(Mark One)

Commission File Number:  0-15938

(860) 610-6000
(Registrant's telephone number)

      As of October 25, 2000, the registrant had 3,272,579 shares of its $0.001 par value Common Stock outstanding.

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See accompanying notes to consolidated financial statements.

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See accompanying notes to consolidated financial statements.

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See accompanying notes to consolidated financial statements.

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      The interim financial statements are presented on a consolidated basis, consisting of the accounts of Farmstead Telephone Group, Inc. and its wholly owned subsidiary, FTG Venture Corporation (inactive) (the "Company"). The interim financial statements presented herein are unaudited, however in the opinion of management reflect all adjustments, consisting of adjustments that are of a normal recurring nature, which are necessary for a fair statement of results for the interim periods presented. This Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.

      Debt obligations maturing within one year consisted of the following (in thousands):

      In January 2000, the Company's participation in an interest-free inventory financing program sponsored by Lucent Technologies ended, concurrent with the transfer of the Company's supplier relationship with Lucent to Catalyst Telecom, an authorized Lucent distributor.

      On September 27, 2000, the Company entered into a two-year, $8 million revolving loan agreement (the "Loan Agreement") with First Union National Bank ("FUNB"), replacing its $10 million revolving credit line with Deutsche Financial Services Corporation. Under the terms of the Loan Agreement, borrowings are advanced at 75% of eligible accounts receivable (primarily receivables that are less than 90 days old), and at 50% of the value of eligible inventory (inventory that was purchased new or refurbished and ready for sale) , provided that the amount advanced against eligible inventory shall not exceed $2 million. The interest rate to be charged the Company on outstanding borrowings is the LIBOR Market Index Rate plus 2.5% (9.12 % at September 30, 2000). The Company is also charged an availability fee equal to .25% per annum on the unused portion of the credit line. Since it is the Company's intent to maintain this credit facility for longer than one year, borrowings are classified as long-term debt.

      The Loan Agreement restricts the Company from the payment of dividends without the consent of FUNB, and requires the Company to maintain a minimum tangible net worth of $6 million at all times. The Loan Agreement also contains financial covenants requiring the Company to maintain certain debt-to-equity and funds flow coverage ratios which the Company was in compliance with at September 30, 2000. As of September 30, 2000, the unused portion of the credit facility was approximately $6.1 million, of which approximately $3.9 million was available under various borrowing formulas. The average and highest amounts borrowed under all revolving credit facilities during the three months ended September 30, 2000 were approximately $1,826,000 and $3,142,000, respectively. The average and highest amounts borrowed under all revolving credit facilities during the nine months ended September 30, 2000 were approximately $3,109,000 and $5,145,000, respectively.

      Long-term debt obligations consisted of the following (in thousands):

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      Accrued expenses and other current liabilities consisted of the following (in thousands):

      The gross profit for the three months ended September 30, 2000 was $2,921,000, an increase of $520,000 or 21.7% over the comparable prior year period. The gross profit for the nine months ended September 30, 2000 was $7,014,000, an increase of $1,308,000 or 22.9% over the comparable prior year period. During the current three month period, as a percentage of revenue, the gross profit increased to 26.4% from 23.6% in the comparable prior year period. This improvement in the current quarter was primarily attributable to product sales mix, particularly a higher percentage of used equipment sales over new equipment sales, and to favorable used equipment purchase costs. The gross margin also benefitted from lower labor and overhead costs.

      During the current nine month period, as a percentage of revenue, the gross profit decreased to 22.2%, from 24.2% in the comparable prior year period. The decrease in the current nine month period was primarily attributable to lower profit margins on sales of new equipment, product sales mix, particularly higher sales of equipment to other resellers at margins lower than the Company's end-user sales margins, losses incurred under the Company's contract to repair equipment for Lucent, and charges incurred in the disposal and revaluation of certain inventories.

      SG&A expenses for the three months ended September 30, 2000 were $2,257,000, an increase of $369,000 or 19.5% over the comparable 1999 period. SG&A expenses for the nine months ended September 30, 2000 were $5,963,000, an increase of $890,000 or 17.5% over the comparable 1999 period. As a percentage of revenues, SG&A expenses were 20.4% and 18.8%, respectively, for the three and nine months ended September 30, 2000, as compared to 18.6% and 21.5%, respectively, for the three and nine months ended September 30, 1999. The increase in SG&A expenses in the current year quarter was primarily attributable to higher sales and sales support compensation, including higher sales commissions from increased sales volume and profit margins, and increased personnel. The Company also incurred increased costs associated

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with consulting fees and expenses relating to business performance improvement projects, and higher marketing expenses, while incurring lower levels of bad debts, depreciation , office and public relations expenses. The increase in SG&A expenses in the current nine month period was primarily attributable to higher sales and sales support compensation, including higher sales commissions from increased sales volume and profit margins, and increased personnel. The Company also incurred increased costs associated with consulting fees and expenses relating to business performance improvement projects and higher employee insurance costs, while incurring lower levels of bad debts, depreciation , and public relations expenses. Although no assurances can be given, management believes it can continue to hold SG&A expenses (as a percent of revenues) at or below current percentage levels.

      Interest expense for the three and nine months ended September 30, 2000 was $58,000 and $257,000, respectively, as compared to $91,000 and $219,000, respectively, for the three and nine month periods of 1999. The decrease in interest expense in the current three month period was attributable to lower average borrowings under the Company's revolving credit facilities, partially offset by higher borrowing costs. The increase in interest expense in the current nine month period was attributable to both higher average borrowings and higher borrowing costs. During the current three month period, average borrowings under all revolving credit facilities were approximately $1,826,000 at an average borrowing rate of 10%, compared with average borrowings of approximately $3,557,000 at an average borrowing rate of 8.5% for the same period of 1999. During the current year nine month period, average borrowings under all revolving credit facilities were approximately $3,109,000 at an average borrowing rate of 9.6%, compared with average borrowings of approximately $2,562,000 at an average borrowing rate of 8% for the same period of 1999. Other income in each current and prior year period consisted primarily of interest earned on invested cash.

      Working capital at September 30, 2000 was $8,338,000, an 18% decrease from $10,150,000 at December 31, 1999. The working capital ratio was 2.4 to 1 at September 30, 2000, compared with 3.2 to 1 at December 31, 1999.

      Operating activities provided $4,436,000 during the nine months ended September 30, 2000, principally due to the generation of net income, reductions in inventories and an increase in accounts payable partially attributable to improved vendor payment terms. Investing activities used $141,000 during the nine months ended September 30, 2000 from the purchase of fixed assets. Financing activities used $3,864,000 during the nine months ended September 31, 2000, in the reduction of the Company's borrowings under its revolving credit lines, repayments of amounts due under its inventory finance agreement, and the repayment of capital lease obligations.

      On September 27, 2000, the Company entered into a two-year, $8 million revolving loan agreement (the "Loan Agreement") with First Union National Bank ("FUNB"), replacing its $10 million revolving credit line with Deutsche Financial Services Corporation. Under the terms of the Loan Agreement, borrowings are advanced at 75% of eligible accounts receivable (primarily receivables that are less than 90 days old), and at 50% of the value of eligible inventory (inventory that was purchased new or refurbished and ready for sale) , provided that the amount advanced against eligible inventory shall not exceed $2 million. The interest rate to be charged the Company on outstanding borrowings is the LIBOR Market Index Rate plus 2.5% (9.12 % at September 30, 2000). The Company is also charged an availability fee equal to .25% per annum on the unused portion of the credit line. Since it is the Company's intent to maintain this credit facility for longer than one year, borrowings are classified as long-term debt.

      The Loan Agreement restricts the Company from the payment of dividends without the consent of FUNB, and requires the Company to maintain a minimum tangible net worth of $6 million at all times. The Loan Agreement also contains financial covenants requiring the Company to maintain certain debt-to-equity and funds flow coverage ratios which the Company was in compliance with at September 30, 2000. As of September 30, 2000, the unused portion of the credit facility was approximately $6.1 million, of which approximately $3.9 million was available under various borrowing formulas. The average and highest amounts borrowed under all revolving credit facilities during the three months ended September 30, 2000 were approximately $1,826,000 and $3,142,000, respectively. The average and highest amounts borrowed under all revolving credit facilities during the nine months ended September 30, 2000 were approximately $3,109,000 and $5,145,000, respectively.

      The Company is currently dependent upon its existing credit agreements and accounts receivable collection experience, to provide cash to satisfy its working capital requirements. Material changes in its credit agreements, or a slowdown in the collection of accounts receivable, could negatively impact the Company. No assurances can be given that the Company will have sufficient cash resources to finance future growth, and it may become necessary to seek additional financing for such purpose. There are currently no material commitments for capital expenditures.

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      The Company's prospects are subject to certain uncertainties and risks. The discussions set forth in this Form 10-Q contain certain statements which are not historical facts and are considered forward-looking statements within the meaning of the Federal Securities laws. The Company's actual results could differ materially from those projected in the forward-looking statements as a result of, among other factors, general economic conditions and growth in the telecommunications industry, competitive factors and pricing pressures, changes in product mix, product demand, risk of dependence on third party suppliers, and other risk factors detailed in this report, described from time to time in the Company's other Securities and Exchange Commission filings, or discussed in the Company's press releases. In addition, other written or oral statements that constitute forward-looking statements may be made by or on behalf of the Company. All forward-looking statements included in this document are based upon information available to the Company on the date hereof. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

      Market risks which have the potential to affect the Company's earnings and cash flows result primarily from changes in interest rates. The Company's cash equivalents, which consist of an investment in a money market fund consisting of high quality short term instruments, principally US government and agency issues and commercial paper, are subject to fluctuating interest rates. A 10 percent change in such current interest rates would not have a material effect on the Company's results of operations or cash flow.

      The Company is also exposed to market risk from changes in the interest rate related to its revolving credit facility, which is based upon the LIBOR Market Index Rate, which is a floating interest rate. Assuming an average borrowing level of $3.1 million (which amount approximated the average amount borrowed under all revolving credit facilities during the nine months ended September 30, 2000), each 1 percentage point increase in the LIBOR Market Index Rate would result in $31,000 of additional annual interest charges. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes.

      Effective October 1, 2000, Lucent Technologies completed the spin-off of its Enterprise Networks Group business segment (PBX business), as well as its SYSTIMAX® cabling and LAN-based data businesses to Lucent shareholders, forming a separate company named Avaya Inc ("Avaya") that will focus directly and independently on the enterprise networking market. According to Lucent, Avaya has started out as an $8 billion Fortune 200 company with a #1 position in the U.S. call center and voice communications systems markets. The Company's Lucent contractual relationships are being continued with Avaya.

Item 6.   Exhibits and Reports on Form 8-K:

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      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.