FARMSTEAD TELEPHONE GROUP INC, 10KSB, 1997-03-25

FARMSTEAD TELEPHONE GROUP INC
10KSB, 1997-03-25
ELECTRONIC PARTS & EQUIPMENT, NEC

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

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

For the fiscal year ended December 31, 1996

Commission file number 0-15938

FARMSTEAD TELEPHONE GROUP, INC.
(Name of small business issuer in its charter)

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

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

Issuer's telephone number: (860) 610-6000

Securities registered under Section 12(b) of the Exchange Act:
Common Stock, $0.001 Par Value
(Title of class)

Securities registered under Section 12(g) of the Exchange Act:
None

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year: $19,698,000

As of February 28, 1997, the aggregate market value of the Common Stock of the
registrant held by non-affiliates, based upon the last sale price of the
registrant's Common Stock on such date, was approximately $10,431,000.

As of February 28, 1997, the registrant had 3,262,329 shares of its $0.001 par
value Common Stock outstanding.

Transitional Small Business Format: Yes [ ] No [X]

<PAGE> 1

TABLE OF CONTENTS TO FORM 10-KSB

PART I

<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Item 1. Description of Business........................................ 3

Item 2. Description of Property........................................ 11

Item 3. Legal Proceedings.............................................. 11

Item 4. Submission of Matters to a Vote of Security Holders............ 11

PART II

Item 5. Market for Common Equity and Related Stockholder Matters....... 11

Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 13

Item 7. Financial Statements........................................... 18

Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures.......................................... 18

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.............. 18

Item 10. Executive Compensation......................................... 20

Item 11. Security Ownership of Certain Beneficial Owners and Management. 20

Item 12. Certain Relationships and Related Transactions................. 20

Item 13. Exhibits and Reports on Form 8-K............................... 20

SIGNATURES............................................................... 21

INDEX TO EXHIBITS........................................................ 35
</TABLE>

<PAGE> 2

PART I

Item 1. Description of Business

General

Farmstead Telephone Group, Inc. (the "Company") is engaged in the
Customer Premise Equipment ("CPE") segment of the telecommunications industry,
(1) as a secondary market reseller of used, remanufactured and/or refurbished
Lucent Technologies, Inc. ("Lucent") business telephone parts and systems, (2)
as an authorized Lucent dealer and distributor of certain new telephone system
products, and (3) as a designer, manufacturer and supplier of proprietary voice
(or "call") processing systems. The Company also provides equipment repair and
refurbishing, inventory management, and other related value-added services. The
Company sells its products and services to corporate end users, and to other
dealers and distributors. CPE refers to equipment which resides at the
customer's premises.

The Company was incorporated in Delaware in 1986 and became a public
company in May 1987 following the completion of its initial public offering. In
1994, the Company acquired certain operating assets of Cobotyx Corporation,
Inc. ("CCI"), a designer, manufacturer and supplier of voice processing
systems, and expanded its entry into this marketplace through the formation of
a voice processing products division ("Cobotyx Division").

Effective February 29, 1996, the Company purchased from AT&T Systems
Leasing Corporation, a subsidiary of AT&T Capital Corporation, certain assets
of its discontinued Asset Recovery Center ("ARC"). The assets acquired
consisted primarily of warehouse equipment, vehicles, computer and office
equipment, and inventory. Prior to its closing in January 1996, the ARC
primarily operated to service AT&T affiliates in the orderly disposition, by
way of consignment sales arrangements, of excess, overstocked and end-of-life
telecommunications, computer and data transmission equipment. The Company
concurrently formed a subsidiary corporation, Farmstead Asset Management
Services, LLC ("FAMS"), and commenced a similar operation in Piscataway, New
Jersey.

Customers and Target Markets

Secondary market telephone parts, systems and services are marketed
domestically through the Company's in-house sales staff to approximately 1,500
active customers ranging from small companies to large, multi-location
corporations, and including equipment wholesalers, dealers, distributors and
government agencies and municipalities. The Company believes its secondary
market equipment customers are generally (i) existing Lucent equipment users
that require piece parts to upgrade, expand, or maintain their existing
telephone system, (ii) cost-conscious businesses that desire to save money by
purchasing used or refurbished equipment instead of new equipment, but still
retain Lucent installation and maintenance support for these products, and
(iii) businesses that may have no current need for Lucent's latest and most
technically advanced product offerings. Businesses also look to the Company,
and to other secondary market resellers, to meet their immediate equipment
delivery requirements. The Company is also pursuing the sale of its secondary
market products internationally, such as in the People's Republic of China
("PRC"), the Republic of the Philippines, and in other countries which have
underdeveloped telecommunications systems and may have limited financial
resources. New Lucent telephone equipment is marketed in selected areas of New
England and New York state through the Company's sales staff and a network of
approximately 35 associate dealers.

The Company distributes its voice processing products domestically and
internationally to over 500 customers, primarily independent dealers and
distributors, end-users, and through arrangements with several manufacturers of
telephone systems and business equipment.

<PAGE> 3

During the two years ended December 31, 1996, no single customer
accounted for more than 5% of revenues, except for J.P. Morgan Company, Inc.,
which accounted for 8.8% in 1996 and Lucent which accounted for 5.4% in 1995.
The Company's business is not considered seasonal.

Strategy

The Company's current objective is to significantly expand its revenues
and profitability through a strategy based on:

* Domestic Expansion - The Company is seeking to expand its revenues and
customer base in the domestic secondary telephone equipment marketplace
by increasing its sales force, establishing business in other geographic
areas of the U.S. and by continuing to provide quality refurbished
products, superior customer service and support, and other value-added
services as required by its customers. The Company is also attempting to
become a more strategic partner to Lucent, by specializing in the resale
of Lucent products and through the establishment of distribution rights
to new equipment. The Company may also seek to acquire similar businesses
in other geographic areas of the U.S., as opportunities arise, in order
to increase its share of this market.

* New Call Processing Products and Services - The Company plans to continue
its expansion into this marketplace by utilizing or developing current
technologies to produce state-of-the-art products that provide basic
voice and call processing functionality while also providing flexibility
and expandability. The Company plans to adapt its technology to emerging
industry standards, and plans to provide custom computer telephone
integration ("CTI") solutions for its customers, including interactive
voice response and unified messaging products.

* International Expansion - The Company plans to continue to market its
products internationally, through sales agency relationships, and the
establishment of marketing and/or distribution agreements with
established overseas businesses in the countries that the Company has
targeted to penetrate, including the PRC, the Republic of the
Philippines, Latin America, and other countries.

Industry Background

According to reports published in 1993 and 1994 (the latest available) by
The Telecom Library, Inc., a communications industry publishing company, the
telephone equipment secondary market is one of the fastest growing sectors of
the telecommunications industry, with gross sales estimated to reach $704
million in 1994, representing an increase of 22% from $577 million in 1993. Of
total surveyed 1993 gross sales, 66% represented sales of parts (as opposed to
complete systems). In addition, sales to end-users represented 79% of total
sales. AT&T equipment comprised the largest brand name segment of the
marketplace, with 25% of sales. The 1994 report forecasted an annual growth
rate of 20% for 1995 and for 1996, and through the end of the decade, annual
growth rates were estimated to be in the thirty percentile range and higher,
driven by increases in the replacement rate of equipment in the installed base,
due to technical innovations in the equipment.

According to voice processing industry sources, the domestic market for
voice processing systems recorded aggregate end-user revenues of approximately
$2.5 billion in 1995, with approximately 97,000 systems estimated to have been
sold (up from $2.1 billion in revenues and 74,000 systems in 1994). The
marketplace is further divided into two main categories: voice messaging
equipment, in which the Company's products primarily compete, with 1995 end
user revenues of $1.6 billion ($1.3 billion in 1994), and voice response
equipment, with 1995 end user revenues of $900 million ($853 million in 1994).
Major manufacturers of voice processing systems include switch suppliers (such
as Lucent, Northern Telecom, Inc. and Rolm Co.), independent manufacturers of
proprietary systems (such as Centigram Communications Corporation and Octel
Communications Corporation),

<PAGE> 4

and independent manufacturers of personal computer ("PC") based, open
architecture systems (such as Active Voice, Inc. and Applied Voice
Technologies, Inc.). The open system, standard architecture suppliers
often buy board level technology from a few core voice technology suppliers,
and then use standard operating systems and programming languages, and PCs, to
create proprietary voice processing solutions.

CTI, which is defined as the actual hardware and software that attach to
both the telephone systems and computers, is believed by industry sources to
be moving rapidly from an important submarket of the PBX market, and evolving
into its own market, with revenues of $1.5 billion in 1995 estimated to
approach $8 billion in 1999.

The Company's Telephone Equipment Products

Product Descriptions

The Company sells used, remanufactured, refurbished and new telephone
parts and systems manufactured by Lucent. Parts sold primarily include digital
and analog telephone sets, circuit packs, and other system accessories, such as
headsets, consoles, speakerphones and paging systems. Telephone systems are
generally categorized as key systems and PBX systems. Key systems are generally
used by small businesses, and are characterized by telephones which have
multiple buttons permitting the user to select outgoing or incoming telephone
lines directly. PBXs are private telephone switching systems usually located on
a customer's premises, with an attendant console, and are designed for use by
larger businesses. Because most of the features of a PBX are stored in the
switch, and not on the telephone, a PBX can provide more features and
flexibility than a key system.

Lucent key systems sold by the Company, in both piece parts and complete
systems, and their capacities include: Merlin(R) and Merlin Legend(R) (2 lines,
6 telephones to 80 lines, 144 telephones); Spirit(R) (3 lines, 8 telephones to
24 lines, 48 telephones) and Partner(R) (6 lines, 12 telephones to 24 lines, 48
telephones).

Lucent PBX equipment sold by the Company, primarily in piece parts, and
their capacities include: System 25 (any combination of lines and telephones up
to a maximum of 256), System 75 (200 lines, 800 telephones); System 85 (16,000
lines, 50,000 telephones); Definity(R) G1 (400 lines, 1,600 telephones);
Definity(R) G2 (32,000 lines, 100,000 telephones); Definity(R) G3 (4,000 lines,
10,000 telephones); and Dimension(R) (2,968 lines, 7,232 telephones), an older
technology, manufacturer-discontinued product which the Company offers for sale
in the PRC and other foreign countries.

Telephone equipment sales and service revenues accounted for 83% of total
Company revenues in 1996 (79% in 1995). Sales of PBX equipment and associated
telephones and accessories were 88% of telephone equipment sales in both 1996
and 1995, while key equipment parts and system sales were 12% of telephone
equipment sales in both 1996 and 1995.

Relationship with AT&T/Lucent Technologies

Prior to February 1, 1996, the business of Lucent was conducted as a
part of the operations of AT&T Corp. ("AT&T"). On February 1, 1996, as a
result of a decision to restructure the company, AT&T began the process of
separating Lucent into a stand-alone company. AT&T completed an IPO of Lucent
shares in April 1996 and the divestiture of Lucent was completed in October
1996 through the distribution of AT&T's shares in Lucent to AT&T shareholders.
Lucent is comprised of the systems and technology units that were formerly
part of AT&T. With 1996 revenues of $23.2 billion, Lucent is one of the
world's leading designers, developers and manufacturers of telecommunications
systems, software and products. Throughout this report, references to AT&T
and Lucent will be referred to collectively as "Lucent Technologies", or
"Lucent".

<PAGE> 5

Since 1985, Lucent has provided support to the secondary market by
continuing to offer installation, maintenance, repair, reconditioning and
certification services for its products purchased by end-users through
equipment resellers. Equipment resellers such as the Company may also, with
various restrictions, utilize Lucent documentation, technical information and
software. Lucent also generally provides a one year warranty for products
purchased from Lucent for resale, provided that Lucent performs the
installation. The installation and maintenance of Lucent equipment is generally
provided by Lucent. The Company does, however, coordinate the installation
scheduling directly with Lucent if requested to do so by its customer. The
Company also has agreements with a number of installation and maintenance
companies covering the New England and New York geographic areas who can also
provide such services.

The Company currently has several product sales agreements with Lucent,
which have terms ranging up to two years, although they can generally be
canceled upon 90 days notice. Since 1991, the Company has been a "Lucent
Authorized Distributor of Selected Lucent - Remanufactured Products" ("Lucent
Agreement"), under a program with Lucent which currently includes only eight
other secondary market companies in different geographic areas of the country.
The Lucent Agreement does not provide the Company with an exclusive sales
territory. Under the program, the Company is authorized to sell domestically
specified Lucent remanufactured products, currently including certain
Merlin(R), Spirit(R) and System 25 products. The Company is also required to
purchase all of such included products directly from Lucent. During 1996, the
company obtained distribution rights to new Lucent products including (i) PBX
products such as Definity(R) G3 and Audix(R), (ii) new Key System products
including Merlin Legend(R) and Partner(R) Communication systems, and (iii) new
consumer telecommunication products including 2-line telephones, cordless
telephones and answering machines. During 1996 the Company also obtained
distribution rights to Lucent's Classic (Remanufactured) Definity(R) product
line. The Company was assigned specific sales territories under each of these
new agreements, which principally cover various parts of New England and
New York.

The Company believes that its relationship with Lucent is satisfactory
and has no indication that Lucent has any intention of canceling any of the
existing agreements. The Company's business is not expected to be adversely
impacted by the divestiture of Lucent from AT&T. It could, however, be
materially adversely affected should Lucent decide to no longer provide
installation and maintenance services on used, remanufactured or refurbished
products sold by resellers such as the Company, or should it cancel the
Company's distribution rights to new equipment. In the event that the Lucent
Agreement is terminated, the Company does not believe that it would have a
material effect on the Company's business, since it could acquire like
refurbished products from other sources at comparable prices.

Marketing and Customers

Telephone parts, systems and services are marketed domestically through
the Company's in-house sales staff, and approximately 35 associate dealers, to
approximately 1,500 active customers ranging from small companies to large,
multi-location corporations, and including equipment wholesalers, dealers,
distributors and government agencies and municipalities . Approximately 63% of
the Company's 1996 and 1995 telephone equipment sales and service revenues were
to customers located in New England, New York, New Jersey and Pennsylvania.
End-user sales accounted for approximately 95% (85% in 1995) of telephone
equipment sales in 1996, while sales to resellers accounted for approximately
5% (15% in 1995).

The Company markets Dimension(R) PBX equipment in the People's Republic
of China ("PRC") to businesses, government agencies and local telephone service
providers through its affiliate, Beijing Antai Communication Equipment Company,
Ltd. ("ATC") located in Beijing, PRC. In May 1995, the Company completed the
acquisition of a 50% interest in ATC, for a purchase price of $100, plus a
$390,000 capital contribution to ATC. ATC was formed in October 1992 as a Joint
Venture Enterprise, and is also owned 50% by Beijing Aquatic Product Inc. ATC,
previously a distributor for the Company in the PRC, markets, assembles,
manufactures, installs and services the Company's telecommunications products
which have been developed for use in the PRC. These

<PAGE> 6

products include (i) used Lucent PBX equipment, and (ii) central office
equipment, consisting of proprietary Chinese system software, proprietary
digital and analog interfaces, and a proprietary billing system, the
combination of which enables the PBX equipment to be operated as a small
central office (a telephone company facility where subscriber's lines are
joined to switching equipment for connecting other subscribers to each other,
locally and long distance). ATC also distributes and installs local
telecommunications transmission systems and home and business alarm systems,
however their historical operations to date have been insignificant, and no
assurances can be given that the Company or ATC will be successful in selling
its products in the PRC.

In June 1996, the Company and several Philippines investors formed
TeleSolutions, Inc., in which the Company invested $40,000 for a 40% ownership
interest. TeleSolutions was formed for the purpose of refurbishing, installing
and selling telecommunications equipment in the Republic of the Philippines.

The Company's Voice Processing Products

Product Descriptions

Voice (or "call") processing encompasses various types of computer
assistance to facilitate interaction over the telephone, between a caller, one
or more persons, and a computer. With call processing technology, telephone
users can utilize voice and touchtones to manipulate calls, interact with
computer databases, and access and respond to messages or data from voice or
other electronic media, thereby making internal and external communications
more efficient. The four most common call processing features are: (1) Voice
Mail - allows a caller to store voice messages and replies in a computer, and
thereby conduct a dialogue with any person without having to be on the same
line at the same time; (2) Automated Attendant - allows a caller to direct the
computer to switch the call to a telephone extension different from the one
dialed, without the manual intervention of an operator; (3) Interactive Voice
Response - allows a caller to obtain information in voice form (for example,
selecting announcements from a list of options) from a local or non-local
database and (4) Unified Messaging - gives users a single point of access for
all messages by making voive mail, fax, email and video mail messages all
accessible from a desktop PC in a networked environment.

In January 1994, the Company acquired certain assets of CCI, and
established the Cobotyx Division to be responsible for ongoing voice processing
equipment business and strategy. The assets acquired from CCI included
technology and know-how, inventories, property and equipment, all trademarks,
tradenames, and patents. Certain key engineering, technical and support
personnel of CCI were subsequently hired by the Company to staff this
operation. Through its Cobotyx Division, the Company designs, integrates,
manufactures, distributes and supports products that provide automated call
handling, voice and fax messaging, interactive voice response, automated call
distribution and unified messaging capabilities. The Company also uses
component technology licensed from other suppliers. Products currently marketed
include:

COBOT[TM] Plus Receptionist - a single port, solid state, fully-featured
automated attendant with Rotary Dial Detection, for PBXs, Key
systems or Centrex (a business telephone service offered by a local
telephone company, providing custom calling features such as call
forwarding, call transfer, least cost routing and speed calling)
applications.

COBOT[TM] Plus Secretary - an automated attendant and voice mail system,
with a 2 - 8 port, 500 mailbox capacity.

SOHO ("small office, home office") SECRETARY - a low cost, but
fully-featured automated attendant and voice mail system, with a 2
- 4 port capacity, designed for the small office, branch office
market.

<PAGE> 7

KASSIE[TM] - a PC-based automated attendant and voice mail system, with
a 2 - 24 port, 10,000 mailbox capacity, that can be optioned to
support advanced applications like fax and interactive voice
response.

COBOT[TM] LAN - a PC-based communication server which connects to a Local
Area Network ("LAN") and acts to control multiple type messages
such as voice, fax, email, and video mail. Each server has a 96
port capacity and, with multiple servers, the system can
accommodate large applications.

COBOT[TM] VM - a PC-based system which provides voice mail and automated
attendant features, and which is upgradable to a COBOT[TM] LAN.

Marketing and Customers

The Company distributes its voice processing products domestically and
internationally to approximately 500 customers, consisting primarily of a
nationwide network of independent dealers and distributors, end-users, and
through arrangements with several manufacturers of telephone systems and
business equipment. A typical dealer is a small business operator who primarily
sells telephone systems to small and medium size businesses. Most dealers also
sell competing call processing systems. The Company attempts to maintain
relationships with a large number of dealers and, because of the potential for
dealer turnover, considers it advantageous not to become overly dependent upon
a few dealers. Approximately 68% of the Company's voice processing sales and
service revenues in 1996 were to dealers and distributors (66% in 1995), with
13% (26% in 1995) from sales to Lucent. Approximately 37% (30% in 1995) of the
Company's voice processing sales and service revenues in 1996 were
international, principally to customers in Mexico, Central and South America.
Voice processing sales and service revenues accounted for 12% of total revenues
in 1995 (21% in 1995).

On July 27, 1995 the Company entered into a Joint Venture Agreement ("JV
Agreement") with Asia-Pacific Services, Inc. of Atlanta, Georgia ("APSI") and
Beijing Taikang Telecommunications, Inc., owned and operated by the Planning
and Research Institute of the Ministry of Posts and Telecommunications, PRC
("Taikang"). The purpose of the joint venture ("JV") was the manufacture,
assembly and marketing in the PRC and other international markets of voice
processing equipment and software, including all of the Company's current voice
processing products. On July 27, 1995 the Company also entered into an
agreement ("Interim Agreement") with these same parties for the provision of
product marketing and other business organization activities in advance of the
startup of the JV. For the year ended December 31, 1995, the Company incurred
expenses pursuant to these agreements of approximately $450,000, consisting of
working capital provided, project management consulting fees, travel costs and
demonstration products provided by the Company. As a result of the Company's
inability to fund the $1 million initial capital contribution requested by
Taikang in order to start the joint venture, on November 1, 1995 the Company
and Taikang agreed to terminate both the JV Agreement and the Interim
Agreement.

Customer Services

The Company is committed to respond to its customers' service or
project-oriented telecommunications needs. While each type of service is not
material to the Company's operations as a whole, the Company believes they help
differentiate the Company from its competitors, as well as contribute to
longer lasting customer relationships and incremental sales. The Company
provides the following services:

Repair and Refurbishing: The Company performs fee-based repair and
refurbishing services for its customers through its in-house facilities and use
of subcontract repair shops. For telephone equipment, the in-house work is
generally limited to the cleaning, buffing and minor repair of single-line
telephone sets. The Company outsources the repair of circuit boards and digital
telephone sets locally. The Cobotyx Division has the technical equipment and
personnel to repair voice processing equipment down to the circuit board level.

<PAGE> 8

Inventory Management: The Company provides inventory storage, accounting,
and distribution services, acting as a centralized depot for its customers'
idle telecommunications equipment. Through FAMS, the Company additionally
sells, on behalf of its customers, their used computer, data transmission and
telephone equipment on a consignment basis.

Other Services: The Company's technical staff currently provide
engineering, configuration, technical "hot line" telephone support and limited
on-site installation services. The Company rents out equipment on a
month-to-month basis, servicing those customers that have temporary, short-term
equipment needs. For two companies in the television broadcast industry the
Company provides telecommunications coordination services for broadcast sports
and other events throughout the country. The Company's Cobotyx division also
provides custom computer telephone interface solutions for its customers on a
consulting basis.

The Company's combined service revenues accounted for 10% of revenues in
1996 and 4% of revenues in 1995. No single service accounted for more than 5%
of revenues.

Competition

The marketplace for the Company's telephone equipment products is highly
competitive. The Company competes with Lucent and other secondary market
equipment resellers, of which the Company estimates there are over 100
nationwide, principally on the basis of timeliness of delivery, customer
service and price. The growth in the number of these dealers has resulted in
more competitive sales pricing, and in higher equipment acquisition costs. The
Company also competes with Lucent and other new equipment manufacturers and
distributors.

The portion of the industry that supplies call processing systems to
small and medium sized businesses is extremely competitive. In the domestic
dealer and original equipment manufacturer channels, the Company competes on
the basis of price, system features, ease of installation and use, sales and
technical support, and product reliability. Principal competitors at present
fall into three categories: (a) telephone equipment manufacturers that offer
their own call processing systems (for example, Lucent, Northern Telecom, Inc.,
Rolm Co. and Toshiba America Information Systems, Inc.); (b) independent call
processing system manufacturers whose products integrate with multiple
telephone systems and are either based on proprietary hardware (for example
Centigram Communications Corporation, Comverse Technology, Inc. and Octel
Communications Corporation), or are PC-based like the Company's products (for
example, Active Voice, Inc., Applied Voice Technologies, Inc. and Compass
Technology, Inc., now a division of Octel Communications Corporation) and (c)
large telephone companies. For both telephone and voice processing products,
the Company anticipates intensified competition from larger companies having
substantially greater technical, financial and marketing resources, as well as
larger customer bases and name recognition than the Company. As the industry
further develops CTI products, the Company anticipates that it will encounter a
broader variety of competitors, including new entrants from related computer
and communication industries. There can be no assurance that the Company will
be able to develop more technologically advanced products or that even if it is
able to develop, or acquire rights to incorporate into its products, the next
generation of technology, that such products will perform as well as
competitor's products or that such products will be accepted by the market or
that the Company will see any financial benefit therefrom.

Suppliers

The Company obtains its telephone equipment parts for resale from a
variety of sources, depending upon price and availability at the time of
purchase. These sources include Lucent, other secondary market equipment
dealers and distributors, leasing companies and end-users. In accordance with
various distribution agreements with Lucent, the Company is required to
purchase certain products only from Lucent. The Company believes that if the
various Lucent agreements were to be canceled or not renewed, it could obtain
similar used or refurbished products from other suppliers, but would lose its
ability to acquire new products for sale. The Company is not

<PAGE> 9

otherwise dependent upon any single supplier for telephone equipment. The
Company believes that product availability in the marketplace is presently
sufficient to allow the Company to meet its customers' delivery requirements.

The printed circuit boards utilized in the COBOT[TM] Plus Digital
Announcer and the COBOT[TM] Plus Receptionist are manufactured for the Company
by Dovatron Manufacturing East, a division of Dovatron, Inc. ("Dovatron").
While the Company plans to continue utilizing Dovatron in this manner, it
believes that it could readily engage other sources if it were necessary to do
so. For its other voice processing products, the Company purchases electronic
components, IBM-compatible PCs and voice and fax boards from multiple vendors.
The products are assembled, configured to customer specifications, tested
and/or installed by the Company or alternatively, the Company can purchase
certain products complete to the Company's specifications. Because the
Company's product platforms consist principally of standard electronic and PC
components, the Company is not dependent upon any single supplier.

The Company utilizes in certain of its products software obtained under
license agreements with vendors. The Company believes that the functionality
provided by the licensed software can be obtained from multiple software
suppliers, and is therefore not dependent upon any single supplier.

Patents, Licenses and Trademarks

No patent or trademark is considered material to the Company's overall
operations. The manufacture and sale of certain of the Company's products
involves the use of processes, products or information, the rights to certain
of which are owned by others. Although the Company has obtained licenses with
regard to the use of certain of such processes, products and information, there
can be no assurance that such licenses will not be terminated or expire during
critical periods, that the Company will be able to obtain licenses for other
rights which may be important to it, or, if obtained, that such licenses will
be obtained on commercially reasonable terms. If the Company is unable to
obtain such licenses, the Company may have to develop alternatives to avoid
infringing patents of others, potentially causing increased costs and delays in
product development and introduction, or precluding the Company from
developing, manufacturing or selling its proposed products. Additionally, there
can be no assurance that the patents underlying any licenses will be valid and
enforceable. To the extent any products sold by the Company are based on
licensed technology, royalty payments on the licenses will reduce the Company's
gross profit from such product sales and may render the sales of such products
uneconomical.

The Company also relies upon unpatented trade secrets, and no assurance
can be given that others will not independently develop substantially
equivalent proprietary information and techniques, or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company
can meaningfully protect its rights to its unpatented trade secrets.

The Company was granted permission to utilize certain Lucent designated
trademarks, insignia and symbols in the Company's advertising and promotion of
products furnished under the various Lucent agreements.

Research and Development

Research and development expense was $125,000 in 1996 and $99,000 in
1995, representing 0.6% of revenues in each year.

Employees

As of December 31, 1996, the Company had 99 full-time and 10 part-time
employees, consisting of 38 in operations, 45 in sales, sales support and
marketing, and 26 in management and administration. The Company believes that
its relations with its employees are satisfactory. The Company's employees are
not represented by any organized labor union and are not covered by any
collective bargaining agreements.

<PAGE> 10

Item 2. Description of Property

As of December 31, 1996, the Company leased, on a month-to-month basis,
24,000 square feet of office and warehouse space in East Hartford, CT which it
used as its principal executive and administrative offices and its telephone
equipment operations, and 4,000 square feet of office space in Danbury, CT
which it uses for its voice processing products division. In November 1996, the
Company entered into a five year lease, commencing February 1997, for a 34,760
square foot building in East Hartford, CT, and in March 1997 relocated
substantially all of its Connecticut operations into this facility. Under the
terms of the lease agreement, the minimum monthly rental, will be $13,759 for
the first two years, $14,483 during year three and $15,207 during years four
and five. The lease agreement contains two three-year renewal options.

FAMS leases 70,100 square feet of warehouse and office space in
Piscataway, New Jersey at a monthly rent of $24,827 under a two year lease
entered into in March 1996.

Rent expense was $422,000 in 1996 and $201,000 in 1995. The Company
believes that its facilities are adequate for its present needs and suitable
for their intended uses. If new or additional space is required, the Company
believes that adequate facilities are available at competitive prices in the
immediate areas of current operations.

Item 3. Legal Proceedings

The Company is not a party to any pending material proceedings and no
such proceedings are known to be contemplated by others.

Item 4. Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

On and subsequent to September 12, 1996, the Company's securities have
traded on the American Stock Exchange. Prior thereto, and until September 11,
1996, the Company's securities traded on The Nasdaq SmallCap Market[SM]
("Nasdaq") tier of The Nasdaq Stock Market[SM] . The following table lists the
Company's securities and trading symbols:

Date First Former
Amex traded on Nasdaq
Security Symbol Amex Symbol
- ------------------------------------------------------------------------------

<S> <S> <C> <S>
Common Stock.............................. FTG 9/12/96 FONE

Redeemable Class A Common Stock Purchase
Warrant ("Class A Warrant")............... FTG.WS.A 11/29/96 -

Redeemable Class B Common Stock Purchase
Warrant ("Class B Warrant")............... FTG.WS.B 12/2/96 -

<PAGE> 11

Warrant (issued in the Company's 1987
initial public offering; hereinafter
referred to as "IPO Warrant")............. FTG.WS 9/12/96 FONEW

Unit (delisted on 11/29/96)............... FTG.U 9/12/96 -

Unit (issued in the Company's 1987
initial public offering; delisted 9/11/96;
hereinafter referred to as "IPO Unit").... - - FONEW
</TABLE>

The following sets forth the range of quarterly high and low sales prices
for these securities, for the two years ended December 31, 1996 (market prices
and numbers of securities for prior periods have been restated to give
retroactive recognition to the 1-for-10 reverse stock split effected August 13,
1996):

1996 1995
Common Stock: ---------------- ----------------
Quarter Ended High Low High Low
- ------------- ------ ------ ------ ------

<C> <C> <C> <C> <C>
March 31 $ 5.90 $ 1.90 $ 6.25 $ 3.44

June 30 5.90 3.10 6.88 3.75

September 30 5.00 3.10 5.63 3.75

December 31 3.88 2.69 4.06 2.19
</TABLE>

There were 3,262,329 and 2,123,867 common shares outstanding at December
31, 1996 and 1995, respectively.

1996 1995
IPO Warrants: ---------------- ----------------
Quarter Ended High Low High Low
- ------------- ------ ------ ------ -----

<C> <C> <C> <C> <C>
March 31 $ 1.88 $ .31 $ 2.19 $ .94

June 30 2.50 .63 1.88 .31

September 30 1.88 1.25 1.25 .31

December 31 .88 .13 .31 .31
</TABLE>

There were 183,579 IPO warrants outstanding at December 31, 1996 and
1995, respectively.

1996 1995
IPO Units (1): ---------------- ----------------
Quarter Ended High Low High Low
- ------------- ------ ------ ------ ------

<C> <C> <C> <C> <C>
March 31 $ 7.50 $ 3.75 $ 7.50 $ 5.16

June 30 - - 8.13 4.38

September 30 5.00 5.00 6.88 6.88

December 31 - - 3.75 2.50

<FN>
- --------------------
<F1> (1) Units of the Company's securities consisted of one share of common stock
and a detachable warrant to purchase 1.06 shares of common stock at an
exercise price of $4.70 per share. The Units did not trade during the
quarter ended June 30, 1996. The Units were delisted in September 1996.
For further information see the Notes to Consolidated Financial
Statements.
</FN>
</TABLE>

1996
Units (2): ----------------
Quarter Ended High Low
- ------------- ------ ------

<C> <C> <C>
September 30 $ 5.50 $ 3.87

December 31 5.13 4.09

<PAGE> 12

<FN>
- --------------------
<F2> (2) The Units consisted of one share of common stock, one Class A Warrant and
one Class B Warrant. In November 1996 the underlying components became
separately tradable, and the Unit was delisted.
</FN>
</TABLE>

Class A and Class B Warrants:

The Class A and Class B Warrants became separately tradable in November
1996 and for the quarter ended December 31, 1996 had a high sales price of
$.625 and $.438, respectively, and a low sales price of $.25 and $.125,
respectively. There were 1,137,923 Class A and Class B Warrants outstanding at
December 31, 1996.

(b) There were 650 holders of record of the common stock as of December
31, 1996 representing approximately 5,000 beneficial stockholders.

(c) The Company has paid no dividends and does not expect to pay
dividends in the foreseeable future as it intends to retain earnings to finance
the growth of its operations. Pursuant to a Commercial Loan and Security
Agreement with Affiliated Business Credit Corporation, (now merged with First
Union Bank of Connecticut ) the Company is prohibited from declaring or paying
any dividends or making any other distribution on any of the shares of its
capital stock, without the prior consent of the lender.

Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto contained in Item 7 of this Report.

Results of Operations

The following table sets forth the percentage of revenue represented by
the following items for the years ended December 31, 1996 and 1995:

1996 1995
------ ------

<S> <C> <C>
Revenues 100.0% 100.0%

Cost of revenues 69.6 69.5

Selling, general and administrative expenses 27.0 31.6

Research and development expenses .6 .6

Interest expense .8 .6

Equity in unconsolidated subsidiaries .6 1.3

Other income (3.2) (.1)
----------------

Income (loss) before income taxes 4.6 (3.5)

Provision for income taxes .1 .1
----------------

Net income (loss) 4.5% (3.6)%
================
</TABLE>

Year ended December 31, 1996 as compared to the year ended December 31, 1995

Revenues

Total revenues for the year ended December 31, 1996 were $19,698,000, an
increase of $4,381,000 or 29% from the comparable 1995 period. Telephone
equipment revenues accounted for 83% of total 1996 revenues (79% in 1995),
voice processing revenues accounted for 12% of total 1996 revenues (21% in
1995), and revenues from FAMS (which commenced operations in February, 1996),
consisting principally of sales of computer and data transmission equipment and
inventory storage services, accounted for 5% of total 1996 revenues.

<PAGE> 13

Telephone equipment revenues for 1996 increased $4,142,000 or 34% from
1995, as a result of (i) higher end user sales of refurbished and Lucent -
remanufactured products, (ii) sales of new Lucent equipment pursuant to various
product dealer and distributor agreements entered into by the Company in 1996,
and (iii) higher levels of provided services, including installations, event
coordination and equipment repair and refurbishing. Provided services
represented 7% of telephone equipment revenues in 1996 (3% in 1995). End user
revenues accounted for 95% of total telephone equipment revenues in 1996 (86%
in 1995), while revenues from dealers and other equipment resellers accounted
for 5% (14% in 1995).

Voice processing equipment revenues for 1996 decreased by $855,000 or 27%
from 1995, primarily attributable to (i) lower sales to Lucent resulting from
an OEM contract which terminated in February 1996, and (ii) 25% lower sales to
dealers and distributors, partially offset by a 98% increase in end user
revenues. End user revenues accounted for 19% of total voice processing
revenues in 1996 (8% in 1995), while revenues from dealers and distributors
accounted for 68% (66% in 1995), and revenues under an OEM agreement with
Lucent accounted for 13% of total voice processing revenues in 1996 (26% in
1995).

Cost of Revenues

Total cost of revenues increased $3,057,000 or 29% in 1996 as compared
with 1995 due primarily to higher sales volumes. The gross profit margin was
30.4% of revenues for 1996 as compared to 30.5% of revenues for the comparable
prior year period. For the year ended December 31, 1996, $459,000 of purchase
rebates were credited to cost of sales, which had the effect of increasing the
Company's gross profit margin to 30.4% from 28.1% otherwise realized. Excluding
the effect of the rebates as described above, increased product acquisition
costs on certain telephone system parts, higher labor and warehousing costs,
and lower voice processing equipment sales were the principal reasons for a
lower overall gross profit margin from the prior year.

Operating Expenses

Selling, general & administrative expenses ("SG&A") increased $487,000 or
10% in 1996 as compared with 1995. SG&A was 27% of revenues in 1996 as compared
with 32% in 1995. The increase in SG&A was attributable to $738,000 of expenses
incurred by FAMS, which began operations in 1996, and increased sales
compensation, personnel costs and other operating costs associated with the
Company's increased business volume and number of employees. These increased
costs were offset by (i) the discontinuance in 1995 of the Company's in-house
service bureau and the marketing of the VTS-1000/2000 product line, and (ii)
significantly lower international market development costs, primarily due to
the termination in November 1995 of certain voice processing product joint
venture agreements in the PRC.

Research and development expenses ("R&D") increased $26,000 or 26% in
1996 as compared with 1995. R&D was .6% of revenues in each period.

Other Income and Expenses

Other income increased $621,000 in 1996 as compared with 1995. Included
in other income for 1996 was $542,000 related to rebates earned from AT&T on
coupons tendered for redemption, net of coupon acquisition costs. The rebates
are a result of coupons issued by AT&T in 1995 in settlement of a lawsuit,
which are freely transferable and which can be used towards the cost of AT&T
products and services purchased from May 1995 through June 1, 1997. In 1996 the
Company began purchasing coupons at a discount to their $50 face value and
redeeming them with AT&T for the full $50 face value. Accordingly, the Company
recorded in other income the difference between the face value of the coupons
and their acquisition cost. The Company expects to continue to take advantage
of the coupon redemption program through its June 1, 1997 expiration date.
However, the Company is unable to predict the program's effect on future
operating results since (i) the supply of coupons in the after-market is
limited, (ii) the Company's acquisition cost for the coupons can fluctuate,
(iii) beginning June 1, 1996, rebates were restricted to systems and
maintenance services sold (previously, component parts were also separately
included in the program), and (iv) in any event, the Company cannot reasonably
estimate its future sales

<PAGE> 14

activity of products subject to the rebate program. See Note 3 to the
consolidated financial statements included elsewhere herein.

Interest expense increased $60,000 or 61% in 1996 as compared with 1995.
The increase was attributable to higher average borrowings under the Company's
revolving credit facility, in order to support the Company's increased sales
and operating levels. Average borrowings in 1996 were $1,406,000 as compared
with $880,000 in 1995.

Year ended December 31, 1995 as compared to the year ended December 31, 1994

Net Loss

The Company recorded a net loss of $553,000 for the year ended December
31, 1995, as compared to net income of $172,000 for the year ended December 31,
1994. The loss for 1995 was primarily attributable to the Company's efforts to
expand its business and products domestically and internationally.
Domestically, the Company incurred approximately $645,000 of net expenses
during 1995, arising from new sales and technical personnel, product marketing
expenses, equipment and other overhead and operating costs, in connection with
the new VTS 1000/2000 product line, and in the operation of an in-house service
bureau. Due to insufficient revenues and a change in marketing strategy, these
products were discontinued by the end of 1995.

The Company's international business development activities, which were
centered principally in the PRC, negatively impacted operating results by
approximately $774,000 for the year ended December 31, 1995, and by
approximately $541,000 for the year ended December 31, 1994. These activities,
as also described in the Notes to Consolidated Financial Statements included
herein, principally focused on (i) the acquisition of a 50% interest in ATC,
which was completed in May 1995, and (ii) developing strategic business
relationships in the PRC for the marketing of its voice processing products
through the contemplated formation of a second joint venture company. Included
in the above amount for 1995 were expenses of approximately $450,000 from the
Company's funding of voice processing product development and marketing
operations in the PRC pursuant to its obligations under the Interim Agreement
and JV Agreement, consisting of working capital provided, project management
consulting fees, travel costs and demonstration products provided by the
Company. These agreements were terminated in November, 1995 due to a lack of
funds with which to capitalize the proposed joint venture. Also included were
net expenses of approximately $244,000, consisting primarily of facility,
personnel and other operating costs incurred in connection with the domestic
acquisition, testing and storage of product slated for export to the PRC and
other international markets.

In conjunction with the termination of the Interim and JV Agreements, the
Company reduced the scope of other international projects and, until such time
as additional financing can be obtained, the Company expects to incur
significantly reduced international business development expenditures.

The Company's 1995 net loss also includes $81,000 of legal fees and
related expenses incurred in connection with a proposed underwriting of
securities which was terminated during the third quarter of 1995.

Revenues

Sales and service revenues for the year ended December 31, 1995 were
$15,317,000, representing an increase of $3,530,000 or 30% from the comparable
1994 period. Telephone equipment sales and service revenues increased by
$3,372,000 or 38% over 1994, resulting from (i) increased end user and
wholesale sales levels, attributable to wider acceptance of the Company's
products, and a larger and more experienced sales force, and (ii) $475,000 in
equipment sales to ATC. Voice processing product sales and service revenues
increased by $158,000 or 5% from 1994.

<PAGE> 15

Cost of Revenues

Gross profit for the year ended December 31, 1995 increased by $1,115,000
to $4,672,000 (30.5% of revenues) from $3,557,000 (30.2% of revenues) in 1994.
The increase in gross profit dollars was attributable to the increase in sales
and service revenues, while the increased gross profit margin was attributable
to a combination of higher selling prices and lower product costs on certain
products sold during the current period, increased international sales at
higher than average profit margins, and the favorable economies of allocating
overhead costs over a larger sales base.

Operating Expenses

Selling, general and administrative expenses for the year ended December
31, 1995 increased by $1,652,000 to $4,835,000 (32% of revenues) from
$3,183,000 (27% of revenues) for the year ended December 31, 1994.
Approximately 27% of the increase was attributable to international voice
processing product market development activities pursuant to the JV and Interim
Agreements (as more fully described in Note 11 to the notes to consolidated
financial statements), including working capital provided, monthly retainer
fees and travel expenses of outside consultants for international project
management services, and the cost of demonstration products contributed by the
Company. Approximately 45% of the increase was related to personnel costs
attributable to (i) increased personnel and related costs associated with the
start up of the service bureau and VTS-1000/2000 product offerings which were
discontinued by the end of 1995, and (ii) increased compensation expenses,
including increased sales commissions as a result of higher sales levels.
Product marketing expenses increased by 6% primarily due to expanded marketing
of voice processing products, and the Company incurred higher depreciation
expense, bad debt expense and other overhead costs associated with the
Company's increased sales and operating levels. In connection with the
termination of a proposed underwriting of additional securities, the Company
also charged $81,000 of legal fees and related expenses to SG&A in 1995.

Research and development expenses ("R&D") for the year ended December 31,
1995 were $99,000, down 54% from $217,000 incurred in 1994. During 1994 the
Company was engaged more extensively in R&D in connection with telephone
systems and central office products for the PRC, and in the development of the
KASSIE[TM] and VTS-2000 call processing products for both domestic and
international applications. During 1995 the Company allocated a higher
percentage of its in-house technical resources to product support functions.

Other Expenses

Interest expense for the year ended December 31, 1995 was $99,000, up
148% from $40,000 incurred in 1994, due to higher average debt levels and
higher weighted average interest rates on the Company's outstanding debt.

Liquidity and Capital Resources

Working capital at December 31, 1996 was $6,898,000, an increase of
$3,892,000 from working capital at December 31, 1995. The working capital ratio
at December 31, 1996 was 2.4 to 1 as compared to 1.9 to 1 at December 31, 1995.
The increase in working capital and the related ratio was primarily due to cash
generated from the sale of 1,137,923 Units.

Operating activities used $1,064,000 of cash in 1996, principally due to
(i) an increase in accounts receivable, reflecting significantly higher 1996
fourth quarter sales, (ii) an increase in inventories, resulting from the
Company's expanded product lines and higher sales levels and (iii) the
start-up of FAMS in 1996.

Investing activities used $532,000 of cash in 1996, principally in the
purchase of warehouse equipment, vehicles, computer and office equipment for
use by FAMS in its business operations. The Company also invested $40,000 for a
40% ownership interest in TeleSolutions, Inc., a newly formed corporation
located in the Republic of the Philippines. The corporation was formed for the
purpose of refurbishing, installing and selling electronics and
telecommunications equipment.

<PAGE> 16

Financing activities provided $4,198,000 of cash in 1996, attributable to
$3,746,000 generated, net of expenses, from the sale of 1,137,923 Units as more
fully described in Note 8 to the consolidated financial statements included
herein, and a $451,000 increase in borrowings under the Company's revolving
credit line. The Company intends to use the proceeds of the secondary offering
to finance and expand the Company's business, both domestically and
internationally, which could include the acquisition of other businesses,
although the Company currently has no specific agreements. Proceeds will also
be used to further develop its products, to expand its product marketing, and
for general working capital purposes.

On June 5, 1995, the Company entered into a one year renewable Commercial
Loan and Security Agreement (the "Loan Agreement") with Affiliated Business
Credit Corporation (subsequently merged with First Union Bank of Connecticut in
November 1996), providing for a $1.5 million revolving line of credit. This
agreement replaced a $750,000 revolving loan facility with Fleet Bank., N.A. On
March 11, 1996, the Loan Agreement was extended to May 31, 1997, and the amount
of the credit line was increased to $2.0 million, which was further increased
in February 1997 to $2.5 million. Under the current terms of the Loan
Agreement, borrowings bear interest at the prime rate plus 1.5% (which was
9.75% at December 31, 1996) on the greater of (i) the actual monthly loan
balance or (ii) a minimum assumed monthly loan balance of $700,000. The Company
may borrow against the aggregate of (i) 75% of eligible accounts receivable
(domestic receivables less than 90 days old) and (ii) 25% of eligible inventory
(up to a maximum inventory advance of $300,000), up to the maximum amount of
the facility. Borrowings under the Loan Agreement are repayable upon demand,
and are secured by all of the Company's assets. As of December 31, 1996, the
unused credit line was $97,000. The average and highest amounts borrowed under
all credit facilities during the year ended December 31, 1996 was $1,406,000
and $2,088,000, respectively, as compared to $880,000 and $1,479,000,
respectively, for 1995. The Company's borrowings are dependent upon the
continuing generation of collateral, subject to its credit limit. The weighted
average interest rate on the Company's outstanding debt was 10.8% for 1996 and
11.0% for 1995. The Company expects to renew the revolving loan facility on
substantially the same terms prior to its expiration.

On March 13, 1996, FAMS entered into a two year lease for approximately
70,100 square feet of warehouse and office space in Piscataway, New Jersey at a
monthly rent of $24,827. This facility is used for the remarketing of used
Lucent Technologies/AT&T telephone and computer equipment, and for the
provision of asset storage and management services. Start-up costs of this
operation approximated $350,000, consisting principally of the $250,000 asset
purchase price plus relocation and other operating costs. In November 1996,
the Company entered into a five year lease, commencing February 1997, for a
34,760 square foot building in East Hartford, CT. Under the terms of the lease
agreement, the minimum monthly rental, will be $13,759 for the first two years,
$14,483 for year three, and $15,207 for years four and five. The lease
agreement contains two three-year renewal options. In March 1997, the Company
relocated substantially all of its Connecticut operations into this facility.

During the first quarter of 1997, the Company acquired new computer and
data network equipment, and office furniture and equipment, aggregating
approximately $600,000, for use in the Company's new operating facility. The
Company expects to shortly enter into a lease agreement to finance
substantially all of these capital expenditures over a period not to exceed
five years.

The Company believes that it has sufficient capital resources to satisfy
the working capital requirements of its current operations. The Company's
intent, however, is to continue to seek opportunities to expand its business
and product lines. Inflation has not been a significant factor in the Company's
operations.

<PAGE> 17

Item 7. Financial Statements

The following report and financial statements of the Company are
contained on the pages indicated:

Page
----

<S> <C>
Report of Deloitte & Touche LLP........................................ 22

Consolidated Balance Sheets - December 31, 1996 and 1995............... 23

Consolidated Statements of Operations - Years Ended December 31, 1996
and 1995.............................................................. 24

Consolidated Statement of Changes in Stockholders' Equity - Years
Ended December 31, 1996 and 1995...................................... 24

Consolidated Statements of Cash Flows - Years Ended December 31, 1996
and 1995.............................................................. 25

Notes to Consolidated Financial Statements............................. 26
</TABLE>

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act

Incorporated by reference to the Company's proxy statement which the
Company intends to file with the Securities and Exchange Commission within `120
days after the close of its fiscal year, except for the following:

<TABLE>
<CAPTION>
Year First
Name Age Elected Position(s) Held
- ------------------------- --- ---------- ------------------------------------------

<S> <C> <C> <C>
Directors:
- ----------

George J. Taylor, Jr. (2) 54 1984 Chairman of the Board, President, Chief
Executive Officer and Director

Robert G. LaVigne 45 1988 Vice President - Finance & Administration,
Chief Financial Officer, Secretary,
Treasurer, Director

Harold L. Hansen (1) (2) 67 1992 Director

Hugh M. Taylor (1) (2) 53 1993 Director

Joseph J. Kelley (1) (2) 57 1995 Director

Other Executive Officers:
- -------------------------

Alexander E. Capo 46 1987 Vice President - Marketing & Sales

Joseph A. Novak, Jr. 54 1993 Vice President - Operations; General
Manager - FAMS

<PAGE> 18

Neil R. Sullivan 46 1994 Vice President & General Manager -
Telecom Division; Assistant Secretary

John G. Antonich 56 1996 Vice President & General Manager -
Cobotyx Division

<FN>
- --------------------
<F1> (1) Member of the Audit Committee.

<F2> (2) Member of the Compensation Committee.
</FN>
</TABLE>

George J. Taylor, Jr. has been Chairman of the Board of Directors and
Chief Executive Officer of the Company (including its predecessors) since 1984,
and President since 1989. He was a director of FIC Acquisition Corporation
(formerly Farmstead International Corporation) from 1988 until 1992, and was
also the President of Lease Solutions, Inc. (formerly Farmstead Leasing, Inc.),
a business products and automobile leasing company, from 1981 until it was
dissolved in 1993. From 1977 to 1981, Mr. Taylor was Vice President - Marketing
and Sales for National Telephone Company. He 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 1986, and for two
years served as its President and Chairman. Mr. Taylor is the brother of Mr.
Hugh M. Taylor. Mr. Taylor is also a Director of ATC.

Robert G. LaVigne was employed by the Company in March 1988 and has
served in the capacities indicated above since July 1988. In addition, from
January 1994 until October 1994 he served as General Manager of the domestic
telephone equipment business unit. From 1985 to 1988 he was the Controller of
Economy Electric Supply, Inc., a distributor of electrical supplies and
fixtures. From 1982 to 1985 he was the Corporate Controller of Hi-G, Inc., a
manufacturer of electronic and electromechanical components. Mr. LaVigne is a
Certified Public Accountant, and was associated with the accounting firm of
Arthur Young and Company from 1977 to 1982. Mr. LaVigne is also a Director of
ATC.

Harold L. Hansen, a director of the Company since 1992, is currently the
President of Hansen Associates, a management and financial consulting firm
founded by him in 1983. From November 1994 to April 1995 he was the President
of H2O Environmental, Inc., an environmental and geotechnical services company.
During 1993 and 1994 he was the President of Hansen Associates. Prior to 1983
Mr. Hansen served in various corporate executive capacities including Executive
Vice President and Chief Operating Officer of Gestetner Corporation, Vice
President and General Manager of the Office Products Division of Royal Business
Machines and Vice President and General Manager of the Business Products Group
of Saxon Industries.

Hugh M. Taylor has been a director of the Company since July 1993. Since
June 1994 he has served as a Managing Director of Newbury, Piret & Co., an
investment banking firm located in Boston, MA. From 1993 to June 1994 he was
the CEO, President and a director of the Berlin City Bank, Berlin, New
Hampshire. From 1992 to 1993 he was the Executive Vice President of Fleet Bank
of Massachusetts. From 1990 to 1992 he was the Executive Vice President and
Chief Operating Officer of Fleet Bank of Boston. From 1973 to 1990 he was
employed by the New England Merchants Bank, later the Bank of New England,
where he held various executive management positions within the Commercial
Banking Division, and the bank's venture capital subsidiary. Mr. Taylor is the
brother of Mr. George J. Taylor, Jr.

Joseph J. Kelley has been a director of the Company since April 1995. He
has been involved in the telecommunications industry since 1963. He is
currently President of East Haven Associates of Wellesley, in Wellesley,
Massachusetts. The Company provides executive and technical support for
European and Asian based communication companies seeking to expand market share
in the U.S., as well as for U.S. companies seeking to expand internationally.
During 1994, he was Group Vice President of NYNEX, responsible for the State of
Massachusetts operations. From 1985 to 1994 he served in various executive
level positions with NYNEX , or associated companies including Vice President -
Operations of New England Telephone (1991 - 1993), Vice

<PAGE> 19

President - New England Telephone, Network Department (1990 - 1991), Corporate
Director of Business Development, NYNEX Marketing (1988 - 1990) and Vice
President of New England Telephone - Maine (1985 - 1988).

Alexander E. Capo has been involved in the telephone industry since 1972.
He has held the position of Vice President - Marketing and Sales since 1987.
From 1985 to 1987 he was the Director of Sales for The Farmstead Group, Inc.
Prior thereto he was a Sales Manager with the National Telephone Company.

Joseph A. Novak, Jr. was employed by the Company in January 1990. He was
appointed Vice President - Operations in July 1993, General Manager of FAMS in
February 1996, and since August 1995 has been in charge of warehouse and
technical operations for the Company's international telephone equipment
business. From 1990 to 1993 he was in charge of warehouse and technical
operations for the domestic telephone equipment business unit. Prior to 1990,
he was employed by AT&T for 28 years, serving in various operational and sales
management capacities. Mr. Novak is also Vice General Manager and a Director
of ATC.

Neil R. Sullivan was employed by the Company in October 1994 as Corporate
Controller (until August 1996) and as General Manager of the domestic telephone
equipment business unit, and in December 1994 was also appointed Assistant
Secretary of the Company. From 1981 to 1994 he was employed by Zero Corporation
("Zero"), a manufacturer of cabinets, cooling equipment and containers for the
electronics industry. Mr. Sullivan was Controller of various divisions of Zero
from 1981 to 1991, and was Vice President/General Manager of the Zero-East
division from 1991 to 1994.

John G. Antonich was employed by the Company as Director of Sales in July
1993. In February 1996, he was appointed General Manager of the Cobotyx voice
processing products division. From January 1991 to April 1993 he was an Account
Executive with Quodata, a software manufacturer. Prior thereto, he had
extensive sales, technical and managerial experience with Sperry Univac,
Datapoint and Shared Technologies, Inc.

Item 10. Executive Compensation

Incorporated by reference to the Company's proxy statement which the
Company intends to file with the Securities and Exchange Commission within 120
days after the close of its fiscal year.

Item 11. Security Ownership of Certain Beneficial Owners and Management

Incorporated by reference to the Company's proxy statement which the
Company intends to file with the Securities and Exchange Commission within 120
days after the close of its fiscal year.

Item 12. Certain Relationships and Related Transactions

Incorporated by reference to the Company's proxy statement which the
Company intends to file with the Securities and Exchange Commission within 120
days after the close of its fiscal year.

PART IV

Item 13. Exhibits and Reports on Form 8-K

Exhibits: See Index to Exhibits on page 35.

Reports on Form 8-K: The registrant did not file any reports on Form 8-K during
the fourth quarter of 1996.

<PAGE> 20

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

FARMSTEAD TELEPHONE GROUP, INC.

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

Date: March 18, 1997

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Signature Title Date
- --------------------------- --------------------------------------- ----------------

<S> <C> <C>
/s/ George J. Taylor, Jr. Chairman of the Board, Chief Executive March 18, 1997
- --------------------------- Officer, and President (Principal
George J. Taylor, Jr. Executive Officer)

/s/ Robert G. LaVigne Vice President - Finance and March 18, 1997
- --------------------------- Administration, Chief Financial Officer
Robert G. LaVigne and Director (Principal Financial and
Accounting Officer)

/s/ Harold L. Hansen Director March 18, 1997
- ---------------------------
Harold L. Hansen

/s/ Hugh M. Taylor Director March 18, 1997
- ---------------------------
Hugh M. Taylor

/s/ Joseph J. Kelley Director March 18, 1997
- ---------------------------
Joseph J. Kelley
</TABLE>

<PAGE> 21

Deloitte &
Touche LLP
- ------------------------------------------------------------------------------
City Place Telephone: (860) 280-3000
185 Asylum Street Facsimile: (860) 280-3051
Hartford, Connecticut 06103-3402

INDEPENDENT AUDITOR'S REPORT

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

We have audited the accompanying consolidated balance sheets of Farmstead
Telephone Group, Inc. and subsidiaries as of December 31, 1996 and 1995, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 amount 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 financial statement presentation. We believe that our audits provide
a reasonable basis for our opinions.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Farmstead Telephone Group, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.

/s/ DELIOTTE & TOUCHE LLP

March 7, 1997

<PAGE> 22

FARMSTEAD TELEPHONE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 1996 and 1995

(In thousands, except number of shares) 1996 1995
- --------------------------------------------------------------------------------------

ASSETS

<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 2) $ 3,224 $ 622
Accounts receivable, less allowance for doubtful accounts
of $245 in 1996 and $121 in 1995 3,917 2,691
Inventories 3,931 1,946
Other current assets (Note 3) 619 139
---------------------
Total current assets 11,691 5,398

Property and equipment, net of accumulated depreciation and
amortization of $433 in 1996 and $326 in 1995 (Note 4) and
amortization 476 256
Investment in unconsolidated subsidiaries (Note 9) 117 201
Other assets 144 54
---------------------
Total assets $ 12,428 $ 5,909
=====================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Bank borrowings (Note 5) $ 1,903 $ 1,452
Accounts payable 2,364 1,053
Accrued expenses and other current liabilities 526 398
---------------------
Total current liabilities 4,793 2,903

Other liabilities - -
---------------------
Total liabilities 4,793 2,903

Commitments and contingencies (Note 10)

Stockholders' equity (Note 8):
Preferred stock, $0.001 par value; 2,000,000 shares
authorized; zero shares issued and outstanding - -
Common stock, $0.001 par value; 30,000,000 shares
authorized; 3,262,329 and 21,238,676 and shares issued
and outstanding in 1996 and 1995, respectively 3 21
Additional paid-in capital 12,196 8,431
Accumulated deficit (4,564) (5,446)
---------------------
Total stockholders' equity 7,635 3,006
---------------------
Total liabilities and stockholders' equity $ 12,428 $ 5,909
=====================
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE> 23

FARMSTEAD TELEPHONE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 1996 and 1995

(In thousands, except per share amounts) 1996 1995
- --------------------------------------------------------------------------------

<S> <C> <C>
Revenues $ 19,698 $ 15,317
Cost of revenues 13,702 10,645
---------------------
Gross profit 5,996 4,672
Operating expenses:
Selling, general and administrative 5,322 4,835
Research and development 125 99
---------------------
Total operating expenses 5,447 4,934
Operating income (loss) 549 (262)
Interest expense 159 99
Equity in unconsolidated subsidiaries 124 197
Other income (635) (14)
---------------------
Income (loss) before income taxes 901 (544)
Provision for income taxes 19 9
---------------------
Net income (loss) $ 882 $ (553)
=====================

Net income (loss) per share $ .35 $ (.27)
=====================

Weighted average common and common equivalent shares 2,486 2,084
=====================
</TABLE>

CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS' EQUITY

Years Ended December 31, 1996 and 1995

Common Stock Additional Stock
----------------- paid-in subscriptions Accumulated
(In thousands) Shares Amount capital receivable deficit Total
- ---------------------------------------- ------- ------ ---------- ------------- ----------- ---------

<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 20,399 $ 20 $ 8,045 $ (38) $ (4,893) $ 3,134

Warrants exercised 840 1 419 - - 420

Private placements of stock - - (33) 38 - 5

Net loss - - - - (553) (553)
---------------------------------------------------------------------------
Balance at December 31, 1995 21,239 21 8,431 - (5,446) 3,006

Stock options exercised 5 - 1 - - 1

One-for-ten reverse stock split (Note 8) (19,120) (19) 19 - - -

Sale of Units (Note 8) 1,138 1 3,745 - - 3,746

Net income - - - - 882 882
---------------------------------------------------------------------------
Balance at December 31, 1996 3,262 $ 3 $ 12,196 $ - $ (4,564) $ 7,635
===========================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE> 24

FARMSTEAD TELEPHONE GROUP, INC.

CONSOLOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 1996 and 1995

(In thousands) 1996 1995
- -------------------------------------------------------------------------------------------

<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 882 $ (553)
Adjustments to reconcile net income (loss) to net cash flows
used in operating activities:
Depreciation and amortization 173 158
Gross profit deferred on sales to unconsolidated subsidiary - 171
Equity in undistributed loss of unconsolidated subsidiary 113 20
Changes in operating assets and liabilities:
Increase in accounts receivable (1,226) (449)
Increase in inventories (1,985) (250)
(Increase) decrease in other assets (460) 16
Increase (decrease) in accounts payable, accrued expenses
and other current liabilities 1,439 (235)
---------------------
Net cash used in operating activities (1,064) (1,122)
---------------------

Cash flows from investing activities:
Purchases of property and equipment (382) (108)
Purchases of redeemable coupons (1,194) -
Redemptions of coupons 1,084 -
Decrease in short-term investments - 75
Investment in unconsolidated subsidiaries (40) (399)
---------------------
Net cash used in investing activities (532) (432)
---------------------

Cash flows from financing activities:
Proceeds from short-term and long-term borrowings 451 874
Repayments of short-term and long-term borrowings and capital
lease obligation - (27)
Proceeds from exercise of stock options and warrants, net 1 420
Proceeds from sales of Units and common stock, net 3,746 5
---------------------
Net cash provided by financing activities 4,198 1,272
---------------------

Net increase (decrease) in cash and cash equivalents 2,602 (282)

Cash and cash equivalents at beginning of period 622 904
---------------------

Cash and cash equivalents at end of period $ 3,224 $ 622
=====================

Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 159 $ 102
Income taxes 21 4
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE> 25

FARMSTEAD TELEPHONE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Operations

In 1996, the Company changed the presentation format of the Consolidated
Statement of Operations to provide more detailed information for the readers of
this statement. Comparative amounts for 1995 have also been conformed to this
presentation format.

Principles of Consolidation

The consolidated financial statements presented herein include the
accounts of the Company and all wholly-owned subsidiaries. Investments in
companies in which ownership interests range from 20-50% and which the Company
exercises significant influence but does not control, are accounted for under
the equity method. Under the equity method, the original investment is recorded
at cost and subsequently increased or decreased by the Company's share of the
subsidiary's undistributed earnings or losses. The investment is also reduced
by the amount of any deferred gross profits on sales to the subsidiary until
such time as the related goods are resold by the subsidiary. All material
intercompany transactions and balances have been eliminated.

Accounting Estimates

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Revenue Recognition

Revenues are recognized when a product is shipped or when a service is
performed.

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. Cost is determined
on an average basis, which approximates the first-in, first-out method.

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 five years. Maintenance, repairs and minor renewals
are charged to operations as incurred.

<PAGE> 26

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 bases. 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.

Net Income (Loss) Per Share

Net income (loss) per share is based on the weighted average number of
shares outstanding during each period. Fully diluted per share amounts are not
shown for the periods in which the effect is immaterial or antidilutive. In
calculating weighted average shares outstanding, all securities convertible
into common stock, such as stock options, warrants, and units, are excluded if
their effect on net income (loss) per share is antidilutive. Weighted average
shares and per share amounts for each period presented have been restated to
give retroactive recognition to the 1-for-10 reverse stock split effected
August 13, 1996.

New Accounting Pronouncement

In 1996 the company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". The adoption of this statement did not have a
material impact on the Company's financial statements.

2. CASH AND CASH EQUIVALENTS

Cash and cash equivalents at December 31, 1996 includes $3,042,000 which
is invested in a money market fund consisting of high quality short term
instruments, principally U.S. Government and Agency issues and commercial
paper.

3. OTHER CURRENT ASSETS

As part of a class action lawsuit settlement in 1995, AT&T was required
to issue approximately 4.2 million $50 face value coupons to the class action
members. The coupons are freely transferable and are redeemable against the
cost of certain specified AT&T telephone system products or maintenance
services sold by the Company during the period May 1, 1995 through June 1,
1997. In 1996, the Company began purchasing coupons in the marketplace at a
discount to their $50 face value and redeeming them with AT&T subject to a
maximum discount of 20% of the sales price up to a $2,500 maximum discount per
transaction. The Company's accounting policy is to record income in an amount
equal to the excess of the face value of the coupons redeemed over the
acquisition cost of the coupons, in the period in which it can calculate the
amount of rebate it has earned. During the year ended December 31, 1996, the
Company recorded $542,000 as other income from the redemption of coupons
applicable to prior year sales. Rebates earned on current year purchases are
recorded in cost of sales after the related products are sold, and amounted to
$411,000, net of commissions, for 1996. Included in other current assets at
December 31, 1996 was $231,000 of rebates receivable, representing cash due
from the tendering of redeemable coupons. Also included are unused coupons in
the amount of $110,000 which are valued at cost since the Company believes it
will be able to utilize them against future purchases before their June 1, 1997
expiration.

4. PROPERTY AND EQUIPMENT

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

<PAGE> 27

1996 1995
------ ------

<S> <C> <C>
At cost:
Equipment and vehicles $ 684 $ 402
Furniture and fixtures 167 76
Leasehold improvements 58 46
Leased equipment under capital lease (a) - 58
-----------------
909 582
Less accumulated depreciation and amortization (433) (326)
-----------------
$ 476 $ 256
=================
<FN>
- --------------------
<F1> (a) Lease contract expired in February 1996.
</FN>
</TABLE>

5. BANK BORROWINGS

On June 5, 1995, the Company entered into a one year renewable Commercial
Loan and Security Agreement (the "Loan Agreement") with Affiliated Business
Credit Corporation (merged with First Union Bank of Connecticut in November
1996), providing for a $1.5 million revolving line of credit. This agreement
replaced a $750,000 revolving loan facility with Fleet Bank., N.A. On March 11,
1996, the Loan Agreement was extended to May 31, 1997, and the amount of the
credit line was increased to $2.0 million, which was further increased in
February, 1997 to $2.5 million. Under the current terms of the Loan Agreement,
borrowings bear interest at the prime rate plus 1.5% (which was 9.75% at
December 31, 1996) on the greater of (i) the actual monthly loan balance or
(ii) a minimum assumed monthly loan balance of $700,000. The Company may borrow
against the aggregate of (i) 75% of eligible accounts receivable (domestic
receivables less than 90 days old) and (ii) 25% of eligible inventory (up to a
maximum inventory advance of $300,000), up to the maximum amount of the
facility. Borrowings under the Loan Agreement are repayable upon demand, and
are secured by all of the Company's assets. As of December 31, 1996, the unused
credit line was $97,000. The average and highest amounts borrowed under all
credit facilities during the year ended December 31, 1996 was $1,406,000 and
$2,088,000, respectively, as compared to $880,000 and $1,479,000, respectively,
for 1995. The Company's borrowings are dependent upon the continuing generation
of collateral, subject to its credit limit. The weighted average interest rate
on the Company's outstanding debt was 10.8 % for 1996 and 11.0% for 1995. The
Company expects to renew the revolving loan facility on substantially the same
terms prior to its expiration. The carrying values of the Company's borrowings
approximated their fair values at December 31, 1996 and 1995.

6. FORMATION OF SUBSIDIARY

Effective February 29, 1996, the Company purchased from AT&T Systems
Leasing Corporation, a subsidiary of AT&T Capital Corporation, certain assets
of its discontinued Asset Recovery Center ("ARC") for a purchase price of
$250,000. Prior to its closing in January 1996, the ARC primarily operated to
service AT&T affiliates in the orderly disposition, by way of consignment sales
arrangements, of excess, overstocked and end-of-life telecommunications,
computer and data transmission equipment. The assets acquired consisted
primarily of warehouse equipment, vehicles, computer and office equipment, and
inventory. The Company concurrently formed a subsidiary corporation, Farmstead
Asset Management Services, LLC ("FAMS"), which is using the purchased assets in
a similar operation in Piscataway, New Jersey. The Company believes that the
operations of FAMS provides it with an opportunity to develop new sources of
equipment for resale to its existing customers, as well as to other wholesalers
in the telephone, data and computer secondary markets, and internationally.

7. STOCK OPTIONS

The Company has three stock option plans: the 1986 Key Employees and Key
Personnel Stock Option Plan ("1986 Plan"), the 1987 Key Employees and Key
Personnel Stock Option Plan ("1987 Plan"), and the 1992 Stock Option Plan
("1992 Plan"). Each plan permits the granting of options to employees,
directors and consultants of the

<PAGE> 28

Company, which shall be either incentive stock options as defined under
Section 422 of the Internal Revenue Code, or non-qualified options. Incentive
stock options may be granted at no less than market value at the time of
granting, 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. The Company is authorized to grant options
to acquire up to 400,000 shares under the 1986 Plan, 750,000 shares under the
1987 Plan, and 3,500,000 shares under the 1992 Plan. By their terms, as of
October 1996, no further options may be granted under the 1986 Plan, and as of
March 1997, no further options may be granted under the 1987 Plan. Options
currently granted under each plan expire on various dates through 2006.

A summary of transactions for these plans for each of the two years in
the period ended December 31, 1996 is as follows (the number of shares and
option prices for all periods presented have been adjusted for the effects of
the 1-for-10 reverse stock split implemented in August 1996):

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

<S> <C> <C> <C>
Outstanding at December 31, 1994 163,850 $ 1.56 - 16.10 $ 8.10
Granted 116,000 2.50 - 5.20 4.70
Exercised - - -
Canceled or lapsed (15,000) 2.20 - 13.40 7.79
----------------------------------------

Outstanding at December 31, 1995 264,850 1.56 - 11.80 4.34
Granted 565,959 2.20 - 6.70 3.32
Exercised (500) 2.20 2.20
Canceled or lapsed (44,250) 3.30 - 4.20 4.17
----------------------------------------

Outstanding at December 31, 1996 786,059 $ 1.56 - 11.80 $ 3.71
========================================

As of December 31, 1996:
Exercisable 151,850 $ 1.56 - 11.80 $ 4.55
Available for future grant 3,765,562
</TABLE>

The following table summarizes information about stock options
outstanding under the Company's stock option plans as of December 31, 1996:

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

<C> <C> <C> <C> <C> <C>
$ 1.56 - 2.50 22,150 9.1 years $ 1.92 13,150 $ 1.73
3.12 - 3.90 548,959 6.9 years 3.32 6,500 3.46
4.20 - 5.50 197,100 5.4 years 4.57 120,350 4.46
6.70 - 11.80 17,850 3.7 years 8.47 11,850 9.16
</TABLE>

On June 7, 1995, the Company's Board of Directors amended the exercise
price of all outstanding options granted to employees and directors as of that
date. The exercise prices, if higher, were reduced to $.42 per share (further
adjusted to $4.20 per share as a result of the August 1996 reverse stock
split), representing the fair market value of the common stock on that date.
For owners of 10% or more of the common stock, the exercise price was reduced
to 110% of the fair market value.

An officer of the Company has an exercisable option to purchase 7,500
shares of common stock at $1.56 per share pursuant to a 1990 grant outside of
the above listed option plans.

<PAGE> 29

In June 1992, the Company granted a five year option to purchase up to
290,909 shares of common stock to The Wall Street Group, Inc. in conjunction
with a public relations service agreement. The exercise price was $.34 per
share, which represented the fair market value of the common stock at the grant
date. The number of shares and exercise price were adjusted to 29,091 and $3.44
respectively, as a result of the reverse stock split. No options have been
exercised, and the options are fully exercisable as of December 31, 1996.

The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option plans. Accordingly, compensation cost for stock
options is recorded as the excess, if any, of the market price of the Company's
common stock at the date of grant over the exercise price of the option. Had
compensation cost for the Company's stock option plans been determined in
accordance with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the
Company's net income (loss) and net income (loss) per share would have
approximated the proforma amounts shown below for each of the years ended
December 31 (in thousands except per share data):

1996 1995
----------------------- -----------------------
As Reported Proforma As Reported Proforma
----------- -------- ----------- --------

<S> <C> <C> <C> <C>
Net income (loss) $882 $418 $(553) $(688)
Net income (loss) per share $.35 $.17 $(.27) $(.33)
</TABLE>

The fair value of options granted during 1996 and 1995 was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: 6.25% risk-free interest rate, expected
option lives of 3.4 years, expected volatility of 80%, and no dividend yield.

8. STOCKHOLDERS' EQUITY

In 1986, 416,663 warrants were issued in conjunction with the formation
of the Company, each warrant entitling the holder to purchase one-half share of
common stock at a price of $2.00 per share, expiring April 30, 1992. In May
1987, the Company sold 3,313,630 units in its initial public offering, each
unit consisting of one share of common stock and a detachable unit warrant
(together with the warrants issued in 1986, hereinafter referred to as "Public
Warrants") entitling the holder to purchase one-half share of common stock at a
price of $2.00 per share, expiring April 30, 1992. Pursuant to the underwriting
agreement the Company issued to its underwriters options ("Underwriters
Options") to purchase 331,363 of the Company's units, exercisable at $1.68 per
unit through April 13, 1992.

Since May 1987, the Company has periodically extended and modified both
the Public Warrants and the Underwriters Options. Currently, both are due to
expire on June 30, 1997. The Public Warrants are currently exercisable at $4.70
per share, and entitle the holder to acquire 1.06 shares of common stock for
each warrant tendered. They are subject to redemption by the Company on thirty
days written notice at a price of $.05 per warrant, if the bid price for the
common stock is $11.25 or higher per share for ten consecutive business days.
The Underwriters Options are exercisable at $7.50 per unit, entitling the
holder to acquire one share of common stock and a warrant, exercisable at $4.70
per share, to purchase 1.06 shares of common stock.

During the year ended December 31, 1995, 839,729 Public Warrants were
exercised, raising approximately $420,000. As of December 31, 1996, there were
183,579 Public Warrants outstanding.

On April 18, 1994, the Company entered into agreements with Universal
Solutions, Inc. ("USI") and Pyramid Holdings, Inc. ("PHI"), both of which are
unaffiliated with the Company, pursuant to which each company subscribed for
the purchase of 500,000 shares of the Company's common stock at a subscription
price of $0.65 per

<PAGE> 30

share. By further agreement dated as of May 20, 1994, the subscription
agreements were amended to fix the price per share at 57.8 percent of the
average of the high and low bid price of the Company's common stock as of the
date the registration of the purchased stock was declared effective by
the Securities and Exchange Commission, subject to a minimum price of $0.45 and
a maximum price of $0.75 per share. On February 3, 1995, the registration of
these shares was declared effective, and a $0.45 per share subscription price
was determined. As of December 31, 1994, the Company had received an aggregate
of $375,000, and was holding the restricted shares in escrow, pending a
determination of the final subscription price and full payment thereof. In
March 1995 the Company made a business decision to reduce the $75,000 balance
owed for the shares by $37,500 in consideration of the length of the
registration process, and the further deterioration of the Company's stock
price. The subscriptions receivable balance of $37,500 was paid to the Company
in March 1995.

In September 1996, the Company completed a secondary offering of
1,000,000 Units, each Unit consisting of one share of Common Stock, one
Redeemable Class A Common Stock Purchase Warrant (the "Class A Warrants") and
one Redeemable Class B Common Stock Purchase Warrant (the "Class B Warrants",
and collectively with the Class A Warrants, the "Warrants") at an offer price
of $4.06 per Unit. The Units were first offered to stockholders of record as of
August 12, 1996 pursuant to a Rights Offering, which resulted in the sale of
80,512 Units. Upon completion of the Rights Offering, all of the remaining
919,488 Units were then sold through an underwritten offering. In October 1996
an additional 137,923 Units were sold to the Company's underwriter, pursuant to
the underwriter's over-allotment option provision. These transactions resulted
in proceeds of approximately $3,746,000, net of expenses. The Company intends
to use the proceeds to finance and expand the Company's business, which could
include the acquisition of other businesses, although the Company currently has
no specific agreements. Proceeds will also be used to further develop its
products, to expand its product marketing, and for general working capital
purposes.

Each Class A Warrant entitles the holder to purchase one share of Common
Stock at a price of $5.28 and each Class B Warrant entitles the holder to
purchase one share of Common Stock at a price of $6.09 at any time until August
12, 2001. The Warrants are redeemable by the Company at a redemption price of
$.10 per Warrant on thirty days' prior written notice, provided that the
reported closing price of the Common Stock equals or exceeds $6.09 for the
Class A Warrants and $6.90 for the Class B Warrants, for a period of twenty
consecutive trading days ending five days prior to the notice of redemption.

In connection with the underwritten portion of the secondary offering,
the Underwriter received a warrant to purchase 89,948 Units at an exercise
price of $6.70, exercisable from September 17, 1997 until September 16, 2001.

Prior to the commencement of the secondary offering, the Company
implemented a 1-for-10 reverse stock split which became effective August 13,
1996, and which had the effect of reducing the number of outstanding shares of
common stock prior to the commencement of the secondary offering from
21,243,676 to 2,124,406, and the number of outstanding warrants from 1,835,727
to 183,579. In this report, all per share amounts, numbers of shares, stock
options and market prices of the Company's common stock have been restated to
give retroactive recognition to the reverse stock split in prior periods. In
addition, approximately $19,000 was transfered from common stock to additional
paid-in capital in recognition of the decrease in the par value of the reduced
number of outstanding shares of common stock.

9. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES

In May 1995, the Company completed the acquisition of a 50% interest in
Beijing Antai Communication Equipment Co., Ltd. ("ATC"), for a purchase price
of $100, plus a $390,000 capital contribution to ATC. ATC, located in Beijing,
Peoples Republic of China ("PRC"), was formed in October 1992 as a Joint
Venture Enterprise, and is also owned 50% by Beijing Aquatic Product Inc. ATC,
previously a distributor for the Company in the PRC, markets, assembles,
manufactures, installs and services the Company's telecommunications products
which

<PAGE> 31

have been developed for use in the PRC. These products include (i) used
Lucent PBX equipment, and (ii) central office equipment, consisting of
proprietary Chinese system software, proprietary digital and analog interfaces,
and a proprietary billing system, the combination of which enables the PBX
equipment to be operated as a small central office. ATC also distributes and
installs local telecommunications transmission systems and home and business
alarm systems, however their historical operations to date have been
insignificant, and no assurances can be given that the Company or ATC will be
successful in selling its products in the PRC. The acquisition costs exceeded
the underlying equity in the net assets of ATC by approximately $190,000 which
are being amortized on a pro rata basis over the remaining 17 year term of the
joint venture.

In June 1996, the Company and several Phillipines investors formed
TeleSolutions, Inc., in which the Company invested $40,000 for a 40% ownership
interest. TeleSolutions was formed for the purpose of refurbishing, installing
and selling telecommunications equipment in the Republic of the Philippines.

Summarized financial information for affiliated companies accounted for
by the equity method is as follows for each of the years ended December 31
($000s):

<TABLE>
<CAPTION>
1996 1995
------- -------

<S> <C> <C>
Current assets $ 941 $ 941
Total assets 1,027 1,034
Current liabilities 807 670
Total liabilities 798 658
Sales revenues 20 15
Gross profit (loss) (68) 8
Net loss (243) (41)
</TABLE>

The following table shows the changes in the Company's investment in
unconsolidated subsidiaries during each of the years ended December 31
($000's):

1996 1995
----- -----

<S> <C> <C>
Investment at beginning of year $ 201 $ -
Capital contribution, including other direct
acquisition costs 40 399
Equity in unconsolidated subsidiary:
Deferred gross profit on sales to subsidiary - (171)
Equity in net losses (113) (20)
Amortization of excess of cost over equity
in net assets (11) (6)
---------------
Investment at end of year $ 117 $ 201
===============
</TABLE>

10. LEASES AND OTHER COMMITMENTS AND CONTINGENCIES

The Company leases, on a month-to-month basis, approximately 24,000
square feet of office and warehouse space in East Hartford, Connecticut which
it uses for its principal executive and administrative offices and its
telephone equipment operations, and 4,000 square feet of office space in
Danbury, Connecticut, which it uses for its voice processing products division.
In March 1996, the Company's newly formed subsidiary, Farmstead Asset
Management Services, LLC, entered into a two year lease for approximately
70,100 square feet of warehouse and office space in Piscataway, New Jersey at a
monthly rent of $24,827 commencing in April 1996. Rent expense was $422,000 in
1996 and $201,000 in 1995.

In November 1996, the company entered into a five year lease, commencing
February 1997, for a 34,760 square foot building in East Hartford, CT. Under
the terms of the lease agreement, the minimum monthly rental

<PAGE> 32

will be $13,759 for the first two years, $14,483 for year three, and $15,207,
for years four and five. The lease agreement contains two three-year renewal
options. In March 1997, the Company relocated substantially all of its
Connecticut operations into this facility.

Future minimum lease payments for noncancelable operating leases at
December 31, 1996 are as follows: $435,514 for 1997, $239,589 for 1998,
$172,348 for 1999, $181,036 for 2000, $182,484 for 2001 and $30,414 thereafter.

11. INCOME TAXES

Current income tax expense attributable to income from continuing
operations consists of state tax expense of $19,000 in 1996 and $9,000 in 1995.
There was no deferred federal or state tax expense in either of those years.

Income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 34 percent to pretax income (loss) as a result
of the following (in thousands):

1996 1995
------- -------

<S> <C> <C>
Computed "expected" tax expense (benefit) $ 300 $ (185)
Increase (reduction) in income taxes resulting from:
Amortization of goodwill 3 10
State and local income taxes, net of federal income
tax benefit 15 6
Unutilized loss of foreign subsidiary 43 7
(Realized) unrealized benefit of operating loss
carryforwards (350) 164
Other 8 7
------------------
$ 19 $ 9
==================
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1996 and 1995
are as follows (in thousands):

1996 1995
------- -------

<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts $ 100 $ 65
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the Tax
Reform Act of 1986 142 77
Net operating loss and capital loss carryforwards 855 1,301
Other 130 32
------------------
Total gross deferred tax assets 1,227 1,475
Less valuation allowance (1,227) (1,475)
------------------
Net deferred tax assets $ - $ -
==================

Deferred tax liabilities $ - $ -
==================
</TABLE>

The valuation allowance is considered necessary due to the Company's past
history of operating losses. Accordingly, net deferred tax assets have been
reduced to the amount which management believes is more likely than not to be
realized.

The Company has net operating loss carryforwards for federal income tax
purposes of approximately $2,107,000. No federal income tax provision has been
made in the accompanying financial statements because of the presence of net
operating loss carryforwards. These carryforwards expire on various dates
through 2010.

<PAGE> 33

12. BUSINESS DEVELOPMENTS

On July 27, 1995, the Company entered into a Joint Venture Agreement ("JV
Agreement") with Asia-Pacific Services, Inc. of Atlanta, Georgia ("APSI") and
Beijing Taikang Telecommunications, Inc., owned and operated by the Planning
and Research Institute of the Ministry of Posts and Telecommunications, PRC
("Taikang"). The purpose of the joint venture ("JV") was to be the assembly and
marketing in the Chinese market and certain international markets of voice
processing equipment and software, including all of the Company's current voice
processing products. On July 27, 1995 the Company also entered into an
agreement ("Interim Agreement") with these same parties for the provision of
product marketing and other business organization activities in advance of the
startup of the JV. For the year ended December 31, 1995, the Company incurred
expenses pursuant to these agreements of approximately $450,000, consisting of
working capital provided, project management consulting fees, travel costs and
demonstration products provided by the Company.

As a result of the Company's inability to fund the $1 million initial
capital contribution requested by Taikang, on November 1, 1995 the Company and
Taikang agreed to terminate both the JV Agreement and the Interim Agreement.

<PAGE> 34

INDEX TO EXHIBITS

Registrant hereby incorporates by reference the following documents filed
as part of the S-18 Registration Statement of the Company's securities declared
effective on April 13, 1987 (File No. 3-9556B).

3(a) Certificate of Incorporation.

3(b) By-Laws.

4(a) Form of Unit Warrant.

4(b) Amended Form of Underwriter's Option.

4(d) 1987 Key Employees and Key Personnel Stock Option Plan.

10(i) Agreement between the Company and AT&T.

Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual Report for the year ended December 31, 1988 on
Form 10-K:

10.5 Amendment to the 1986 Key Employees and Key Personnel Stock
Option plan previously filed as Exhibit No. 4(c) in the Form
S-18 Registration Statement of Farmstead Telephone Group, Inc.
declared effective on April 3, 1987.

10.6 Amendment to the 1987 Key Employees and Key Personnel Stock
Option Plan previously filed as Exhibit No. 4(d) in the Form
S-18 Registration Statement of Farmstead Telephone Group, Inc.
declared effective on April 13, 1987.

Registrant hereby incorporates by reference the following exhibits filed
as part of the S-3 Registration Statement of the Company's securities declared
effective on July 3, 1991 (File No. 33-41442)

4 Form of Private Placement Warrant

Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual Report for the year ended December 31, 1991 on
Form 10-K:

10.12 Certificate of Amendment of Certificate of Incorporation of
Farmstead Telephone Group, Inc., dated July 10, 1991.

Registrant hereby incorporates by reference the following exhibits filed
with the Form S-3 Registration Statement of the Company's securities declared
effective on October 29, 1992 (Registration No. 33-50432):

4(a) 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.

10(e) Agreement dated June 25, 1992 between the Company and The Wall
Street Group, Inc.

Registrant hereby incorporates by reference the following exhibit filed
with the Registrant's Annual Report on Form 10-K for the year ended December
31, 1992:

<PAGE> 35

4(e) 1992 Stock Option Plan.

Registrant hereby incorporates by reference the following exhibits filed
as part of Form SB-2 , dated December 8, 1994 (Registration No. 33-87134):

10.1 Subscription Agreement between Farmstead Telephone Group, Inc.
and Universal Solutions, Inc., dated April 18, 1994 ("USI
Agreement").

10.1.1 Amendment No. 1 to USI Agreement.

10.2 Subscription Agreement between Farmstead Telephone Group, Inc.
and Pyramid Holdings, Inc., dated April 18, 1994 ("PHI
Agreement").

10.2.1 Amendment No. 1 to PHI Agreement.

10.4 Employment Contract for George J. Taylor, Jr.

Registrant hereby incorporates by reference the following exhibits filed
as part of Form SB-2 , Amendment No. 1, dated January 21, 1995 (Registration
No. 33-87134):

10.5 Consulting Agreements with Hansen Associates.

10.6 Agreement between Farmstead Telephone Group, Inc. and Taikang
Telecommunication Technology Company, dated November 15, 1994.
(Terminated)

10.7 Stock Purchase Agreement between Farmstead Telephone Group,
Inc. and DW International Ltd., dated December 31, 1994.

Registrant hereby incorporates by reference the following exhibit filed
with the Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1994:

10.1 Agreement dated March 8, 1995 by and among Farmstead Telephone
Group, Inc., Taikang Telecommunication Technology Company of
Planning and Research Institute of the Ministry of Posts and
Telecommunications, Comprehensive Service Development Center of
the Great Hall of the People, and Asia-Pacific Services, Inc.
(Terminated)

10.2 Letter of Intent dated March 8, 1995 by and among Farmstead
Telephone Group, Inc., Taikang Telecommunication Technology
Company of Planning and Research Institute of the Ministry of
Posts and Telecommunications, Comprehensive Service Development
Center of the Great Hall of the People, and Asia-Pacific
Services, Inc. (Terminated)

10.3 Summary compensation arrangements for Named Executive.

Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1995:

10.2 Commercial Revolving Loan and Security Agreement dated June 5,
1995, between Farmstead Telephone Group, Inc. and Affiliated
Business Credit Corporation

10.3 Contract for Beijing Antai Communication Equipment Company
Ltd., dated September 23, 1992

<PAGE> 36

Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual report on Form 10-KSB for the year ended December
31, 1995:

10.1 Letter agreement dated March 11, 1996, amending the Commercial
revolving Loan and Security Agreement dated June 5, 1995
between Farmstead Telephone Group, Inc. and Affiliated Business
Credit Corporation

Registrant hereby incorporates by reference the following exhibits filed
as part of SB-2 Registration Statement dated June 3, 1996 (Registration No.
333-5103):

1.1 Form of Standby Underwriting Agreement.

1.2 Form of Selected Dealers Agreement.

4.2 Form of Underwriter's Warrant Agreement (including Form of
Underwriter's Warrant).

10.1 Form of Underwriter's Consulting Agreement.

Registrant hereby incorporates by reference the following exhibits filed
as part of Amendment No. 1 to SB-2 Registration Statement dated July 22, 1996
(Registration No. 333-5103):

10.2 Letter of Agreement dated June 3, 1996 between Farmstead
Telephone Group, Inc. and Lucent Technologies, Inc.

Registrant hereby incorporates by reference the following exhibits filed
as part of Amendment No. 2 to SB-2 Registration Statement dated July 22, 1996
(Registration No. 333-5103):

3(a) Amendment of Certificate of Incorporation.

4.1 Form of Warrant Certificate.

4.3 Form of Warrant Agreement.

4.4 Form of Unit Certificate.

Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996:

10.1 Agreement of Lease By and between Tolland Enterprises and
Farmstead Telephone Group, Inc., dated November 5, 1996.

The following exhibits are filed herewith:

11 Statement re: Computation of per share earnings.

21 Subsidiaries of Small Business Issuer

27 Financial Data Schedule

<PAGE> 37

EXHIBIT 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS

Years ended December 31, 1996 and 1995

(In thousands, except per share amounts)

PRIMARY: 1996 1995
------- -------

<S> <C> <C>
Weighted average shares outstanding 2,460 2,084

Net effect of dilutive stock options and warrants based on
the treasury stock method using average market price 26 -
-------------------
Total weighted average shares 2,486 2,084
===================

Net income (loss) $ 882 $ (553)
===================

Income (loss) per share $ .35 $ (0.27)
===================
</TABLE>

In calculating weighted average shares, all securities convertible into
common stock are excluded if their inclusion would have the effect of
increasing the earnings per share amount or decreasing the loss per share
amount otherwise computed. Fully diluted earnings (loss) per share is not
presented because it is anti-dilutive.

For purposes of this schedule, weighted average shares and per share
amounts shown for each period presented have been restated to give effect to a
1-for-10 reverse stock split implemented August 13, 1996.

For each period presented, fully diluted earnings (loss) per share is
considered to be the same as primary earnings (loss) per share, since the
effect is immaterial and antidilutive.

<PAGE> 38

EXHIBIT 21. SUBSIDIARIES OF THE SMALL BUSINESS ISSUER

<TABLE>
<CAPTION>
Percent State or other jurisdiction of
Name Owned incorporation or organization
- --------------------------------------------------- ------- ------------------------------

<S> <C> <C>
Beijing Antai Communication Equipment Company, Ltd. 50% Peoples Republic of China

GlobalFONE of Romania (1) 100% Romania

Farmstead Asset Management Services, LLC 98% Delaware

FTG Venture Corporation (2) 100% Delaware

TeleSolutions, Inc. 40% Republic of the Philippines

<FN>
- --------------------
<F1> (1) Inactive

<F2> (2) Holds a 2% interest in Farmstead Asset Management Services, LLC.
</FN>
</TABLE>

<PAGE> 39

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,224
<SECURITIES> 0
<RECEIVABLES> 4,162
<ALLOWANCES> 245
<INVENTORY> 3,931
<CURRENT-ASSETS> 11,691
<PP&E> 909
<DEPRECIATION> 433
<TOTAL-ASSETS> 12,428
<CURRENT-LIABILITIES> 4,793
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 7,632
<TOTAL-LIABILITY-AND-EQUITY> 12,428
<SALES> 19,698
<TOTAL-REVENUES> 19,698
<CGS> 13,702
<TOTAL-COSTS> 13,702
<OTHER-EXPENSES> 4,936
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 159
<INCOME-PRETAX> 901
<INCOME-TAX> 19
<INCOME-CONTINUING> 882
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 882
<EPS-PRIMARY> .35
<EPS-DILUTED> .35

</TABLE>