
and revenue is recognized on the installation portion of the transaction 
upon completion of the installation. Revenues on other services are 
recognized when the services are rendered. We record reductions to revenue 
for estimated product returns, based on historical experience.

      Inventory valuation: We periodically assess the valuation of 
inventory and adjust the value for estimated excess and obsolete inventory 
based upon assumptions about current and future demand and market 
conditions. Such estimates are difficult to make under current volatile 
economic conditions. Reviews for excess inventory are done periodically 
during the year and required reserve levels are calculated with reference 
to the projected ultimate usage of that inventory. In order to determine 
the ultimate usage, we take into account recent sales history, forecasts, 
projected obsolescence and our current inventory levels. The excess balance 
determined by this analysis becomes the basis for our excess inventory 
charge. If actual market conditions are less favorable than those projected 
by management, additional write-downs may be required. If actual market 
conditions are more favorable than anticipated, inventory previously 
written down may be sold, resulting in lower cost of sales and higher 
earnings from operations than expected in that period. 


  15


      Collectibility of Accounts Receivable: The allowance for doubtful 
accounts is based upon our assessment of the collectibility of specific 
customer accounts and the aging of the accounts receivable. Reviews of our 
receivables are performed continuously during the year, and reserve levels 
are adjusted when determined necessary. If there were a deterioration of a 
major customer's creditworthiness, or actual defaults were higher than our 
historical experience, we could be required to increase our allowance and 
our earnings could be adversely affected.

      Long-Lived Assets: We have recorded property and equipment and 
intangible assets at cost less accumulated depreciation. The determination 
of useful lives and whether or not those assets are impaired involves 
significant judgment. We conducted the required annual goodwill impairment 
review during the fourth quarter of 2002. In considering the facts that our 
wholly-owned subsidiary, InfiNet, was downsized during the year, was 
inactive at year-end with no operating employees, and that management had 
no current plans for generating business through InfiNet, we recorded a 
goodwill impairment charge of $101,000 as an operating expense, fully 
writing off all previously recorded goodwill from the acquisition of this 
entity. 

      Income Taxes and Deferred Tax Assets: Significant judgment is 
required in determining our provision for income taxes and in determining 
whether deferred tax assets will be realized in full or in part. The 
deferred tax valuation allowance was calculated in accordance with the 
provisions of SFAS No. 109, "Accounting for Income Taxes", which places 
primary importance on a company's cumulative operating results for the 
current and preceding years. Additionally, when it is more likely than not 
that all or some portion of specific deferred tax assets such as net 
operating loss carryovers will not be realized, a valuation allowance must 
be established for the amount of the deferred tax assets that are 
determined not to be realizable. In our judgment, the significant losses 
incurred in 2003, 2002 and 2001 represented sufficient evidence to require 
a valuation allowance, and for 2003 and 2002 we established a full 
allowance against our deferred tax assets as of December 31 of each year. 
In 2002, that resulted in a fourth quarter charge to income tax expense of 
$455,000. 

Risks, Uncertainties and Other Factors That May Affect Future Results 

      Our prospects are subject to certain uncertainties and risks. 
Management recognizes the challenges that it faces, particularly during 
this period of diminished sales levels, and has adopted a number of 
strategies and action steps to deal with its current operating environment. 
Disclosure of our strategies and action steps is contained in the 
discussions set forth in Item 7. "Management's Discussion and Analysis of 
Financial Condition and Results of Operations", and elsewhere herein. These 
risks and uncertainties are also detailed from time to time in reports we 
file with the SEC, including Forms 8-K, 10-Q, and 10-K, and include, among 
other factors, the following principal risks:

      *  Our business is materially impacted by capital spending levels for 
telecommunications products and services in the United States. 

      As a result of the economic downturn that commenced in 2001, many 
businesses have reduced or deferred capital expenditures for 
telecommunications equipment. Our reported 2003 revenues were 23% lower 
than 2002 revenues, and 2002 revenues were in turn 43% lower than 2001 
levels. In addition, this situation has resulted in increased pricing and 
competitive pressures, which have contributed to our revenue erosion. If 
business capital spending for telecommunications products does not improve, 
or if economic conditions in the U.S. deteriorate, our revenues may 
continue to decline and our operating results will be adversely affected. 
We remain cautious about the telecommunications product marketplace going 
forward, and cannot predict whether the level of capital spending for the 
Company's products will improve in the near term. As a result, we believe 
that there will be continued pressure on our ability to generate revenue in 
excess of current levels.

      *  Our business is heavily dependent upon Avaya, as our primary 
supplier of equipment for resale.

      We primarily sell Avaya telecommunications products and services 
through various Dealer and license agreements with Avaya. The Company is 
dependent upon the quality and price-competitiveness of current Avaya 
products as well as Avaya's continued development of new products in order 
to compete. The Company's current sales levels for new parts and systems 
would be adversely impacted should market demand for these Avaya products 
significantly decline. Should Avaya's operations deteriorate to the point 
that it either cannot continue to introduce technologically new products or 
effectively compete with other equipment manufacturers, our long-term 
business strategy to continue as an Avaya dealer would be adversely 
affected. 


  16


      Our new parts and systems sales levels would also be adversely 
impacted if the Avaya dealer and license agreements were terminated, or if 
Avaya eliminated its "Business Partner" programs. It is Avaya's current 
intent to generate a larger percentage of its revenues from its dealer 
base, of which we are one. On some of its major accounts, companies such as 
Farmstead are selected to participate in the fulfillment of certain parts 
of the customer's orders through a "partnering" arrangement with the local 
Avaya sales team. Through these partnering arrangements, we are referred 
opportunities to supply both parts and systems, for which the Avaya sales 
team receives compensation from Avaya. Revenues generated by us through 
this program are significant to our near-term overall revenues and our 
operating results are dependent upon this program continuing. 

      The ARS aftermarket program currently expires December 31, 2004; 
however, Avaya is currently considering replacing it with a successor 
program that would require the ARS companies to purchase refurbished 
"Classic Avaya" equipment directly from Avaya, instead of their exclusive 
use of the "Classic Avaya" label. The program, as it's currently 
contemplated, would allow other companies to purchase refurbished "Classic 
Avaya" equipment directly from Avaya as well. We cannot predict whether the 
ARS program will continue throughout 2004 or what the terms and conditions 
of any successor program might be or how it might impact us. We believe 
that should the ARS program not be renewed, it will not have a material 
adverse impact on our ability to sell refurbished equipment.

      *  Our gross profit margins vary from period to period. 

      Our gross profit margins are dependent upon a variety of factors 
including (1) product mix - gross margins can vary significantly among 
parts sales, system sales and our various service offerings. The parts 
business, for example, involves hundreds of parts that generate 
significantly varying gross profit margins depending upon their 
availability, competition, and demand conditions in the marketplace; (2) 
customer mix - we sell parts to both end-users and to other equipment 
resellers. In our partnering relationship with Avaya, certain customers 
receive pre-negotiated discounts from Avaya which could lower our gross 
margins as we do business with these customers; (3) the level and amount of 
vendor discounts and purchase rebates available to us from Avaya and its 
master distributors; (4) excess capacity - as sales volume falls, overhead 
costs become a higher percentage of sales dollars; (5) competitive 
pressures - as a result of the slowdown in capital equipment spending in 
our industry, we have been faced with increased price competition; and (6) 
obsolescence charges. The combined effect of all of these factors will 
result in varying gross profit margins from period to period. 

      *  Our gross profit margins and operating expenses could be adversely 
affected by a reduction in purchase discount and other rebate or incentive 
programs currently offered by Avaya.

      As an Avaya Dealer, we receive substantial rebates and other cash 
incentives from Avaya, based upon volume levels of certain product 
purchases, which are material to our operating results and which help 
reduce product purchase costs, market development and marketing expenses. 
These incentive programs are subject to change by Avaya, and no assurances 
can be given that they would not be altered so as to adversely impact our 
profit margins or operating expenses. 

      *  We may not have adequate cash or credit lines to finance the 
Company's working capital requirements.

      As further discussed under "Liquidity and Capital Resources", our 
operating losses over the past three years have significantly reduced the 
amount of credit available to us from outside lenders, and increased the 
cost of borrowed funds. We are currently dependent upon cash generated from 
operations, and borrowings under a revolving credit facility, to satisfy 
our working capital requirements. Our revolving credit borrowings are based 
upon the generation of eligible accounts receivable. As our revenues have 
declined, so too have our receivables and borrowing availability. A 
material adverse change in our business going forward could result in a 
covenant default, which could lead to an early termination of the credit 
facility. In addition, continued losses could consume our current cash 
reserves, and negatively affect our ability to obtain replacement financing 
until we could demonstrate improved operating results or a return to 
profitability. No assurances can be given that we will have sufficient cash 
resources to finance future growth, and it may become necessary to raise 
additional funds through public or private debt or equity financings, which 
may also not be available to us until operating performance improves, and 
which may dilute stockholder ownership in us.

      *  We are faced with intense competition and rapidly changing 
technologies, and we may become unable to effectively compete in our 
marketplace.


  17


      We operate in a highly competitive marketplace. Over the years, our 
marketplace has become subject to more rapid technological change as 
communications systems have been evolving from stand-alone voice systems to 
more highly integrated, software-driven systems. Since we principally sell 
Avaya products, our competitive position in the marketplace is highly 
dependent upon Avaya's ability to continue to be a market leader in the 
product lines that we sell. Our competitors principally include Avaya and 
other new equipment manufacturers that similarly compete against Avaya 
products, including Nortel Networks Corporation, Siemens 
Aktiengesellschaft, Alcatel S.A. and NEC Corporation along with their local 
and regional dealers, and other Avaya business partners. In the sale of 
Classic Avaya(TM) products, we compete with the other Avaya-designated ARS 
Dealers. We believe that key competitive factors in our market are price, 
timeliness of delivery, service and product quality and reliability. Due to 
the reduction in business capital spending on telecommunications products, 
which has developed in the U.S. over the past few years, competitive 
pressures have intensified. We also anticipate intensified competition from 
larger companies having substantially greater technical, financial and 
marketing resources, as well as larger customer bases and name recognition. 
As the industry further develops voice and data converged products, we 
anticipate encountering a broader variety of competitors, including new 
entrants from related computer and communication industries. 

      *  If we are unable to attract and retain key management and sales 
employees, we will not be able to compete effectively and our business may 
not be successful.

      Our success is highly dependent upon our ability to hire and retain 
key technical, sales and executive personnel. Competition for such 
personnel is currently intense in our industry, and our deterioration in 
revenues over the past two years has been partly due to turnover of such 
key employees. If we fail to hire and retain a sufficient number of high-
quality personnel, we may not be able to maintain or expand our business. 
We have been attempting to expand our systems sales business, which 
requires more highly skilled technical and sales personnel than our 
aftermarket parts business, and a failure to hire and retain such personnel 
would restrict our ability to effectively develop this sales growth 
strategy.

      *  We could be delisted by the American Stock Exchange.

      Should we continue to record operating losses, fall below minimum 
required levels of stockholders' equity, fall below required minimum 
shareholder or market capitalization levels and /or if our common stock 
continues to trade at a "low price per share", we could be subject to 
delisting by the American Stock Exchange (the "Exchange"). In considering 
whether a security warrants continued trading and/or listing on the 
Exchange, many factors are taken into account, such as the degree of 
investor interest in the company, its prospects for growth, the reputation 
of its management, the degree of commercial acceptance of its products, and 
whether its securities have suitable characteristics for auction market 
trading. Thus, any developments which substantially reduce the size of a 
company, the nature and scope of its operations, the value or amount of its 
securities available for the market, or the number of holders of its 
securities, may occasion a review of continued listing by the Exchange. The 
determination as to whether a security warrants continued trading is not 
based on any precise mathematical formula rather, each case is considered 
on the basis of all relevant facts and circumstances and in light of the 
objectives of the Exchange's policies regarding continued listing.

      *  Other risks

      In addition to the specific risks and uncertainties discussed above, 
our future operating performance can also be affected by: performance and 
reliability of products; the maintenance of our level of customer service 
and customer relationships; adverse publicity; business disruptions; acts 
of terrorism within the U.S., and the impact of those acts on the U.S. 
economy; and other events that can impact revenues and business costs. The 
risks included here are not exhaustive. Other sections of this report may 
include additional factors, which could adversely affect our business and 
financial performance. Moreover, we operate in a very competitive and 
rapidly changing environment. New risk factors emerge from time to time and 
it is not possible for management to predict all such risk factors, nor can 
it assess the impact of all such risk factors on its business or the extent 
to which any factor, or combination of factors, may cause actual results to 
differ materially from those contained in any forward-looking statements. 
Given these risks and uncertainties, investors should not place undue 
reliance on forward-looking statements as a prediction of actual results. 


  18


      Investors should also be aware that while we do, from time to time, 
communicate with securities analysts, it is against our policy to disclose 
to them any material information unless such information shall have been 
previously or is simultaneously disclosed in a manner intended to provide 
broad, non-exclusionary distribution of the information to the public. 
Accordingly, shareholders should not assume that we agree with any 
statement or report issued by any analyst irrespective of the content of 
the statement or report. Furthermore, we have a policy against issuing or 
confirming financial forecasts or projections issued by others. Thus, to 
the extent that reports issued by securities analysts contain any 
projections, forecasts or opinions, such reports are not our 
responsibility.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Interest rates: Market risks which have the potential to affect our 
earnings and cash flows result primarily from changes in interest rates. 
Our cash equivalents, which consist of an investment in a money market fund 
consisting of high quality short term instruments, principally U.S. 
government and agency issues and commercial paper, are subject to 
fluctuating interest rates. A 10 percent change in such current interest 
rates would not have a material effect on our results of operations or cash 
flow. We are also exposed to market risk from changes in the interest rate 
related to our revolving credit facility, which is based upon the Prime 
Rate, which is a floating interest rate. Assuming an average borrowing 
level of $250,000 (which amount approximated the average amount borrowed 
under our revolving credit facility during the year ended December 31, 
2003), each 1 percentage point increase in the Prime Rate would result in 
$2,500 of additional annual interest charges. We do not currently use 
interest rate derivative instruments to manage exposure to interest rate 
changes.

      Cash Surrender Value of Company-owned insurance policies: The Company 
invests the cash surrender value of its Company-owned insurance policies in 
various investment portfolios administered by the respective insurance 
companies, which include investments in debt and equity securities. The 
cash surrender value is therefore subject to market risk and market 
fluctuations. The Company believes that this risk is moderated by the 
diversity of the underlying investments. As of December 31, 2003, the cash 
surrender value of these policies amounted to $302,156. A hypothetical 10% 
decline in cash surrender value, resulting from a decline in the market 
value of the underlying investments, would result in a $30,215 loss to the 
Company.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      See Index to Financial Statements and Financial Statement Schedule in 
Item 15. 

ITEM 9A.  CONTROLS AND PROCEDURES 

(a)  Evaluation of Disclosure Controls and Procedures. Our Chief Executive 
Officer and Chief Financial Officer have evaluated the effectiveness of our 
disclosure controls and procedures (as such term is defined in Rules 13a-
14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended 
(the "Exchange Act")) as of a date within 90 days prior to the filing date 
of this Annual Report on Form 10-K. Based on such evaluation, such officers 
have concluded that our disclosure controls and procedures are effective in 
alerting them on a timely basis to material information relating to our 
Company required to be included in our reports filed or submitted under the 
Exchange Act. 

(b)  Changes in Internal Controls. There were no significant changes in our 
internal controls or in other factors that could significantly affect such 
controls subsequent to the date of their most recent evaluation.

                                  PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required by Item 10 is included, in part, in Item 1, 
"Executive Officers of the Registrant", and is incorporated by reference to 
our Proxy Statement in connection with our Annual Meeting of Stockholders 
to be held June 10, 2004, which will be filed with the SEC pursuant to 
regulation 14A on or before April 29, 2004. 

ITEM 11.  EXECUTIVE COMPENSATION

      The information required by Item 11is incorporated by reference to 
our Proxy Statement in connection with our Annual Meeting of Stockholders 
to be held June 10, 2004, which will be filed with the Securities and 
Exchange Commission, pursuant to regulation 14A, on or before April 29, 
2004. 


  19


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 
          AND RELATED STOCKHOLDER MATTERS

      The information required by Item 12 is incorporated by reference to 
our Proxy Statement in connection with our Annual Meeting of Stockholders 
to be held June 10, 2004, which will be filed with the Securities and 
Exchange Commission, pursuant to regulation 14A, on or before April 29, 
2004. 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 

      The information required by Item 13 is incorporated by reference to 
our Proxy Statement in connection with our Annual Meeting of Stockholders 
to be held June 10, 2004, which will be filed with the Securities and 
Exchange Commission, pursuant to regulation 14A, on or before April 29, 
2004. 

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The information required by Item 14 is incorporated by reference to 
our Proxy Statement in connection with our Annual Meeting of Stockholders 
to be held June 10, 2004, which will be filed with the Securities and 
Exchange Commission, pursuant to regulation 14A, on or before April 29, 
2004. 

PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)   Index to Financial Statements and Financial Statement Schedule 

                                                                       Page
                                                                       ----

      Report of Carlin, Charron & Rosen LLP                             22
      Report of DiSanto Bertoline & Company, P.C.                       23
      Consolidated Balance Sheets - December 31, 2003 and 2002          24
      Consolidated Statements of Operations - 
       Years Ended December 31, 2003, 2002 and 2001                     25
      Consolidated Statements of Changes in Stockholders' Equity -
       Years Ended December 31, 2003, 2002, and 2001                    25
      Consolidated Statements of Cash Flows - 
       Years Ended December 31, 2003, 2002, and 2001                    26
      Notes to Consolidated Financial Statements                        27

      Financial Statement Schedule:
      Report of Carlin, Charron & Rosen LLP                             38
      Report of DiSanto Bertoline & Company, P.C.                       39
      Schedule II - Valuation and Qualifying Accounts                   40

(b)   Exhibits: See Index to Exhibits on page 41.

      (c) Reports on Form 8-K: On December 22, 2003, a Form 8-K was filed 
with the Securities and Exchange Commission to report that on December 22, 
2003 a press release was issued announcing (i) the renewal of our 
Authorized Remarketing agreements with Avaya for an additional one-year 
term; (ii) the extension of the Chief Executive Officer's full-time 
employment period to December 31, 2004; the extension of the Chief 
Financial Officer's employment agreement through December 31, 2004; (iii) 
our appointment by Avaya as a "Gold" Business Partner, making us one of 
Avaya's top 40 business partners out of a total number of business partners 
that exceeds 1,500; and (iv) our appointment as an Avaya "2 Star Services 
Partner" in recognition of our principle use of the Avaya services 
organization to perform installation, maintenance, and moves, adds and 
changes for our customers.


  20


                                 SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, the registrant has duly caused this report to be 
signed on its behalf by the undersigned, thereunto duly authorized on March 
25, 2004.

                                       FARMSTEAD TELEPHONE GROUP, INC.


                                       By: /s/ George J. Taylor, Jr.
                                           -------------------------
                                           George J. Taylor, Jr.
                                           Chairman of the Board, Chief
                                           Executive Officer and President

      Pursuant to the requirements of the Securities Exchange Act of 1934, 
this report has been signed below by the following persons on behalf of the 
registrant and in the capacities indicated as of March 25, 2004.

Signature                        Title(s)
---------                        --------

/s/ George J. Taylor, Jr.        Chairman of the Board, Chief Executive Officer
-----------------------------    and President
George J. Taylor, Jr.            (Principal Executive Officer)

/s/ Robert G. LaVigne            Executive Vice President, Chief Financial 
-----------------------------    Officer, Secretary and Director 
Robert G. LaVigne                (Principal Financial and Accounting Officer)

/s/ Harold L. Hansen             Director
-----------------------------
Harold L. Hansen

/s/ Hugh M. Taylor               Director
-----------------------------
Hugh M. Taylor

/s/ Joseph J. Kelley             Director
-----------------------------
Joseph J. Kelley

/s/ Ronald P. Pettirossi         Director
-----------------------------
Ronald P. Pettirossi


  21


                        INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of 
Farmstead Telephone Group, Inc.

We have audited the accompanying consolidated balance sheets of Farmstead 
Telephone Group, Inc. (the "Company") as of December 31, 2003 and 2002, and 
the related consolidated statements of operations, changes in stockholders' 
equity and cash flows for the years then ended. These consolidated 
financial statements are the responsibility of the Company's management. 
Our responsibility is to express an opinion on these consolidated financial 
statements based on our audits. 

We conducted our audits in accordance with auditing standards generally 
accepted in the United States of America. Those standards require that we 
plan and perform the audits to obtain reasonable assurance about whether the 
consolidated financial statements are free of material misstatement. An audit 
includes examining, on a test basis, evidence supporting the amounts and 
disclosures in the consolidated financial statements. An audit also includes 
assessing the accounting principles used and significant estimates made by 
management, as well as evaluating the overall consolidated financial 
statement presentation. We believe that our audits provide a reasonable basis 
for our opinion.

In our opinion, the consolidated financial statements referred to above 
present fairly, in all material respects, the financial position of Farmstead 
Telephone Group, Inc. as of December 31, 2003 and 2002, and the results of 
their operations and their cash flows for the year then ended in conformity 
with accounting principles generally accepted in the United States of 
America. 



/S/ CARLIN, CHARRON & ROSEN, LLP
Glastonbury, Connecticut
February 27, 2004


  22


                        INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of 
Farmstead Telephone Group, Inc.

We have audited the accompanying consolidated statements of operations, 
changes in stockholders' equity and cash flows of Farmstead Telephone 
Group, Inc. and subsidiaries (the "Company") for the year ended December 31, 
2001. These consolidated financial statements are the responsibility of the 
Company's management. Our responsibility is to express an opinion on these 
consolidated financial statements based on our audit. 

We conducted our audit in accordance with U.S. generally accepted auditing 
standards. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the consolidated statements of 
operations, changes in stockholders' equity and cash flows are free of 
material misstatement. An audit includes examining, on a test basis, evidence 
supporting the amounts and disclosures in the consolidated statements of 
operations, changes in stockholders' equity and cash flows. An audit also 
includes assessing the accounting principles used and significant estimates 
made by management, as well as evaluating the overall presentation of the 
consolidated statements of operations, changes in stockholders' equity and 
cash flows. We believe that our audit of the consolidated statements of 
operations, changes in stockholders' equity and cash flows provides a 
reasonable basis for our opinion.

In our opinion, the consolidated statements of operations, changes in 
stockholders' equity and cash flows referred to above present fairly, in all 
material respects, the results of operations and cash flows of Farmstead 
Telephone Group, Inc. and subsidiaries for the year ended December 31, 2001 
in conformity with U.S. generally accepted accounting principles. 



/S/ DISANTO BERTOLINE & COMPANY, P.C.
Glastonbury, Connecticut
February 21, 2002


  23


                       FARMSTEAD TELEPHONE GROUP, INC.
                         CONSOLIDATED BALANCE SHEETS
                         December 31, 2003 and 2002




(In thousands, except share amounts)                                       2003        2002
-------------------------------------------------------------------------------------------

                                                                              
ASSETS
Current assets:
  Cash and cash equivalents                                             $   827     $   994
  Accounts receivable, net (Note 3)                                       1,408       1,869
  Inventories, net (Note 4)                                               1,969       2,309
  Other current assets (Note 10)                                            447          69
-------------------------------------------------------------------------------------------
Total Current Assets                                                      4,651       5,241
-------------------------------------------------------------------------------------------
Property and equipment, net (Note 5)                                        313         394
Other assets (Note 12)                                                      327         238
-------------------------------------------------------------------------------------------
Total Assets                                                            $ 5,291     $ 5,873
===========================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                      $ 1,248     $ 1,111
  Accrued expenses and other current liabilities (Note 7)                   274         385
-------------------------------------------------------------------------------------------
Total Current Liabilities                                                 1,522       1,496
-------------------------------------------------------------------------------------------
Other liabilities (Note 12)                                                 478         348
-------------------------------------------------------------------------------------------
Total Liabilities                                                         2,000       1,844
-------------------------------------------------------------------------------------------

Commitments and contingencies (Note 10)

Stockholders' Equity:
  Preferred stock, $0.001 par value; 2,000,000 shares
   authorized; no shares issued and outstanding                               -           -
  Common stock, $0.001 par value; 30,000,000 shares
   authorized; 3,311,601 and 3,298,958 shares issued and outstanding
   at December 31, 2003 and 2002, respectively                                3           3
  Additional paid-in capital                                             12,316      12,313
  Accumulated deficit                                                    (8,996)     (8,287)
  Accumulated other comprehensive loss                                      (32)          -
-------------------------------------------------------------------------------------------
Total Stockholders' Equity                                                3,291       4,029
-------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity                              $ 5,291     $ 5,873
===========================================================================================


        See accompanying notes to consolidated financial statements.


  24


                       FARMSTEAD TELEPHONE GROUP, INC.
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                Years Ended December 31, 2003, 2002 and 2001




(In thousands, except per share amounts)                           2003        2002        2001
-----------------------------------------------------------------------------------------------

                                                                               
Revenues:
Equipment                                                       $12,929     $17,321     $30,856
Services and other revenue                                        1,751       1,829       2,483
-----------------------------------------------------------------------------------------------
Net revenues                                                     14,680      19,150      33,339
-----------------------------------------------------------------------------------------------

Cost of revenues:
Equipment                                                         8,836      13,021      23,226
Services and other revenue                                        1,131       1,098       1,707
Other cost of revenues                                              827       1,408       1,748
-----------------------------------------------------------------------------------------------
Total cost of revenues                                           10,794      15,527      26,681
-----------------------------------------------------------------------------------------------
Gross profit                                                      3,886       3,623       6,658
Selling, general and administrative expenses                      4,561       5,753       8,119
-----------------------------------------------------------------------------------------------
Operating loss                                                     (675)     (2,130)     (1,461)
Interest expense                                                    (28)        (24)       (144)
Other income                                                          7          97          42
-----------------------------------------------------------------------------------------------
Loss before income taxes and minority interest
 in income of subsidiary                                           (696)     (2,057)     (1,563)
Provision for income taxes                                           13         473          17
-----------------------------------------------------------------------------------------------
Loss before minority interest in income of subsidiary              (709)     (2,530)     (1,580)
Minority interest in income of subsidiary                             -           -         128
-----------------------------------------------------------------------------------------------
Net loss                                                        $  (709)    $(2,530)    $(1,708)
===============================================================================================

Basic and diluted net loss per common share                     $  (.21)    $  (.77)    $  (.52)

Basic and diluted weighted average common shares outstanding      3,305       3,289       3,272
-----------------------------------------------------------------------------------------------


                       FARMSTEAD TELEPHONE GROUP, INC.
                     CONSOLIDATED STATEMENTS OF CHANGES
                           IN STOCKHOLDERS' EQUITY
                Years Ended December 31, 2003, 2002, and 2001




                                                                                    Accumulated
                                       Common Stock      Additional     Accum-            other
                                     ----------------       Paid-in     ulated    comprehensive
(In thousands)                       Shares    Amount       Capital    Deficit             loss      Total
----------------------------------------------------------------------------------------------------------

                                                                                  
Balance at December 31, 2000          3,272        $3       $12,248    $(4,049)            $  -     $8,202
Net loss                                  -         -             -     (1,708)               -     (1,708)
Compensatory stock options issued         -         -            37          -                -         37
----------------------------------------------------------------------------------------------------------
Balance at December 31, 2001          3,272         3        12,285     (5,757)               -      6,531
Net loss                                  -         -             -     (2,530)               -     (2,530)
Compensatory stock options issued         -         -            15          -                -         15
Issuance of common stock                 26         -            13          -                -         13
----------------------------------------------------------------------------------------------------------
Balance at December 31, 2002          3,298         3        12,313     (8,287)               -      4,029
Net loss                                  -         -             -       (709)               -       (709)
Pension liability adjustment              -         -             -          -              (32)       (32)
Comprehensive loss                        -         -             -          -                -       (741)
Issuance of common stock                 13         -             3          -                           3
----------------------------------------------------------------------------------------------------------
Balance at December 31, 2003          3,311        $3       $12,316    $(8,996)            $(32)    $3,291
==========================================================================================================


        See accompanying notes to consolidated financial statements.


  25


                       FARMSTEAD TELEPHONE GROUP, INC.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                Years Ended December 31, 2003, 2002 and 2001




(In thousands)                                                            2003        2002        2001
------------------------------------------------------------------------------------------------------

                                                                                      
Operating Activities:
Net loss                                                                 $(709)    $(2,530)    $(1,708)
Adjustments to reconcile net loss to net cash flows
 (used in) provided by operating activities:
  Provision for (reversal of) doubtful accounts receivable                  75         (33)        104
  Provision for losses on inventories                                       28         143       1,443
  Depreciation and amortization                                            164         215         257
  Provision for impairment of goodwill                                       -         101           -
  Minority interest in income of subsidiary                                  -           -         128
  Deferred income taxes                                                      -         455           -
  Value of compensatory stock options issued                                 -          15          37
Changes in operating assets and liabilities:
  Decrease in accounts receivable                                          386       1,297       3,290
  Decrease in inventories                                                  312       1,975       1,311
  (Increase) decrease in other assets                                     (467)         36         (18)
  Increase (decrease) in accounts payable                                  137      (1,683)       (995)
  Decrease in accrued expenses and other liabilities                       (13)        (95)       (848)
------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities                        (87)       (104)      3,001
------------------------------------------------------------------------------------------------------
Investing Activities:
Purchases of property and equipment                                        (83)       (104)       (130)
Acquisition of InfiNet                                                       -        (153)          -
------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                      (83)       (257)       (130)
------------------------------------------------------------------------------------------------------
Financing Activities:
Repayments under revolving credit lines                                      -           -      (1,689)
Repayments of capital lease obligation                                       -         (37)       (102)
Capital (distribution to) contribution from minority interest partner        -        (100)         25
Proceeds from issuance of common stock                                       3          13           -
------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                          3        (124)     (1,766)
------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents                      (167)       (485)      1,105
Cash and cash equivalents at beginning of year                             994       1,479         374
------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                 $ 827     $   994     $ 1,479

Supplemental disclosure of cash flow information:
Cash paid during the year for:
  Interest                                                               $  26     $    25     $   155
  Income taxes                                                               5          16          87
Non-cash Items:
  Increase in accrued benefit obligation recorded in
   Stockholders' equity                                                  $  32     $     -     $     -


        See accompanying notes to consolidated financial statements.


  26


                       FARMSTEAD TELEPHONE GROUP, INC.
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Operations
      Farmstead Telephone Group, Inc. ("Farmstead" or the "Company") is 
principally engaged as a provider of new and used Avaya, Inc. ("Avaya") 
business telecommunications parts and complete systems. The Company 
provides used, "Classic Avaya(TM) " telecommunications equipment parts 
pursuant to an "Authorized Remarketing Supplier Program" with Avaya, and 
offers the full-line of new telecommunications parts and systems as an 
Avaya Dealer. Its products are primarily customer premises-based private 
switching systems and peripheral products, including voice processing 
systems. The Company also provides telecommunications equipment 
installation, repair and refurbishing, short-term rental, inventory 
management, and related value-added services. The Company sells its 
products and services to large and mid-size, multi-location businesses as 
well as to small businesses, government agencies, and other equipment 
resellers. During the years ended December 31, 2003, 2002 and 2001, no 
single customer accounted for more than 10% of revenues. 

Principles of Consolidation
      The consolidated financial statements presented herein consist of the 
accounts of Farmstead Telephone Group, Inc. and its wholly-owned 
subsidiaries, FTG Venture Corporation (inactive) and InfiNet Systems, LLC 
(which became wholly-owned effective January 1, 2002; prior thereto the 
Company owned a 50.1% interest). Since the Company owned greater than a 50% 
interest in, and exercised significant control over, InfiNet, the financial 
statements of InfiNet have been consolidated herein for all applicable 
years. All intercompany balances and transactions have been eliminated.

Use of Estimates
      The preparation of consolidated financial statements in conformity 
with accounting principles generally accepted in the United States of 
America requires management to make estimates and assumptions that affect 
the reported amounts of assets and liabilities, revenues and expenses and 
related disclosures in the consolidated financial statements. Actual 
results could differ from those estimates. Estimates are used in accounting 
for the allowances for uncollectible receivables, inventory obsolescence, 
warranty reserves, depreciation, taxes and contingencies, among others. 
Estimates and assumptions are reviewed periodically and the effects of 
revisions are reflected in the consolidated financial statements in the 
period they are determined to be necessary.

Revenue Recognition
      Revenue from sales of equipment is generally recognized when 
persuasive evidence of an agreement exists, shipment has occurred, the 
sales price is fixed and determinable, and collection of the resulting 
receivable is probable. Additionally, for sales of systems where 
installation services are the responsibility of the Company, revenue is 
recognized on the equipment portion of the transaction upon shipment of the 
equipment to the installation location, and on the installation portion of 
the transaction upon completion of the installation. Revenues on other 
services are recognized when the services are rendered. Reductions to 
revenues are recorded for estimated product returns, based on historical 
experience.

Cash and Cash Equivalents
      The Company considers all highly liquid investments purchased with an 
initial maturity of three months or less to be cash equivalents.

Inventories
      Inventories are stated at the lower of cost or market, and are valued 
on an average cost basis. The Company periodically assesses the valuation 
of inventory and will adjust the value for estimated excess and obsolete 
inventory based upon assumptions about current and future demand and market 
conditions.

Property and Equipment
      Property and equipment are stated at cost. Depreciation is computed 
using the straight-line method over the estimated useful lives of the 
related assets, which range from three to ten years, except for leasehold 
improvements, which are amortized over the shorter of the estimated useful 
life or the remaining lease term. Maintenance, repairs and minor renewals 
are charged to operations as incurred. When assets are retired or sold, the 
cost of the assets and


  27


the associated accumulated depreciation is removed from the accounts and 
any resulting gain or loss is recorded that period.

Stock Compensation Plans 
      The Company accounts for stock option awards granted to officers, 
directors and employees (collectively "employees") under the recognition 
and measurement principles of Accounting Principles Board Opinion No. 25, 
"Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, no 
stock-based employee compensation cost is reflected in net income, as all 
options granted to employees under these plans have been granted at no less 
than fair market value on the date of grant. The Company applies the 
disclosure only provisions of Financial Accounting Standards Board 
Statement ("SFAS") No. 123, "Accounting for Stock-based Compensation" 
("SFAS 123") and SFAS No. 148, "Accounting for Stock-Based Compensation - 
Transition and Disclosure" ("SFAS 148") for such employee stock option 
awards. The Company accounts for stock option awards granted to consultants 
under the fair value recognition provisions of SFAS 123. Under this method, 
options are valued using the Black-Scholes option pricing method, and the 
calculated option value is recorded as an expense in the financial 
statements. Had compensation cost for the Company's stock option plans been 
determined in accordance with the fair value-based method prescribed under 
SFAS 123, the Company's net loss and basic and diluted net loss per share 
would have approximated the pro forma amounts indicated below (dollars in 
thousands except per share amounts):




                                                              Year ended December 31,
                                                           -----------------------------
                                                            2003        2002        2001
      ----------------------------------------------------------------------------------

                                                                        
      Net loss, as reported                                $(709)    $(2,530)    $(1,708)
      Deduct: Total stock-based employee compensation
       expense determined under fair value based method
       for all awards, net of related tax effects            (78)       (178)       (250)
      ----------------------------------------------------------------------------------
      Pro forma net loss                                   $(787)    $(2,708)    $(1,958)
      ==================================================================================

      Loss per share:
        As reported                                        $(.21)    $  (.77)    $  (.52)
        Pro forma                                          $(.24)    $  (.82)    $  (.60)
      ==================================================================================


      The weighted-average fair value of options granted during 2003, 2002 
and 2001 was $.27, $.62, and $1.24, respectively. The fair value of stock 
options used to compute pro forma net loss and net loss per share 
disclosures was estimated on the date of grant using the Black-Scholes 
option-pricing model with the following weighted-average assumptions: 




                                                         2003     2002     2001
                                                         ----     ----     ----

                                                                  
                Dividend yield                              0%       0%      0%
                Average risk-free rate                   2.93%    3.68%    4.3%
                Expected option holding period (yrs.)     4.7      5.6     5.0


Income Taxes
      The Company provides for income taxes under the asset and liability 
method, under which deferred tax assets and liabilities are recognized for 
the future tax consequences attributable to differences between the 
financial statement carrying amounts of existing assets and liabilities and 
their respective tax basis. Deferred tax assets and liabilities are 
measured using enacted tax rates expected to apply to taxable income in the 
years in which those temporary differences are expected to be recovered or 
settled. The effect on deferred tax assets and liabilities of a change in 
tax rates is recognized in income in the period that includes the enactment 
date. Deferred tax assets are reduced by a valuation allowance if it is 
probable that a benefit will not be realized in the future. 

Net Loss Per Common Share
      Basic net loss per common share was computed by dividing net loss 
(the numerator) by the weighted average number of common shares outstanding 
(the denominator) during the period. Diluted net loss per common share was 
computed by increasing the denominator by the weighted average number of 
additional shares that could have been outstanding from securities 
convertible into common stock, such as stock options and warrants, unless 
their effect on net loss per share is antidilutive. The following table 
shows securities outstanding as of December 31 that could potentially 
dilute basic earnings or loss per common share in the future that were not 
included in the current computation of diluted loss per common share 
because to do so would have been antidilutive. The amounts presented below 
for the Warrants and the Underwriter Options and Warrants (which represent 
options to acquire


  28


Units convertible into common stock and warrants) for 2001 reflect the 
maximum common shares issuable upon their full conversion (Note 13).




      (In thousands)                         2003     2002     2001
      -------------------------------------------------------------

                                                     
      Stock Options                         1,871    1,852    1,875
      Warrants *                                -        -    2,472
      Underwriter Options and Warrants *        -        -      339
      -------------------------------------------------------------
      Total                                 1,871    1,852    4,686
      =============================================================


*  expired unexercised on June 30, 2002.



Segment Information
      In the opinion of management, the Company operates in one industry 
segment, which is the sale of telecommunications equipment.

Fair Value of Financial Instruments
      The carrying amounts of Farmstead's financial instruments, including 
cash and cash equivalents, accounts receivable, debt obligations, accounts 
payable and accrued expenses, approximate fair value due to their short 
maturities.

Reclassifications
      Certain amounts in prior years' financial statements and related 
notes have been reclassified to conform to the 2003 presentation.

2.    CASH AND CASH EQUIVALENTS

      Cash and cash equivalents totaled $826,764 and $994,437 at December 
31, 2003 and 2002, respectively. Included in each period are investments in 
a money market fund consisting of high quality short term instruments, 
principally U.S. Government and Agency issues and commercial paper. The 
carrying amounts approximate their fair value at December 31, 2003 and 
2002.

3.    ACCOUNTS RECEIVABLE, NET

      As of December 31, the components of accounts receivable were as 
follows (in thousands):




                                                 2003       2002
      ----------------------------------------------------------

                                                    
      Trade accounts receivable                $1,410     $1,893
      Less: allowance for doubtful accounts       (80)       (47)
      ----------------------------------------------------------
      Trade accounts receivable, net            1,330      1,846
      Other receivables                            78         23
      ----------------------------------------------------------
      Accounts receivable, net                 $1,408     $1,869
      ==========================================================


      Other receivables consist of commissions, rebates and other dealer 
incentives due from Avaya, Inc., and are recorded in the consolidated 
financial statements when earned.

4.    INVENTORIES, NET

      As of December 31, the components of inventories were as follows (in 
thousands):




                                                              2003       2002
      -----------------------------------------------------------------------

                                                                 
      Finished goods and spare parts                        $1,817     $2,362
      Work in process                                          450        456
      Rental equipment                                          61         53
      -----------------------------------------------------------------------
                                                             2,328      2,871
      Less: reserves for excess and obsolete inventories      (359)      (562)
      -----------------------------------------------------------------------
      Inventories, net                                      $1,969     $2,309
      =======================================================================


      Work in process inventories consists of used equipment requiring 
repair or refurbishing.


  29


5.    PROPERTY AND EQUIPMENT, NET

      As of December 31, the components of property and equipment, net were 
as follows (in thousands): 




                                                              Estimated
                                                         Useful Lives (Yrs.)      2003       2002
      -------------------------------------------------------------------------------------------

                                                                                  
      Computer and office equipment                            3 -  5           $1,174     $1,318
      Furniture and fixtures                                   5 - 10              290        290
      Leasehold improvements                                       10              190        190
      Capitalized software development costs                        5               92         44
      -------------------------------------------------------------------------------------------
                                                                                 1,746      1,842
      Less: accumulated depreciation and amortization                           (1,433)    (1,448)
      -------------------------------------------------------------------------------------------
      Property and equipment, net                                               $  313     $  394
      ===========================================================================================


      The Company has capitalized software development costs incurred by 
subcontract programmers in the development of on-line product catalogs and 
ordering processes. Depreciation and amortization expense was $164,009, 
$215,294 and $256,797 for the years ended December 31, 2003, 2002 and 2001, 
respectively.

6.    DEBT OBLIGATIONS

      As of December 31, 2002 the Company had a $500,000 revolving credit 
facility with Wachovia Bank, National Association ("Wachovia Facility") 
that was scheduled to expire February 28, 2003.  On February 19, 2003 the 
Company entered into a one-year, $1.5 million revolving loan agreement (the 
"BACC Agreement") with Business Alliance Capital Corporation ("BACC"), 
replacing the Wachovia Facility. Under the terms of the BACC Agreement, 
borrowings are advanced at 75% of eligible accounts receivable, as defined 
(primarily receivables that are less than 90 days old and, in the case of 
system sales, the receivable does not become "eligible" until the system 
has been installed), and at 25% of the value of eligible inventory, as 
defined (primarily inventory that was purchased pursuant to a firm customer 
order), provided that the amount advanced against eligible inventory shall 
not exceed $200,000 or 30% of all outstanding advances under the BACC 
Agreement. Interest is charged at the per annum rate of one and one-half 
percentage points (1.5%) above the prime rate, but not less than 5.75%, 
subject to a minimum interest charge based on an average daily loan balance 
of $250,000 regardless of the actual average loan balance. Under the BACC 
Agreement, the Company is charged an annual facility fee of 1% of the 
facility and a monthly servicing fee equal to .25% of the average 
outstanding loan balance, subject to a minimum average daily loan balance 
of $250,000. As additional security to BACC, the Company issued a $300,000 
standby letter of credit in favor of BACC, secured by cash, which can be 
drawn upon 90 days after an event of default. The BACC Agreement restricts 
the Company from the payment of dividends and limits capital expenditures 
during the term of the agreement to $150,000, without the consent of BACC. 
The BACC Agreement contains no specific financial covenants however, it 
defines certain circumstances under which the agreement can be declared in 
default and subject to termination, including among others if (i) there is 
a material adverse change in the Company's business or financial condition; 
(ii) an insolvency proceeding is commenced; (iii) the Company defaults on 
any of its material agreements with third parties; (iv) the Company fails 
to comply with the terms, representations and conditions of the agreement, 
and (v) there are material liens or attachments levied against the 
Company's assets. In the event the BACC Agreement is terminated prior to 
its expiration date, the Company shall pay a fee in an amount equal to 4% 
of the advance limit. 

      On February 19, 2004, the BACC Agreement was extended for an 
additional one-year term with the following modifications: (i) the advance 
limit was increased to $1.7 million; and (ii) the cap on inventory advances 
was increased to $400,000.

      As of December 31, 2003, there were no borrowings under the BACC 
credit facility, and based upon borrowing formulas, the Company had 
$727,000 in borrowing availability. The average and highest amounts 
borrowed during the year ended December 31, 2003 were approximately 
$250,000 and $967,000, respectively. 


  30


7.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

      As of December 31, the components of accrued expenses and other 
current liabilities were as follows (in thousands):




                                                        2003    2002
      --------------------------------------------------------------

                                                          
      Salaries, commissions and benefits                $120    $241
      License fees                                       102      24
      Other                                               52     120
      --------------------------------------------------------------
      Accrued expenses and other current liabilities    $274    $385
      ==============================================================


8.    STOCK OPTIONS

      On April 3, 2002, the Board of Directors adopted the Farmstead 
Telephone Group, Inc. 2002 Stock Option Plan (the "2002 Plan"), which was 
approved by stockholders at the June 13, 2002 Annual Meeting of 
Stockholders. The 2002 Plan replaced the 1992 Stock Option Plan that 
terminated in May 2002. Options previously granted under the 1992 Plan, of 
which there are 1,708,206 options outstanding at December 31, 2003, may 
continue to be exercised in accordance with the terms of the individual 
grants. The 2002 Plan permits the granting of options to employees, 
directors and consultants of the Company, which shall be either incentive 
stock options ("ISOs") as defined under Section 422 of the Internal Revenue 
Code, or non-qualified stock options ("NSOs"). ISOs may be granted at no 
less than market value at the time of grant, with a maximum term of ten 
years except, for a 10% or more stockholder, the exercise price shall not 
be less than 110% of market value, with a maximum term of five years. NSOs 
may be granted at no less than 50% of market value at the time of granting, 
with a maximum term of 10 years. Any option granted pursuant to this Plan 
which for any reason fails to qualify as an ISO shall be deemed to have 
been granted as an option not qualified under Section 422 of the Code. The 
maximum number of shares issuable under the 2002 Plan, which expires April 
3, 2012, are 1,300,000, of which there were162,500 options outstanding at 
December 31, 2003. Options currently granted expire on various dates 
through 2013. A summary of stock option transactions for each of the three 
years in the period ended December 31, 2003 is as follows:



                                                                        Weighted
                                                                         Average
                                             Number         Exercise    Exercise
                                          of Shares      Price Range       Price
      --------------------------------------------------------------------------

                                                                  
      Outstanding at December 31, 2000    1,951,036    $1.12 - 11.80       $1.92
      Granted                               379,300      .68 -  2.04        1.53
      Exercised                                   -               -            -
      Canceled or expired                  (455,530)    1.12 -  3.12        1.65
      --------------------------------------------------------------------------
      Outstanding at December 31, 2001    1,874,806    $ .68 - 11.80       $1.91
      Granted                               254,500      .29 -  1.50         .79
      Exercised                                   -                -           -
      Canceled or expired                  (277,000)     .68 -  2.04        1.53
      --------------------------------------------------------------------------
      Outstanding at December 31, 2002    1,852,306      .29 - 11.80        1.81
      Granted                               101,500      .28 -   .79         .35
      Exercised                                   -                -           -
      Canceled or expired                   (83,100)     .28 - 11.80        1.78
      --------------------------------------------------------------------------
      Outstanding at December 31, 2003    1,870,706    $ .28 -  7.30       $1.73
      ==========================================================================
      As of December 31, 2003:
        Exercisable                       1,672,456    $ .28 -  7.30       $1.84
        Available for future grant        1,137,500



  31


      The following summarizes information about stock options outstanding 
and exercisable as of December 31, 2003: 




                                     Options Outstanding                           Options Exercisable
                   -------------------------------------------------------    -----------------------------
                                       Weighted Avg.
       Range of       Number             Remaining           Weighted Avg.       Number       Weighted Avg.
Exercise Prices    Outstanding    Contractual Life (Yrs)    Exercise Price    Exercisable    Exercise Price
---------------    -----------    ----------------------    --------------    -----------    --------------

                                                                                   
   $ .28 - 1.00        221,500              8.6                  $ .59           109,000          $ .65
   $1.01 - 1.50        262,150              7.3                   1.28           184,400           1.35
   $1.51 - 2.00      1,366,556              4.0                   1.96         1,358,556           1.96
   $2.01 - 7.30         20,500              2.9                   4.75            20,500           4.75
   --------------------------------------------------------------------------------------------------------
     Total           1,870,706              5.0                  $1.73         1,672,456          $1.84
   ========================================================================================================


9.    INFINET SYSTEMS, LLC

      Effective February 1, 2001, the Company entered into a joint venture 
agreement with TriNet Business Trust ("TriNET"), forming a limited 
liability corporation operating under the name of InfiNet Systems, LLC 
("InfiNet"). Under the agreement, the Company had a 50.1% ownership 
interest, and TriNET had a 49.9% ownership interest. With operations based 
in East Hartford, CT, InfiNet became an Avaya dealer, authorized to sell 
new Avaya telecommunications systems primarily to customers within the 
State of Connecticut and various counties in the State of New York. 

      Effective January 1, 2002, the Company acquired TriNET's 49.9% 
ownership interest in InfiNet for an aggregate cash purchase price of 
$153,334. The $100,512 excess of the purchase price over the fair value of 
the net assets acquired was initially allocated to goodwill, in accordance 
with SFAS 142. Due to the downsizing of InfiNet's operating activities 
during 2002, which included the reduction of its entire workforce and a 
business decision to fulfill systems sales orders directly through 
Farmstead, the entire $100,512 balance of goodwill was written off as an 
operating expense in December 2002. 

      The following pro forma information presents the Company's 
consolidated results of operations for the year ended December 31, 2001 as 
if the acquisition had been completed as of the beginning of that year. The 
consolidated results of operations for the year ended December 31, 2002 
include the effects of the acquisition from January 1, 2002.




                                                          Year ended
                                                      December 31, 2001
                                                   ------------------------
      (In thousands, except per share data)        As Reported    Pro forma
      ---------------------------------------------------------------------

                                                              
      Revenues                                         $33,339      $33,339
      Loss before minority interest in
       income of subsidiary                             (1,580)      (1,580)
      Minority interest in income of subsidiary            128            -
      ---------------------------------------------------------------------
      Net loss                                         $(1,708)     $(1,580)

      Loss per share: basic                            $  (.52)     $  (.48)
                      diluted                          $  (.52)     $  (.48)
      =====================================================================


10.   LEASES AND OTHER COMMITMENTS AND CONTINGENCIES

      Leases: As of December 31, 2003, the Company occupied two buildings 
in East Hartford, CT, aggregating 49,897 square feet of office and 
warehouse space under lease contracts expiring December 31, 2004. The 
leases contain two, three-year renewal options. The Company also leases 
1,700 square feet of office space in New York, NY under a non-cancelable 
lease expiring March 31, 2005. This lease contains one, two-year renewal 
option.


  32


      As of December 31, 2003, aggregate future minimum annual rental 
payments under the initial terms of the leases were as follows: $313,692 
for 2004 and $14,250 for 2005. Rent expense was $313,692 in 2003, $285,946 
in 2002 and $250,146 in 2001.

      Employment Agreement: The Company has an employment agreement with 
the Chief Executive Officer ("CEO") dated January 1, 1998 and as amended 
August 1, 2001, January 1, 2003 and January 1, 2004 (the "Agreement"). 
Under the Agreement, the CEO will be employed on a full-time basis until 
December 31, 2004 (the "Active Period") at a base salary of $160,000. 
Commencing January 1, 2005, the CEO will be employed on a limited basis for 
a five-year period expiring December 31, 2009 (the "Limited Period"). 
During each year of the Limited Period, the CEO will be paid a base salary 
equal to one-third of the base salary rate in effect at the time of 
commencement of the Limited Period, but not less than $100,000, as 
consideration for up to fifty days of active service per year. In addition, 
during the first year of the Limited Period, the CEO will receive an 
additional payment of $142,423. The CEO will also be eligible for an annual 
bonus of up to 50% of base salary during the term of the Agreement. The 
Agreement provides severance pay should the CEO terminate the Agreement for 
"good cause", as defined, or should the Company terminate the Agreement 
without cause, or in the event of a change in control of the Company, as 
defined. During the Active Period, severance pay would amount to three 
times (i) the amount of the then-current base pay (deemed to be $300,000 
for purposes of severance pay calculations), plus (ii) the average bonus 
paid during the three most recent calendar years. During the Limited 
Period, severance pay will equal the total amount of base salary that would 
have been due for the time remaining in the Limited Period. The CEO will 
not be entitled to any severance or other compensation during the Active 
Period or Limited Period if he voluntarily terminates his employment or if 
the Company terminates the Agreement "for cause", as defined.

      License Fees: Under a license agreement with Avaya, the Company is 
required to pay fees to Avaya based upon a percentage (currently 6.5%) of 
the sales price of Classic Avaya(TM) products sold by the Company. The 
Company is also required to pay fees to Avaya based upon a percentage 
(currently 15%) of the sales price of Classic Avaya(TM) products sold 
through the Company's call center. The Company recorded in cost of revenues 
approximately $323,000, $507,000 and $1,341,000 of fee expense in 2003, 
2002 and 2001, respectively. 

      Letter of Credit: In connection with the Company's revolving credit 
agreement with BACC, the Company issued a $300,000 irrevocable standby 
letter of credit ("LC") in favor of BACC. The LC can be drawn upon by BACC 
to satisfy any outstanding obligations under the Company's loan agreement 
ninety days after an event of default. The LC is secured by cash, and since 
this cash is restricted from use by the Company during the term of the LC, 
it has been classified under other current assets in the consolidated 
balance sheet at December 31, 2003.

11.   RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT

      In December 2003, the Financial Accounting Standards Board ("FASB") 
issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions 
and Other Postretirement Benefits, an Amendment of FASB Statements No. 87, 
88 and 106" ("SFAS No. 132"). SFAS No. 132 requires, for defined benefit 
pension plans and other defined postretirement benefit plans, additional 
disclosures regarding plan assets, investment strategy, measurement date, 
plan obligations, cash flows and components of net periodic benefit cost, 
effective upon issuance. The Company adopted the disclosure requirements 
under SFAS 132 for the year ended December 31, 2003. See Note 12 of the 
Notes to Consolidated Financial Statements included herein.

12.   EMPLOYEE BENEFIT PLANS

      The Company maintains a Supplemental Executive Retirement Plan 
("SERP") for the benefit of its CEO. The SERP is a defined benefit plan, 
structured to provide the CEO with an annual retirement benefit, payable 
over 15 years beginning at age 65, in an amount equal to one-third of the 
CEO's average final three-year salary, however in no event less than 
$100,000 per year. The Company used the Projected Unit Credit Method in 
determining the amount of benefit obligation expense to accrue each year. 
During 2002, the Company calculated the amount of benefit obligation 
expense using a 7% interest rate assumption. During 2003, the interest rate 
assumption was lowered to 6.25%, resulting in the recognition of an 
actuarial loss of $31,906 which will be amortized to expense over a four-
year period beginning 2004. The amount of the unrecognized actuarial loss 
as of December 31, 2003 has been recorded in Accumulated Other 
Comprehensive Loss as a component of Stockholders' Equity.


  33


      The components of the net periodic benefit cost included in the 
results of operations for the three years ended December 31, 2003 are set 
forth as follows (in thousands):




                                 2003    2002    2001
                -------------------------------------

                                         
                Service cost      $69     $65     $61
                Interest cost      29      23      17
                -------------------------------------
                Net expense       $98     $88     $78
                =====================================


      The following information summarizes activity in the SERP for the two 
years ended December 31, 2003 (in thousands): 




                                                                       2003      2002
      -------------------------------------------------------------------------------

                                                                          
      Changes in Benefit Obligation
        Benefit obligation at beginning of year                       $ 348     $ 260
        Service cost                                                     69        65
        Interest cost                                                    29        23
        Actuarial loss                                                   32         -
      -------------------------------------------------------------------------------
        Benefit obligation at end of year                             $ 478     $ 348
      ===============================================================================

      Fair Value of Plan Assets (1)                                   $   -     $   -
      ===============================================================================

      Reconciliation of Funded Status
        Funded status                                                 $(478)    $(348)
        Unrecognized actuarial loss                                      32         -
      -------------------------------------------------------------------------------
        Accrued net periodic pension cost                             $(446)    $(348)
      ===============================================================================

      Amounts Recognized in the Consolidated Balance Sheets
        Accrued benefit obligation                                    $(478)    $(348)
        Accumulated other comprehensive loss                             32         -
      -------------------------------------------------------------------------------
        Net liability reflected in the consolidated balance sheets    $(446)    $(348)
      ===============================================================================


  The SERP is an unfunded plan; however, it is being informally funded 
      through a Company-owned life insurance policy with an annual premium 
      payment of $50,000 for ten years. The cash surrender value of this 
      policy was $259,882 and $151,584 at December 31, 2003 and 2002, 
      respectively.



      The benefits expected to be paid under the SERP in each of the next 
five fiscal years, and in the aggregate for the five fiscal years 
thereafter are as follows: $0 (2004 - 2006), $100,000 (2007), $100,000 
(2008) and $500,000 (2009 - 2013).

      The Company has for the past several years provided a split dollar 
life insurance program for certain officers as a means of providing a life 
insurance benefit and a future retirement benefit. As of December 31, 2003 
the split dollar insurance program included only the Chief Financial 
Officer. Under this plan, the Company may make discretionary payments of up 
to 10% of the participant's annual compensation. Payments aggregated $0 in 
2003, $19,259 in 2002 and $49,506 in 2001. The cash surrender value of a 
participant's account vests with the participant over a ten-year period, 
based on years of service, with each participant 100% vested upon the later 
of attainment of age 65 or the completion of five years of service with the 
Company. As of December 31, 2003, $21,136 was vested. 

      Included in other assets at December 31, 2003 and 2002 is $302,156 
and $212,644, respectively, representing the aggregate cash surrender value 
of the insurance policies underlying the Company's SERP and split dollar 
insurance programs.

      Employee Stock Purchase Plan ("ESPP"). In September 2001, the Company 
established an ESPP, following stockholder approval, under which an initial 
250,000 shares of common stock could be sold to employees. The shares 
issuable pursuant to the ESPP were registered on Form S-8 (No. 333-69290) 
dated September 11, 2001. Beginning in 2003, an annual increase of the 
lesser of (i) 100,000 shares of common stock, (ii) 2% of the Company's 
issued and outstanding capital stock on January 1 of such year, and (iii) 
an amount determined by the Company's board of directors, can be added to 
the ESPP. No shares were added to the ESPP in 2003. The ESPP 


  34


covers all employees working more than 20 hours per week, excluding 
employees owning 5% or more of the combined voting power of all classes of 
shares of the Company or its subsidiary corporations. The ESPP provides for 
six-month "offering periods" beginning September 14, 2001, with a final 
offering period beginning March 1, 2011, and during such periods employees 
can participate through payroll deductions of up to 10% of their earnings. 
At the end of each offering period, participating employees are able to 
purchase stock at a 15% discount to the market price of Company stock at 
either the beginning or end of the offering period, whichever is lower. 
Shares purchased through the ESPP cannot exceed $25,000 in fair market 
value per person per calendar year. The shares purchased are allocated to 
an account established for each participant at a brokerage firm. During the 
two years ended December 31, 2003, the Company issued 12,643 and 26,379 
shares, respectively, of Common Stock. 

13.   STOCKHOLDERS' EQUITY

      During the two years ended December 31, 2003, the Company issued 
12,643 and 26,379 shares, respectively, of Common Stock under its 2001 
Employee Stock Purchase Plan (see Note 12).

      On June 30, 2002, the following securities expired unexercised: all 
1,137,923 of the Class A Redeemable Common Stock Purchase warrants ("Class 
A Warrants"); all 1,137,923 of the Class B Redeemable Common Stock Purchase 
warrants ("Class B Warrants"); all 183,579 of the Warrants issued in 
connection with the Company's 1987 initial public offering ("IPO 
Warrants"); all 33,136 of the Underwriter Options to purchase 33,136 Units, 
issued in connection with the Company's 1987 initial public offering 
("Underwriter Options"); all 89,948 Representative Warrants to purchase 
89,948 Units ("Representative Warrants") issued in 1996 to the Company's 
underwriter in connection with a secondary offering of securities. 

14.   CONCENTRATIONS OF CREDIT RISK

      The principal financial instruments subject to credit risk are as 
follows:

      Accounts Receivable: The Company extends credit to its customers in 
the normal course of business. As of December 31, 2003, two customers 
accounted for 15% and 10% of accounts receivable. As of December 31, 2002, 
one customer accounted for 11% of accounts receivable. Although the Company 
is subject to changes in economic conditions which may impact its overall 
credit risk, the Company sells to a wide variety of customers, and does not 
focus on any particular industry sector. The Company establishes its 
allowance for doubtful accounts based upon factors surrounding the credit 
risk of specific customers, historical trends and experience, and other 
information available to it. Management considers the Company's credit risk 
to be satisfactorily diversified and believes that its allowance for 
doubtful accounts is adequate to absorb estimated losses as of December 31, 
2003. During the three years ended December 31, 2003, no single customer 
accounted for more than 10% of revenues.

      Cash and Cash Equivalents: The Company maintains cash and cash 
equivalents with various financial institutions. Cash equivalents consist 
of investments in a money market fund consisting of high quality short term 
instruments, principally U.S. Government and Agency issues and commercial 
paper, and the fair value approximates the carrying value at each reporting 
period. At times such amounts may exceed insurance limits.

      Cash Surrender Value of Company-owned insurance policies: The Company 
invests the cash surrender value of its Company-owned insurance policies in 
various investment portfolios administered by the respective insurance 
companies, which include investments in debt and equity securities. The 
cash surrender value is therefore subject to market risk and market 
fluctuations. The Company believes that this risk is moderated by the 
diversity of the underlying investments. As of December 31, 2003, the cash 
surrender value of these policies amounted to $302,156. 

15.   RELATED PARTY TRANSACTIONS

      During 2002 and 2001, the Company engaged PFS Venture Group LLC 
("PFS") to assist the Company with its strategic reorganization 
initiatives. PFS provided business-consulting services to small to mid-
sized companies. Mr. Bruce S. Phillips who, in June 2001, became a director 
of the Company, and remained a director until his death in August 2002, was 
the principal owner of PFS. During 2002 PFS earned $51,000 in fees, and Mr. 
Phillips received 11,250 options to acquire common stock at exercise prices 
of $1.00 to $1.50 per share. During 2001, PFS earned $84,000 in fees, and 
Mr. Phillips received 21,000 stock options at an exercise price of $1.50 
per share. 


  35


16.   INCOME TAXES

      The following table provides a summary of the current and deferred 
components of the provision for federal and state income taxes attributable 
to earnings before income taxes for the three years ended December 31 (in 
thousands):




                                     2003    2002    2001
      ---------------------------------------------------

                                             
      Federal income tax expense:
        Current                       $ -    $  -     $ -
        Deferred                        -     436       -
      State income tax expense:
        Current                        13      18      17
        Deferred                        -      19       -
      ---------------------------------------------------
      Provision for income taxes      $13    $473     $17
      ===================================================


      Differences between the tax expense reflected in the consolidated 
financial statements and the amounts calculated at the federal statutory 
income tax rate of 34% for the three years ended December 31 are as follows 
(in thousands):




                                                               2003       2002      2001
      ----------------------------------------------------------------------------------
                                                           
      Income tax benefit at statutory rate                    $(237)    $ (699)    $(581)
      Increase (reduction) in income taxes
       resulting from:
      State and local income taxes, net of federal
       income tax benefit                                        (9)       (12)      (11)
      Non-deductible life insurance                              (8)        30        25
      Non-deductible meals and entertainment                      7         17        19
      Change in valuation allowance, net of temporary
       differences for which benefit has not been provided      260      1,137       565
      ----------------------------------------------------------------------------------
      Provision for income taxes                              $  13     $  473     $  17
      ==================================================================================


      The tax effects of temporary differences that give rise to 
significant portions of deferred tax assets and liabilities at December 31, 
2003 and 2002 are as follows (in thousands):




                                                       2003        2002
      -----------------------------------------------------------------

                                                          
      Deferred tax assets:
      Allowance for doubtful accounts               $    27     $    16
      Inventory allowances                              122         190
      Accrued pension benefit obligation                152         118
      Property and equipment                             34          31
      Other                                              20          30
      Net operating loss and other carryforwards      2,192       1,831
      -----------------------------------------------------------------
      Total gross deferred tax assets                 2,547       2,216
      Less: valuation allowance                      (2,547)     (2,216)
      -----------------------------------------------------------------
      Net deferred tax assets                       $     -     $     -
      =================================================================


      The Company has federal net operating loss carryforwards of 
approximately $5,469,000 that expire through 2024. In 2003 and 2002, the 
valuation allowance was increased by an amount that fully offset the 
Company's deferred tax assets as of December 31, 2003 and 2002, 
respectively. Management believes that the present valuation allowance is 
prudent due to the net losses sustained during the three years ended 
December 31, 2003 and the unpredictability of future earnings.


  36


17. QUARTERLY FINANCIAL DATA (UNAUDITED)

      Summarized quarterly financial data for 2003 and 2002 is as follows 
(in thousands except earnings (loss) per share):




                                                                 Quarter
---------------------------------------------------------------------------------------
2003                                             First     Second      Third     Fourth(a)
---------------------------------------------------------------------------------------

                                                                     
Revenues                                        $4,439     $3,811     $3,237     $3,193
Gross Profit                                     1,136        975        946        829
Operating loss                                    (139)      (119)      (134)      (283)
Net loss                                          (145)      (132)      (149)      (283)
Basic and diluted:
  Loss per common share                           (.04)      (.04)      (.05)      (.09)
  Weighted average common shares outstanding     3,299      3,305      3,306      3,311
=======================================================================================



                                                                 Quarter
---------------------------------------------------------------------------------------
2002                                             First     Second      Third     Fourth(b)
---------------------------------------------------------------------------------------

                                                                     
Revenues                                        $6,027     $4,764     $4,766     $3,593
Gross Profit                                     1,306        755      1,065        497
Operating loss                                    (354)      (662)      (287)      (827)
Net loss                                          (301)      (660)      (284)    (1,285)
Basic and diluted:
  Loss per common share                           (.09)      (.20)      (.09)      (.39)
  Weighted average common shares outstanding     3,281      3,289      3,290      3,299
=======================================================================================


(a)   Includes a $93,000 credit to income from a reduction in the Company's 
      reserves for sales and product warranty returns, and a $41,000 charge 
      to bad debt expense.
(b)   Includes a $101,000 write-off of goodwill, $333,000 of inventory 
      valuation charges, and a $455,000 charge to increase the deferred tax 
      asset valuation allowance.




  37


INDEPENDENT AUDITORS' REPORT 


To the Board of Directors and Stockholders of 
Farmstead Telephone Group, Inc.

We have audited the consolidated financial statements of Farmstead 
Telephone Group, Inc. (the "Company") as of December 31, 2003 and 2002, and 
for the years then ended, and have issued our report thereon dated February 
27, 2004; such consolidated financial statements and report are included 
elsewhere in this Form 10-K. Our audit also includes the financial 
statement schedules of Farmstead Telephone Group, Inc., listed in Item 15. 
These financial statement schedules are the responsibility of the Company's 
management. Our responsibility is to express an opinion based on our 
audits. In our opinion, such financial statement schedules, when considered 
in relation to the basic consolidated financial statements taken as a 
whole, present fairly in all material respects the information set forth 
therein.


/S/ CARLIN, CHARRON & ROSEN, LLP
Glastonbury, Connecticut
February 27, 2004


  38


INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Farmstead Telephone Group, Inc.

We have audited the consolidated statements of operations, changes in 
stockholders' equity and cash flows of Farmstead Telephone Group, Inc. and 
subsidiaries (the "Company") for the year ended December 31, 2001, and have 
issued our report thereon dated February 21, 2002; such report is included 
elsewhere in this Form 10-K. Our audit also includes the financial 
statement schedule of Farmstead Telephone Group, Inc. and subsidiaries for 
the year ended December 31, 2001 listed in Item 15. This financial 
statement schedule is the responsibility of the Company's management. Our 
responsibility is to express an opinion based on our audit. In our opinion, 
such financial statement schedule, when considered in relation to the basic 
consolidated statements of operations, changes in stockholders' equity and 
cash flows taken as a whole, presents fairly in all material respects the 
information set forth therein.


/S/ DISANTO BERTOLINE & COMPANY, P.C.
Glastonbury, Connecticut
February 21, 2002


  39


SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
                (In thousands)




                                                                Column C- Additions
                                                          ------------------------------
                                                               (1)              (2)
                                           Column B-         Charged          Charged                     Column E-
                                           Balance at     (credited) to    (credited) to                  Balance at
                                          beginning of      costs and          other         Column D-      End of
        Column A- Description                period          expenses         accounts      Deductions      period
--------------------------------------    ------------    -------------    -------------    ----------    ----------

                                                                                               
Year 2003
---------
Allowance for doubtful accounts                 $   47           $   75                -          $ 42*       $   80
Inventory valuation reserves                       562               28                -           231*          359
Deferred tax asset valuation allowance           2,216              331**              -             -         2,547

Year 2002
---------
Allowance for doubtful accounts                 $  150           $  (33)               -          $ 70*       $   47
Inventory valuation reserves                     1,382              143                -           963*          562
Deferred tax asset valuation allowance           1,039            1,177                -             -         2,216

Year 2001
---------
Allowance for doubtful accounts                 $  244           $  104                -          $198*       $  150
Inventory valuation reserves                       935            1,443                -           996*        1,382
Deferred tax asset valuation allowance             455              584                -             -         1,039


*     Represents write-offs of inventories and uncollectible accounts 
      receivable.
**    Recorded to fully reserve for the increase in the Company's net 
      deferred tax assets.




  40


                              INDEX TO EXHIBITS

      The following documents are filed as Exhibits to this report on Form 
10-K or incorporated by reference herein. Any document incorporated by 
reference is identified by a parenthetical referencing the SEC filing which 
included such document.

      3(a)    Certificate of Incorporation [Exhibit 3(a) to the S-18 
              Registration Statement of the Company's securities declared 
              effective on April 13, 1987 (File No. 3-9556B)]
      3(b)    Certificate of Amendment of Certificate of Incorporation 
              [Exhibit 3(a) to Amendment No. 2 to SB-2 Registration 
              Statement dated July 22, 1996 (Registration No. 333-5103)]
      3(c)    Certificate of Amendment of Certificate of Incorporation of 
              Farmstead Telephone Group, Inc., dated July 10, 1991 [Exhibit 
              10.12 to the Annual Report on Form 10-K for the year ended 
              December 31, 1991]
      3(d)    Amended and Restated By-Laws [Exhibit 3(d) to the Annual 
              Report on Form 10-K for the year ended December 31, 2000]
      3(e)    Certificate of Amendment of Certificate of Incorporation of 
              Farmstead Telephone Group, Inc. dated July 9, 2001 [Exhibit 
              3(e) to the Quarterly Report on Form 10-Q for the quarter 
              ended June 30, 2001]
      4(a)    Form of Unit Warrant [ Exhibit 4(a) to the S-18 Registration 
              Statement of the Company's securities declared effective on 
              April 13, 1987 (File No. 3-9556B)]
      4(b)    Amended Form of Underwriter's Option [ Exhibit 4(b) to the 
              S-18 Registration Statement of the Company's securities 
              declared effective on April 13, 1987 (File No. 3-9556B)]
      4(c)    Resolutions adopted by Unanimous Written Consent of the 
              Company's Board Of Directors dated as of July 9, 1992 
              amending terms of Warrants and Underwriter's Options [Exhibit 
              4(a) to the Form S-3 Registration Statement of the Company's 
              securities declared effective on October 29, 1992 
              (Registration No. 33-50432)]
      4(d)    Amended 1992 Stock Option Plan [Exhibit to the Proxy 
              Statement on Schedule 14A filed April 14, 1998 (File No.
              001-12155)]
      4(e)    Form of Underwriter's Warrant Agreement (including Form of 
              Underwriter's Warrant) [Exhibit 4.2 to the SB-2 Registration 
              Statement dated June 3, 1996 (Registration No. 333-5103)]
      4(f)    Form of Warrant Certificate [Exhibit 4.1 to Amendment No. 2 
              to SB-2 Registration Statement dated July 22, 1996 
              (Registration No. 333-5103)]
      4(g)    Form of Warrant Agreement [Exhibit 4.3 to Amendment No. 2 to 
              SB-2 Registration Statement dated July 22, 1996 (Registration 
              No. 333-5103)]
      4(h)    Form of Unit Certificate [Exhibit 4.4 to Amendment No. 2 to 
              SB-2 Registration Statement dated July 22, 1996 (Registration 
              No. 333-5103)]
      4(i)    Resolutions adopted by the Company's Board of Directors June 
              18, 1998, amending terms of Warrants and Underwriter's 
              Options [Exhibit 4(I) to the Annual Report on Form 10-KSB for 
              the year ended December 31, 1998] 
      4(j)    Resolutions adopted by the Company's Board of Directors July 
              19, 2001, amending terms of warrants and Underwriter's 
              Options. [Exhibit 4(j) to the Quarterly Report on Form 10-Q 
              for the quarter ended June 30, 2001]
      4(k)    Farmstead Telephone Group, Inc. 2002 Stock Option Plan 
              [Appendix A to the Proxy Statement on Schedule 14A filed 
              April 19, 2002 for the 2002 Annual Meeting of Stockholders]    
      10(a)   Form of Underwriter's Consulting Agreement [ Exhibit 10.1 to 
              the SB-2 Registration Statement dated June 3, 1996 
              (Registration No. 333-5103)]
      10(b)   Letter of Agreement dated June 3, 1996 between Farmstead 
              Telephone Group, Inc. and Lucent Technologies, Inc. [Exhibit 
              10.2 to Amendment No. 1 to SB-2 Registration Statement dated 
              July 22, 1996 (Registration No. 333-5103)]
      10(c)   Agreement of Lease By and between Tolland Enterprises and 
              Farmstead Telephone Group, Inc., dated November 5, 1996 
              [Exhibit 10.1 to the Quarterly Report on Form 10-QSB for the 
              quarter ended September 30, 1996]
      10(d)   Employment Agreement dated as of January 1, 1998 between 
              Farmstead Telephone Group, Inc. and George J. Taylor, Jr. 
              [Exhibit 10.5 to the Annual Report on Form 10-KSB for the 
              year ended December 31, 1997]
      10(e)   Supplemental Executive Retirement Plan, effective as of 
              January 1, 1998 [Exhibit 10.6 to the Annual Report on Form 
              10-KSB for the year ended December 31, 1997]
      10(f)   ARS Dealer Agreement Between Lucent Technologies and 
              Farmstead Telephone Group, Inc. For


  41


              Business Communications Systems [Exhibit 10(s) to the Annual 
              Report on Form 10-KSB for the year ended December 31, 1998]
      10(g)   ARS License Agreement Between Lucent Technologies and 
              Farmstead Telephone Group, Inc. For Authorized Remarketing 
              Supplier Program [Exhibit 10(t) to the Annual Report on Form 
              10-KSB for the year ended December 31, 1998]
      10(h)   Rider #1 to Lease Dated November 5, 1996 By and Between 
              Tolland Enterprises ("Landlord") and Farmstead Telephone 
              Group, Inc. ("Tenant"), attached as of May 27, 1999 [Exhibit 
              10(cc) to the Annual Report on Form 10-K for the year ended 
              December 31, 1999]
      10(i)   First Amendment of Lease, dated June 30, 1999, By and Between 
              Tolland Enterprises ("Landlord") and Farmstead Telephone 
              Group, Inc. ("Tenant") [Exhibit 10(dd) to the Annual Report 
              on Form 10-K for the year ended December 31, 1999]
      10(j)   Loan Agreement, dated September 27, 2000 between First Union 
              National Bank and Farmstead Telephone Group, Inc. [Exhibit 
              10(ee) to the Quarterly Report on Form 10-Q for the quarter 
              ended September 30, 2000]
      10(k)   Promissory Note, dated September 27, 2000 between First Union 
              National Bank and Farmstead Telephone Group, Inc. [Exhibit 
              10(ff) to the Quarterly Report on Form 10-Q for the quarter 
              ended September 30, 2000]
      10(l)   Employment Agreement dated as of January 1, 2000 between 
              Farmstead Telephone Group, Inc. and Robert G. LaVigne 
              [Exhibit 10(ee) to the Annual Report on Form 10-K for the 
              year ended December 31, 2000]
      10(m)   Amendment to Lucent ARS License Agreement Between Lucent 
              Technologies Inc. and Farmstead Telephone Group, Inc., dated 
              February 2, 2001. [Exhibit 10(ff) to the Annual Report on 
              Form 10-K for the year ended December 31, 2000]
      10(n)   Amendment to Lucent ARS Dealer Agreement Between Lucent 
              Technologies Inc. and Farmstead Telephone Group, Inc., dated 
              February 2, 2001. [Exhibit 10(gg) to the Annual Report on 
              Form 10-K for the year ended December 31, 2000]
      10(o)   Farmstead Telephone Group, Inc. Employee Stock Purchase Plan 
              [Appendix B to the to the Proxy Statement on Schedule 14A 
              filed April 13, 2001 for the 2001 Annual Meeting of 
              Stockholders]
      10(p)   Limited Liability Company Agreement of InfiNet Systems LLC, 
              effective February 1, 2001 [Exhibit 10(dd) to the Annual 
              Report on Form 10-K for the year ended December 31, 2001]
      10(q)   First Modification to Loan Agreement, entered into December 
              19, 2001 [Exhibit 10(ee) to the Annual Report on Form 10-K 
              for the year ended December 31, 2001]
      10(r)   Restated First Addendum To That Certain Employment Agreement 
              Between Farmstead Telephone Group, Inc. and George J. Taylor, 
              Jr., effective August 1, 2001 [Exhibit 10(ff) to the Annual 
              Report on Form 10-K for the year ended December 31, 2001]
      10(s)   Avaya Inc. Reseller Master Terms and Conditions; Agreement 
              No. AVNERA1-060601, dated May 31, 2002 . [Exhibit 10(a) to 
              the Quarterly Report on Form 10-Q for the quarter ended June 
              30, 2002]
      10(t)   Third Modification to Loan Agreement, dated September 23, 
              2002 between Farmstead Telephone Group, Inc. and Wachovia 
              Bank, National Association (f/k/a First Union National Bank). 
              [Exhibit 10(a) to the Quarterly Report on Form 10-Q for the 
              quarter ended September 30, 2002]
      10(u)   Modification Number One To Promissory Note, dated October 9, 
              2002 between Farmstead Telephone Group, Inc. and Wachovia 
              Bank, National Association. [Exhibit 10(b) to the Quarterly 
              Report on Form 10-Q for the quarter ended September 30, 2002]
      10(v)   Fourth Modification to Loan Agreement, dated October 9, 2002 
              between Farmstead Telephone Group, Inc. and Wachovia Bank, 
              National Association (f/k/a First Union National Bank). 
              [Exhibit 10(c) to the Quarterly Report on Form 10-Q for the 
              quarter ended September 30, 2002]
      10(w)   Loan and Security Agreement dated February 19, 2003 by and 
              between Business Alliance Capital Corp. and Farmstead 
              Telephone Group, Inc. 2001 [Exhibit 10(v) to the Annual 
              Report on Form 10-K for the year ended December 31, 2002]
      10(x)   Revolving Credit Master Promissory Note dated February 19, 
              2003 between Business Alliance Capital Corporation and 
              Farmstead Telephone Group, Inc. [Exhibit 10(w) to the Annual 
              Report on Form 10-K for the year ended December 31, 2002]
      10(y)   Second Addendum to That Certain Employment Agreement Between 
              Farmstead Telephone Group, Inc. and George J. Taylor, Jr., 
              Dated as of January 1, 1998, as Amended by That Certain 
              Restated First Addendum Dated as of August 1, 2001[Exhibit 
              10(x) to the Annual Report on Form 10-K for the year ended 
              December 31, 2002]


  42


      10(z)   Revolving Credit Master Promissory Note dated February 19, 
              2004 between Business Alliance Capital Corporation and 
              Farmstead Telephone Group, Inc.
      10(aa)  Modification Agreement dated February 19, 2004 between 
              Business Alliance Capital Corporation and Farmstead Telephone 
              Group, Inc.
      10(bb)  Third Addendum to That Certain Employment Agreement Between 
              Farmstead Telephone Group, Inc. and George J. Taylor, Jr., 
              Dated as of January 1, 1998, as Amended by That Certain 
              Restated First Addendum Dated as of August 1, 2001and as 
              Further Amended by That Certain Second Addendum Dated as of 
              January 1, 2003
      10(cc)  Second Addendum to That Certain Employment Agreement between 
              Farmstead Telephone Group, Inc. and Robert G. LaVigne dated 
              as of January 1, 2000 as Amended by That First Addendum Dated 
              as of January 1, 2003
      10(dd)  Amendment to Reseller Master Terms and Conditions: Authorized 
              Remanufactured Supplier (ARS) Program Between Avaya Inc. and 
              Farmstead Telephone Group, Inc., dated October 28, 2003
      21      Subsidiaries 
      23(a)   Consent of DiSanto Bertoline & Company, P.C.
      23(b)   Consent of Carlin, Charron & Rosen LLP
      31.1    Certification of the Chief Executive Officer, pursuant to 
              Section 302 of the Sarbanes-Oxley Act of 2002.
      31.2    Certification of the Chief Financial Officer, pursuant to 
              Section 302 of the Sarbanes-Oxley Act of 2002.
      32.1    Certification of the Chief Executive Officer, pursuant to 
              Section 906 of the Sarbanes-Oxley Act of 2002.
      32.2    Certification of the Chief Financial Officer, pursuant to 
              Section 906 of the Sarbanes-Oxley Act of 2002.


  43