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

                                 FORM 10-KSB

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

                 For the fiscal year ended December 31, 1998

                       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:

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

    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:  $27,738,000

As of February 26, 1999, 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 $5,627,334.

As of February 26, 1999, the registrant had 3,272,579 shares of its $0.001 
par value Common Stock outstanding.

                     DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant's definitive proxy statement for the 
Annual Meeting of Stockholders to be held on June 17, 1999 are incorporated 
by reference in Items 9 through 13 of Part III of this Annual Report on 
Form 10-KSB.

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

<PAGE>  1

                      TABLE OF CONTENTS TO FORM 10-KSB

                                   PART I

                                                                  Page
                                                                  ----

Item 1.    Business                                                 3
Item 2.    Property                                                 6
Item 3.    Legal Proceedings                                        6
Item 4.    Submission of Matters to a Vote of Security Holders      6

                                   PART II

Item 5.    Market for Common Equity and Related 
            Stockholder Matters                                     6
Item 6.    Management's Discussion and Analysis of Financial
            Condition and Results of Operations                     7
Item 7.    Financial Statements                                    11
Item 8.    Changes in and Disagreements With Accountants
            on Accounting and Financial Disclosure                 12

                                  PART III

Item 9.    Directors, Executive Officers, Promoters and
            Control Persons; Compliance with Section 16(a)
            of the Exchange Act                                    12
Item 10.   Executive Compensation                                  13
Item 11.   Security Ownership of Certain Beneficial Owners
            and Management                                         13
Item 12.   Certain Relationships and Related Transactions          13
Item 13.   Exhibits and Reports on Form 8-K                        13

<PAGE>  2

                                   PART I

Item 1.  Business

General

      Farmstead Telephone Group, Inc. ("Farmstead" or the "Company") was 
incorporated in Delaware in 1986 and became publicly held in May 1987 
following the completion of an initial public offering.  The Company is 
located at 22 Prestige Park Circle, East Hartford, CT 06108, and its 
telephone number is (860) 610-6000.  The Company is principally engaged as 
(i) a secondary market reseller, and authorized Lucent Dealer of 
remanufactured and refurbished Lucent Technologies, Inc. ("Lucent") 
telecommunications parts and systems, and (ii) as an authorized Lucent 
dealer for certain new telecommunications products. These Lucent products 
are primarily customer premises-based private switching systems and 
peripheral products, including voice processing systems.  The Company also 
provides telecommunications equipment repair and refurbishing, rental, 
inventory management, and related value-added services.  The Company sells 
its products and services primarily to both large and small end-user 
businesses, government agencies, and other secondary market dealers.

      In January, 1994, the Company acquired certain operating assets of 
Cobotyx Corporation, Inc., a designer,  manufacturer and supplier of voice 
processing systems.  The Company expanded its entry into this marketplace 
by concurrently forming a voice processing products division operating 
under the trade name "Cobotyx." In December 1997, the Company decided to 
begin the process of divesting itself from this business, and during 1998, 
while actively looking for a buyer for certain of its assets and developed 
technologies, significantly downsized all related operations, including 
terminating product development activities.  To date, the Company has not 
located a qualified buyer for this business.  The operations of the Cobotyx 
business unit were not material to the Company's 1998 operating results.   
For the years ended December 31, 1998 and 1997, Cobotyx generated revenues 
of $605,000 and $1,479,000, respectively. 

      In February, 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.   Due to declining revenues and continued operating 
losses, effective October 1, 1997, the Company sold all of its ownership 
interests in FAMS. During 1997, prior to the sale date, FAMS recorded 
revenues of $799,000.

Products 

      The Company primarily sells remanufactured, refurbished (by the 
Company or other equipment refurbishers) and new telecommunications parts 
and systems manufactured by Lucent (See "Relationship with Lucent 
Technologies" for further information on Lucent).  These products are 
primarily private switching systems, generally PBXs and key systems, 
located at the customers premises, that permit a number of local telephones 
or terminals to communicate with one another, with or without use of the 
public telephone network.  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.  A PBX normally has more memory capacity and 
therefore can provide more features and flexibility than a key system.  The 
Company sells both telecommunication system parts and complete systems, 
however the Company's revenues are predominantly from the sale of parts. 
Parts sold include both digital and analog telephone sets and circuit 
packs, and other system accessories and related products such as headsets, 
consoles, speakerphones, paging systems and voice processing products 
offered by Lucent.

      Lucent key systems sold by the Company, in both piece parts and 
complete systems, include:  Merlin(R) and Merlin Legend(R),   Spirit(R) and 
Partner(R).   Lucent PBX equipment sold by the Company, primarily in parts, 
include Definity(R), System 75 and System 85.

      Equipment sales revenues accounted for approximately 94% of 
consolidated revenues from continuing operations in 1998 (93% in 1997), 
while service revenues comprised 6% of consolidated revenues from 
continuing operations in 1998 

<PAGE>  3

(7% in 1997).  Sales of PBX equipment and associated telephones and 
peripherals comprised approximately 81% of equipment sales in 1998 
(85% in 1997), while key equipment and other equipment sales comprised 
19% (15% in 1997).

Relationship with 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 1998 consolidated revenues of $30.1 
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."

      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 up to a one-year warranty for 
products purchased from Lucent for resale. 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.

      Since February 1998, the Company has been operating under a Lucent-
sponsored "Authorized Remarketing Supplier" ("ARS") program as an ARS 
Dealer, licensed under a three-year contract entered into in December 1998 
(the "ARS Agreement") to sell "Classic Lucent(TM)" products to end users 
nationwide.  Classic Lucent products are defined as used Lucent key system 
and PBX system parts, currently supported by Lucent,  that have been 
refurbished by the Company under Lucent quality standards.  This 
designation applies to substantially all of the used Lucent products which 
the Company now sells. The Company is currently one of four companies 
authorized to participate in this program.  No company has been designated 
an exclusive sales territory.  The ARS Agreement also allows the Company to 
sell certain new Lucent PBX products and voice processing products to end 
users.  Prior thereto, the Company was an "Authorized Distributor of 
Selected Lucent - Remanufactured Products" since 1991.

      In February 1999, in connection with the Company's appointment as an 
ARS Dealer, the Company's new key system distributor agreement and 
associated dealer base were transferred to another Lucent distributor.  The 
transfer reflects the Company's focus on developing its Classic Lucent 
products business.

      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 could be materially 
adversely affected should Lucent decide to cancel the aforementioned 
agreements.

Marketing and Customers

      Telecommunications parts, systems and services are marketed through 
the Company's direct sales staff, which includes salespersons located 
throughout the east coast, Illinois and California, and through a network 
of associate dealers (until February 25, 1999), to over 2,600 business 
locations, with customers ranging from large, multi- location corporations, 
to small companies and home offices, and to equipment wholesalers, dealers, 
and government agencies and municipalities.  Approximately 84% (90% in 
1997) of the Company's revenues were generated by customers located in New 
England, and along the east coast.  End users accounted for approximately 
87% of 1998 revenues (89 % in 1997), while sales to dealers and other 
resellers accounted for approximately 13% of 1998 revenues (11% in 1997).  
During the two years ended December 31, 1998, no single customer accounted 
for more than 10% of  revenues from continuing operations, except for 
Lucent, which accounted for 15% of 1998 revenues. The Company's business is 
not considered seasonal.

      The Company had attempted over the last several years prior to 1998 
to market telecommunications equipment in the People's Republic of China 
and in the Republic of the Philippines. Its efforts, however, were not 
successful, and by the end 

<PAGE>  4

of 1997 the Company ceased pursuing these international markets.  The Company 
is currently focusing its sales efforts domestically.

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 
equipment 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.  The in-house work includes cleaning, 
buffing and minor repairs.   The Company outsources major repairs of 
circuit boards and digital telephone sets.

      Inventory Management:   The Company provides inventory storage, 
accounting, and distribution services, acting as a centralized depot for 
its customers' idle telecommunications equipment.

      Equipment Rentals:  The Company rents out equipment on a month-to-
month basis, servicing those customers that have temporary, short-term 
equipment needs.

      Other Services:   The Company's technical staff currently provide 
engineering, configuration, technical "hot line" telephone support and 
limited on-site installation services. For customers in the television 
broadcast industry the Company provides telecommunications coordination 
services for broadcast sports and other events throughout the country.

      The Company's combined service revenues accounted for 6% of revenues 
from continuing operations in 1998 and 7% in 1997.  No individual service 
category accounted for more than 5% of revenues from continuing operations.

Competition

      The Company operates in a highly competitive marketplace.  Telephone 
equipment product competitors currently include Lucent and other new 
equipment manufacturers such as Northern Telecom Limited, other new 
equipment distributors, as well as other secondary market equipment 
resellers, of which the Company estimates there are over 100 nationwide.   
In the sale of Classic Lucent products, the Company competes with the other 
Lucent-designated ARS Dealers.  The Company believes that key competitive 
factors in its market are timeliness of delivery, service support, price 
and product reliability.  The Company also considers its working 
relationships with its customers to be an important and integral 
competitive factor. 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 ("Computer 
Telephony Integration" - the actual hardware and software that attaches to 
both telephone systems and computers) products, the Company anticipates 
that it will encounter a broader variety of competitors, including new 
entrants from related computer and communication industries.

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, its largest supplier, and other 
secondary market equipment dealers, distributors, leasing companies and end 
users.   In accordance with its agreements with Lucent, the Company is 
required to purchase new products only from Lucent or Lucent-approved 
distributors.  The Company is not otherwise dependent upon any other single 
supplier for telecommunications equipment.  The Company believes that if 
its Lucent agreements were to be terminated, it could obtain these products 
from other suppliers.   The Company believes that product availability in 
the marketplace is presently sufficient to allow the Company to meet its 
customers' equipment delivery requirements.  See also "Relationship with 
Lucent Technologies."

<PAGE>  5

Patents, Licenses and Trademarks

      No patent or trademark is considered material to the Company's 
continuing operations.  Pursuant to agreements in effect with Lucent, the 
Company may utilize, during the term of these agreements, certain Lucent 
designated trademarks, insignia and symbols in the Company's advertising 
and promotion of Lucent products.

Employees

      As of December 31, 1998, the Company had 81 employees, of which 80 
were employed on a full-time basis.  The Company's employees are not 
represented by any organized labor union and are not covered by any 
collective bargaining agreements.

Item 2.   Property

      As of December 31, 1998, the Company operated in a 34,760 square foot 
building in East Hartford, CT, which is being leased pursuant to a five-
year lease which commenced February 1997. The lease agreement contains two 
three-year renewal options.  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 
its 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

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

                                   PART II

Item 5.   Market for Common Equity and Related Stockholder Matters

      The Company's securities are traded on the American Stock Exchange.  
The Company's securities and their trading symbols are as follows:  Common 
Stock - "FTG"; Warrant issued in the Company's 1987 initial public offering 
("IPO Warrants") - "FTG.WS";  Redeemable Class A Common Stock Purchase 
Warrant - "FTG.WS.A"; Redeemable Class B Common Stock Purchase Warrant - 
"FTG.WS.B".  The following sets forth the range of quarterly high and low 
sales prices for these securities, for the two years ended December 31, 
1998:

<TABLE>
<CAPTION>

                 Common Stock:                       IPO Warrants:
                      1998              1997              1998             1997
                 --------------    --------------    -------------    ------------
Quarter Ended    High      Low     High      Low     High     Low     High    Low
-------------    ----      ---     ----      ---     ----     ---     ----    ---

<S>              <C>      <C>      <C>      <C>      <C>      <C>     <C>     <C>
March 31         $3.50    $1.81    $4.00    $2.75    $1.13    $.31    $.38    $.13
June 30           2.75     1.50     3.62     2.25     1.13     .63     .50     .13
September 30      2.25     1.25     2.56     1.69      .56     .38     .56     .31
December 31       2.81     1.13     2.94     1.62      .75     .31     .63     .38

<CAPTION>

                 Class A Warrants:                   Class B Warrants:
                      1998              1997              1998             1997
                 --------------    --------------    -------------    ------------
Quarter Ended    High      Low     High      Low     High     Low     High    Low
-------------    ----      ---     ----      ---     ----     ---     ----    ---

<S>              <C>      <C>      <C>      <C>      <C>      <C>     <C>     <C>
March 31         $ .38    $ .06    $ .75    $ .31    $ .19    $.03    $.50    $.19
June 30            .25      .06      .50      .19      .25     .03     .44     .13
September 30       .38      .13      .56      .19      .38     .06     .19     .06
December 31        .75      .25      .50      .13      .75     .19     .19     .06

</TABLE>

<PAGE>  6

      There were 3,264,579 and 3,262,329 common shares outstanding at 
December 31, 1998 and 1997, respectively.  There were 183,579 IPO Warrants 
and 1,137,923 Class A Warrants and Class B Warrants outstanding at December 
31, 1998 and 1997.  As of December 31, 1998 there were 580 holders of 
record of the common stock  representing approximately 3,900 beneficial 
stockholders.  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 First Union National Bank, 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.

Year Ended December 31, 1998 Versus Year Ended December 31, 1997 

Results of Operations

Net Income (Loss)

      The Company recorded net income of $571,000 for the year ended 
December 31, 1998 as compared to a net loss of $1,866,000 for the year 
ended December 31, 1997.  The results for 1998 consisted of income from 
continuing operations of $780,000, and a loss from discontinued operations 
of $209,000. The results for 1997 consisted of a loss from continuing 
operations of $600,000, and a loss from discontinued operations of 
$1,266,000.

      Due to declining revenues and resulting operating losses, effective 
October 1, 1997, the Company sold its wholly-owned subsidiary, Farmstead 
Asset Management Services, LLC ("FAMS") to FAMS, LLC, a newly formed New 
Jersey corporation (the "Buyer") owned by a former employee for $40,000 in 
cash and a $360,000 10% Note, payable in 60 monthly installments.  In doing 
so, the Company recorded in 1997 a loss on disposal of FAMS of $208,000.  
Prior to the effective date of sale, FAMS incurred an operating loss of 
approximately $578,000 in 1997, on revenues of $799,000.  Included in the 
loss from discontinued operations for 1998 is a $195,000 charge to reduce 
the note receivable from FAMS, LLC to its estimated realizable value.

      In December 1997, due to declining revenues and resulting operating 
losses in the Cobotyx business unit, the Company began actively pursuing 
divesting itself of this voice processing products business. To date, the 
Company has not located a qualified buyer, however during 1998 the Company 
significantly reduced all business operations, including the cessation of 
internal product development activities. The loss from discontinued 
operations attributable to Cobotyx operations was $14,000 for 1998, on 
revenues of $605,000, as compared to a loss of $480,000 in 1997 on revenues 
of $1,479,000.  The Company expects revenues to continue to decline as 
demand for the Cobotyx products diminish, however the Company does not 
expect this to have a material impact on future operating results.

Discussion of the Results of Continuing Operations

Revenues

      Revenues from continuing operations for the year ended December 31, 
1998 were $27,738,000, an increase of $7,179,000 or 35% from the comparable 
1997 period.  During 1998 the Company established several new sales offices 
throughout the country, and increased its sales force.  The Company also 
benefited from its appointment as a Lucent Authorized Remarketing Supplier 
of Classic Lucent telephone equipment ("ARS"). These factors resulted in a 
33% increase in end user equipment sales.  The increase in revenues was 
also attributable to 66% growth in equipment sales to dealers and other 
resellers, and a 16% growth in service revenues, consisting principally of 
installations, event coordination and equipment rentals.  End user 
equipment sales revenues accounted for 81% of revenues in 1998 (82% in 
1997), while revenues from dealers and other equipment resellers accounted 
for 13% (11% in 1997) and services accounted for 6% of revenues (7% in 
1997).  As a part of its agreement in becoming an ARS, in February 1999 the 
Company transferred its new key system dealer base to another Lucent 
distributor.  Revenues from this dealer base accounted for 10% of revenues 
in 1998 (8% in 1997).  The Company anticipates that this loss in revenue 
will be offset by increased revenues under the ARS agreement.

<PAGE>  7

Gross Profit

      Gross profit from continuing operations for the year ended December 
31, 1998 was $6,922,000, an increase of $1,823,000 or 36% from the 
comparable 1997 period.  The overall gross profit margin was 25% of 
revenues during both 1998 and 1997.  License fees paid in 1998 to Lucent 
for equipment sales under the ARS program reduced the gross profit margin 
by 1 percentage point however, this was offset by lower overhead costs per 
sales dollar on the higher volume sales level.  The Company anticipates 
that the gross profit margin will remain at the current level for 1999.

Selling, General & Administrative ("SG&A") Expenses

      SG&A expenses from continuing operations for the year ended December 
31, 1998 were $5,926,000, an increase of $818,000 or 16% over the 
comparable 1997 period.  SG&A expenses were 21% of revenues in 1998, versus 
25% for the comparable 1997 period.  Sales and marketing expenses accounted 
for 75% of the increase in SG&A due to increased sales compensation 
expenses resulting from increased sales and sales support personnel and 
commission payments on a higher sales volume, and from increased travel 
expenses in connection with supporting its remote salespersons and 
marketing the new ARS program to Lucent sales offices nationwide.  Higher 
facility occupancy costs, including increased depreciation expense from 
fixed assets purchased in connection with the Company's 1997 business 
relocation, accounted for approximately 20% of the SG&A growth over 1997.

Interest Expense and Other Income

      Interest expense increased $68,000 or 33% in 1998 versus 1997.  The 
increase was attributable to higher average debt levels as compared with 
the prior year.  Other income from continuing operations for the years 
ended December 31, 1998 and 1997 consisted principally of interest earned 
on the Company's invested cash.

Year Ended December 31, 1997 Versus Year Ended December 31, 1996

Net  Income (Loss)

      The Company recorded a net loss $1,866,000 for the year ended 
December 31, 1997 as compared to net income of $882,000 for the year ended 
December 31, 1996.  These results consisted of a loss from continuing 
operations of $600,000 for 1997 as compared to income from continuing 
operations of $1,206,000 for 1996, and a loss from discontinued operations 
of $1,266,000 for 1997 as compared to a loss from discontinued operations 
of $324,000 for 1996.

Continuing Operations

      The decline in the operating results from continuing operations from 
1996 to 1997 was attributable to several factors.  In 1997, due to the 
unprofitable operations of the Company's foreign affiliates, ATC and 
TeleSolutions, the Company established a full valuation reserve against all 
associated assets, including inventory located overseas.  The combined 
foreign affiliate losses and asset write-downs resulted in a one-time 
charge of $444,000.  The Company recorded approximately $899,000 less 
income in 1997 from the AT&T coupon rebate program than it did in 1996, due 
to the expiration of this program in 1997.  In addition, the Company's 
operating expenses increased as the Company increased its employment levels 
in connection with expanding its sales territory and product lines, and 
relocating to a larger facility.

Discontinued Operations

      In September 1997, due to declining revenues and resulting operating 
losses, the Company entered into negotiations with an employee of FAMS for 
the sale of the Company's interest in FAMS.  The sale transaction was 
completed in December, effective October 1, 1997.  FAMS, LLC, a newly 
formed New Jersey corporation (the "Buyer") acquired all of the Company's 
interest in FAMS for $40,000 in cash and a $360,000 10% Note, payable in 60 
monthly installments.  The Note is secured by a  $45,000 letter of  credit 
and by all  of the assets of  FAMS.  The Company has recorded a loss on 
disposal of FAMS of $208,000, consisting of $116,000 representing the 
excess of the book value of the net assets sold over the sales proceeds, 
and $92,000 of other costs and expenses of the sale. For the years ended 
December 31, 1997 and 1996, FAMS recorded revenues of $799,000 and 
$1,230,000, respectively.  Prior to the effective date of sale, FAMS 
incurred an operating loss of approximately $578,000 in 1997, as compared 
with an operating loss of approximately $370,000 in 1996.

      In December 1997 the Company began actively pursuing divesting itself 
of its Cobotyx voice processing products business.  Assets expected to be 
sold during 1998 include inventories, fixed assets, and certain other 
current assets which, as of December 31, 1997 aggregated approximately 
$560,000, plus all related technologies developed by the Company, 
tradenames, and other contract rights.  The operations of this business 
through its disposal date are not expected to have a material negative 
impact on the Company's 1998 operating results, and the Company expects to 
sell these assets at book value.   For the years ended December 31, 1997 
and 1996, voice processing product revenues approximated $1,479,000 and 

<PAGE>  8

$2,297,000, respectively. The loss from operations was approximately 
$480,000 in 1997 as compared to income from operations of $46,000 in 1996. 

Revenues

      Revenues from continuing operations for the year ended December 31, 
1997 were $20,559,000, an increase of  $4,253,000 or 26% from the 
comparable 1996 period.   The increase was attributable to sales of new 
products principally through the Company's associated dealers, increased 
end user secondary market equipment sales, and increased service revenues.  
Telephone equipment sales revenues accounted for  approximately 93% of  
revenues in 1997 and in 1996, while service revenues comprised 7% of 
revenues in both years.

Gross Profit

      Gross profit from continuing operations for the year ended December 
31, 1997 was $5,099,000, an increase of $659,000 or 15% from the comparable 
1996 period.  The gross profit margin was 25% of revenues during 1997, as 
compared to 27% of revenues for the comparable 1996 period. The decrease in 
gross profit margin was attributable principally to product sales mix as 
sales of new equipment to dealers, which yield lower profit margins than 
end user sales, increased over the prior year.  The decrease in the gross 
profit margin from the prior year was also partly attributable to lower 
product purchase rebates earned in 1997 from the utilization of AT&T 
coupons.

Selling, General & Administrative ("SG&A") Expenses

      SG&A expenses from continuing operations for the year ended December 
31, 1997 were $5,108,000, an increase of $1,558,000 or 44% over the 
comparable 1996 period.  SG&A expenses were 25% of revenues in 1997, 
compared with 22% for the comparable 1996 period.  The increase in SG&A in 
1997 was principally attributable to (i) higher average employment levels 
and associated compensation costs, as the Company increased its sales, 
marketing, customer and technical support staff, developed a network of 
associate dealers, and expanded its sales territories and product lines, 
and (ii) higher facility rental and occupancy costs, including increased 
depreciation expense from fixed assets purchased in connection with the 
Company's relocation to its larger headquarters in East Hartford, 
Connecticut.

Other Income and Expenses

      Other income from continuing operations for the year ended December 
31, 1997 was $100,000, as compared with $627,000 for the year ended 
December 31, 1996.  Other income for 1997 consisted principally of interest 
earned on the Company's invested cash.  Included in other income for 1996 
was $542,000  of  rebates earned from AT&T on coupons tendered for 
redemption, net of coupon acquisition costs.

      Interest expense increased $47,000 or 30% in 1997 as compared with 
1996.  The increase was attributable to higher average borrowings under the 
Company's revolving credit facility, and interest expense incurred under a 
capital lease entered into in 1997.

Liquidity and Capital Resources

      Working capital, defined as current assets less current liabilities, 
at December 31, 1998 was $7,399,000, an increase of $959,000 from the 
$6,440,000 of working capital at December 31, 1997.  The working capital 
ratio at December 31, 1998 was approximately 2.4 to 1 versus 3.1 to 1 at 
December 31, 1997.  The decline in the ratio was principally attributable 
to the use of cash and short term borrowings to finance the increase in 
inventories during the fourth quarter of 1998.

      Operating activities used $2,424,000 during the year ended December 
31, 1998, principally as a result of a $4,267,000 increase in inventories.  
The increase in inventories was attributable to (i) a special purchase by 
the Company of approximately $2 million of  new equipment from Lucent in 
advance of a scheduled price increase, (ii) higher stocking levels of 
equipment refurbished by Farmstead to be sold under the Classic Lucent 
trademark, and (iii) increased inventories of equipment acquired from 
trade-ins and customer bids, requiring repair and refurbishing by Farmstead 
before it can be sold. 

      Investing activities used $214,000 during the year ended December 31, 
1998, from the purchase of telecommunications and computer equipment for 
the Company's internal use.  The Company has no material fixed asset 
purchases planned for 1999.

<PAGE>  9

      Financing activities generated $2,126,000 during the year ended 
December 31, 1998, from advances under the Company's inventory financing 
and revolving credit facilities.  On October 1, 1998 the Company's credit 
facility with Finova Capital Corporation ("Finova") was increased to $4 
million, and on February 4, 1999 further increased to $5 million, until 
March 31, 1999 at which time it will revert back to a $2 million facility.  
The credit line has been used to finance Lucent products purchased directly 
from Lucent or from approved Lucent distributors.  Such advances are 
repayable, interest-free, in either two or three equal monthly 
installments, depending upon the product purchased.  As of December 31, 
1998, outstanding borrowings aggregated $3,082,000, and all borrowings are 
secured by the Company's inventories.

      The Company also maintains a $6 million revolving loan facility with 
First Union National Bank, expiring May 30, 2000.  Under the current 
agreement, effective January 1, 1999, borrowings are advanced at 75% of 
eligible accounts receivable, bear interest at LIBOR plus 2.75% (7.8% at 
December 31, 1998) and are secured by all of the Company's assets excluding 
inventories.  The agreement requires the Company to maintain a minimum 
tangible net worth of $5.75 million, increasing to $6 million at December 
31, 1999, and to maintain certain debt to net worth and debt service 
coverage ratios.  In addition, the agreement restricts fixed asset 
purchases and does not allow the payment of cash dividends without the 
consent of the lender.  There is no requirement to maintain compensating 
balances under the agreement.  As of  December 31, 1998, the unused portion 
of the credit facility was $4.3 million, of which approximately $1.2 
million was available under the borrowing formula.  The average and highest 
amounts borrowed during the year ended December 31, 1998 were approximately 
$2,329,000 and $3,673,000, respectively.  Borrowings are dependent upon the 
continuing generation of collateral, subject to the credit limit.  The 
weighted average interest rate on this facility debt was 9.5% for 1998 and 
10.1% for 1997.

      The Company believes that it has sufficient capital resources, in the 
form of cash and availability under its credit facilities, to satisfy its 
current working capital obligations, although there can be no assurances 
that this will be the case.  The Company is currently reviewing its working 
capital financing needs with its current lenders, and expects to maintain 
its facilities at their current levels.  The Company believes it can obtain 
similarly structured credit facilities from other credit providers on terms 
not materially less favorable to the Company than its present terms.  
Inflation  has not been a significant factor in the Company's operations.

YEAR 2000 READINESS DISCLOSURES

      The Company considers "Year 2000 ("Y2K") compliant" products to be 
those which, when used in accordance with their associated documentation, 
will not fail to perform in accordance with their specifications or as 
otherwise warranted, in any manner that is material and adverse to the 
customer, as relating to the product's handling of calendar dates provided, 
however, that the products are used only with services, products and/or 
software that are themselves Y2K compliant and which properly exchange 
accurate date data with each other.  During 1998, the Company formed a Y2K 
Project Team to conduct an assessment of its internal business systems and 
products.  The Team is directed by the Company's Vice President of 
Operations and includes other members of senior management.  The Company 
additionally set up a Year 2000 website at www.farmstead.com that provides 
Year 2000 product information as well as information on the progress of the 
Company's Year 2000 efforts.

      The Company's significant internal computer-based systems consist of 
hardware and packaged software purchased from outside vendors, which 
operate in a Windows NT Local Area Network environment.  The Company plans 
to upgrade to Year 2000 compliant versions of these systems and equipment, 
and upgrade its internal use personal computers, by the end of April, 1999. 
The Company also plans to have a contingency plan developed by the end of 
September, 1999 which will address potential operational problems and 
customer support problems in the event an interruption in its normal 
operating environment should occur.  The Company currently estimates that 
the costs to upgrade its internal use computer- based systems and 
associated computer hardware to Y2K compliant products will not exceed 
$25,000. 

      The Company distributes and resells telecommunications parts and 
systems manufactured by Lucent.   Lucent is also the Company's major 
product supplier.  As such, the Company relies upon representations made by 
Lucent as to the Year 2000 compliance status of its products.  Based upon 
information disseminated by Lucent, the Company believes that those Lucent 
products from which the Company principally derives its sales revenues are 
either currently Year 2000 compliant, or can be upgraded to a compliant 
version.   For products determined to be non-compliant, our policy is to 
assist our customers in obtaining Y2K compliant components or system 
upgrades at a reasonable cost when, and if, Y2K compliant versions are 
subsequently made available.

<PAGE>  10

      To ensure the continued delivery of third party products and 
services, Farmstead has sent surveys to its major suppliers and has been 
assessing their responses.  Since almost all of Farmstead's major suppliers 
are still engaged in executing their own readiness plans, Farmstead cannot, 
at this time, fully assess the Year 2000 risks to its supply chain.  We 
will continue to monitor the Year 2000 status of our major suppliers and 
will develop appropriate contingent responses as these risks become 
clearer.

      The Company believes that it is taking the necessary steps to resolve 
Year 2000 issues and to lessen the risks associated therein.  The risks to 
the Company from a failure to resolve Year 2000 issues, either in its 
internal systems or from a failure on the part of its major suppliers and 
key business partners, are perceived by management to be similar for other 
businesses in the Company's industry and for other businesses generally.  
The Company is reliant upon its outside vendors to provide Y2K compliant 
upgrades to the Company's internal computer systems.  The failure of the 
Company to obtain such Y2K compliant products could result in a temporary 
inability to process transactions, ship product, send invoices, or engage 
in similar normal operating activities on a timely basis.  In such event, 
the Company's operating results, including sales levels or cash flow could 
be adversely affected.  The Company believes, however, that this is 
mitigated somewhat by the Company's relatively small size and transaction 
volumes, such that manual processing procedures could be quickly 
implemented to accommodate most significant internal processes.

      The Company can give no guarantee that the systems of other companies 
upon which the Company relies will be converted on time, or that a 
significant operating problem caused by a Y2K problem would not have a 
material adverse effect on the Company.  Since the Company is a distributor 
of Lucent products, and Lucent is the Company's key supplier,  the Company 
could be materially adversely impacted by Y2K problems which impact 
Lucent's ability to supply product to the Company on time, or to supply 
product that is Y2K compliant.  It is presently unknown to what extent the 
Company could be materially adversely impacted by any of such scenarios.  

Forward-Looking Statements

      The Company's prospects are subject to certain uncertainties and 
risks.  The discussions set forth in this Form 10-KSB report contain 
certain statements, based on current expectations, estimates, forecasts and 
projections about the industry in which the Company operates and 
management's beliefs and assumptions, 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 certain 
risks, uncertainties and assumptions which are difficult to predict.  They 
include, 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, Y2K problems 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 which 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.

Item 7.   Financial Statements 

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

                                                                Page
                                                                ----

Report of Deloitte & Touche LLP                                  15
Consolidated Balance Sheets - December 31, 1998 and 1997         16
Consolidated Statements of  Operations - Years Ended
 December 31, 1998 and 1997                                      17
Consolidated Statements of Changes in Stockholders'
 Equity - Years Ended  December 31, 1998 and 1997                18
Consolidated Statements of Cash Flows - Years Ended
 December 31, 1998 and 1997                                      19
Notes to Consolidated Financial Statements                       20

<PAGE>  11

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.  In the event the Company is 
unable to file its proxy statement within such time, an amended Form 10-KSB 
will be filed in lieu thereof.

                      Executive Officers of the Company
                     (Information as of January 1, 1999)

<TABLE>
<CAPTION>

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

<S>                        <C>      <C>        <C>
George J. Taylor, Jr. *    56       1984       Chairman of the Board, 
                                               President, Chief Executive 
                                               Officer

Robert G. LaVigne *        47       1988       Executive Vice President,
                                               Chief Financial Officer, 
                                               Secretary, Treasurer

Alexander E. Capo          48       1987       Vice President - Sales

Joseph A. Novak, Jr.       55       1993       Vice President - Operations

Neil R. Sullivan           47       1994       Vice President- Accounting & 
                                               Administration, Assistant 
                                               Secretary

Robert L. Saelens          53       1997       Vice President - Marketing

--------------------
<F*>  Member of the Board of Directors.

</TABLE>

      George J. Taylor, Jr., Chairman of the Board of Directors and Chief  
Executive Officer of the Company (including its predecessors) since 1984, 
and President since 1989.  Member of the Compensation Committee of the 
Board of Directors (until February 24, 1998).  President of Lease 
Solutions, Inc. (formerly Farmstead Leasing, Inc.), a business  products 
and automobile leasing company, from 1981 to 1993.  Vice President - 
Marketing and Sales for National Telephone Company from 1977 to 1981.  
Director of Beijing Antai Communication Equipment Company, Ltd. ("ATC").  
Mr. Taylor was one of the founders of the National Association of 
Telecommunication Dealers, has been a  member of, or advisor to, its Board 
of Directors since its inception in 1986, and for  two years served as its 
President and Chairman.  Brother of Mr. Hugh M. Taylor, a Director of the 
Company.

      Robert G. LaVigne, Executive Vice President since July 1997.  Chief 
Financial Officer, Corporate Secretary and Treasurer since 1988.  Vice 
President - Finance & Administration from 1988 until July 1997.  General 
Manager of the domestic telephone equipment division from January 1994 
until October 1994.  Controller of Economy Electric Supply, Inc., a  
distributor of electrical supplies and fixtures, from 1985 to 1988.  
Corporate Controller of Hi-G, Inc., a  manufacturer of electronic and 
electromechanical components, from 1982 to 1985.  Certified Public 
Accountant.  Director of ATC.

<PAGE>  12

      Alexander E. Capo, Vice President - Sales since July 1997.  Vice 
President - Sales & Marketing from 1987 until July 1997.   Director of 
Sales for The Farmstead Group, Inc. from 1985 to 1987.  Sales Manager for 
the National Telephone Company from 1972 to 1983.

      Joseph A. Novak, Jr., Vice President - Operations since 1993.  
General Manager of Farmstead Asset Management Services, LLC from 1996 to 
1997.   Prior to 1990, he was employed  by AT&T for 28 years, serving in 
various operational and sales management capacities. Vice General Manager 
and a Director of ATC. 

      Neil R. Sullivan, Vice  President - Accounting & Administration since 
July 1997.  Vice President & General Manager of the domestic telephone 
equipment division from August 1996 to July 1997.  Corporate Controller 
from October 1994 to August 1996.  Assistant Secretary  of the Company 
since 1994. 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.

      Robert L. Saelens, Vice President - Marketing since June 1997.  
President of Saelens & Associates, a marketing consulting firm, from 1989 
to 1997.  President of Baker, Bateson & Saelens, Inc., a marketing 
consulting firm, from 1982 to 1989.  Prior thereto Mr. Saelens served for 
ten years in the Creative and Strategic planning departments of the J. 
Walter Thompson Corporation.

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.  In the event the 
Company is unable to file its proxy statement within such time, an amended 
Form 10-KSB will be filed in lieu thereof.

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.  In the event the Company is 
unable to file its proxy statement within such time, an amended Form 10-KSB 
will be filed in lieu thereof.

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.  In the event the Company is 
unable to file its proxy statement within such time, an amended Form 10-KSB 
will be filed in lieu thereof.

Item 13.  Exhibits and Reports on Form 8-K

(a) Exhibits:  See Index to Exhibits on page 28.

(b) Reports on Form 8-K:   The registrant did not file any reports on Form 
8-K during the fourth quarter of 1998.

PAGE  13

                                 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 on March 19, 1999.

                                       FARMSTEAD TELEPHONE GROUP, INC.

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

      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 indicated as of March 19, 1999.

Signature                              Title
---------                              -----

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

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

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

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

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

<PAGE>  14

                       REPORT OF DELOITTE & TOUCHE LLP

                        INDEPENDENT AUDITORS' 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 subsidiary (the "Company") as of December 31, 
1998 and 1997, 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 
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 financial statements are free 
of material misstatement.  An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the 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 opinion.

In our opinion, such consolidated financial statements present fairly, in 
all material respects, the financial position of Farmstead Telephone Group, 
Inc. and subsidiary as of December 31, 1998 and 1997, and the results of 
their operations and their cash flows for the years then ended in 
conformity with generally accepted accounting principles.


/s/ Deloitte & Touche LLP

February 19, 1999

<PAGE>  15

                       FARMSTEAD TELEPHONE GROUP, INC.
                         CONSOLIDATED BALANCE SHEETS
                         December 31, 1998 and 1997

<TABLE>
<CAPTION>

(In thousands, except share data)                              1998       1997
-------------------------------------------------------------------------------

<S>                                                          <C>        <C>
ASSETS
Current assets:
  Cash and cash equivalents                                  $   590    $ 1,102
  Accounts receivable, less allowance for doubtful
   accounts of $287 in 1998 and $579 in 1997                   4,950      5,077
  Inventories                                                  6,850      2,583
  Net assets of discontinued operations (Note 6)                   -        560
  Other current assets                                           194        181
-------------------------------------------------------------------------------
Total Current Assets                                          12,584      9,503
-------------------------------------------------------------------------------
Property and equipment, net (Note 3)                             845        935
Other assets                                                      69        391
-------------------------------------------------------------------------------
Total Assets                                                 $13,498    $10,829
===============================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                           $ 1,442    $ 1,560
  Borrowings under inventory finance agreement (Note 5)        3,082        889
  Current portion of long-term debt (Note 5)                      78         69
  Accrued expenses and other current liabilities (Note 4)        583        545
-------------------------------------------------------------------------------
Total Current Liabilities                                      5,185      3,063
-------------------------------------------------------------------------------
Long-term debt (Note 5)                                        1,916      1,997
Other liabilities (Note 11)                                       53          -
-------------------------------------------------------------------------------
Total Liabilities                                              7,154      5,060
-------------------------------------------------------------------------------

Commitments and contingencies  (Note 10)

Stockholders' Equity:
  Preferred stock, $0.001 par value; 2,000,000 shares
   authorized; no shares issued and outstanding                    -          -
  Common stock, $0.001 par value; 30,000,000 shares
   authorized; 3,264,579 and 3,262,329 shares issued
   and outstanding in 1998 and 1997, respectively                  3          3
  Additional paid-in capital                                  12,200     12,196
  Accumulated deficit                                         (5,859)    (6,430)
-------------------------------------------------------------------------------
Total Stockholders' Equity                                     6,344      5,769
-------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity                   $13,498    $10,829
===============================================================================

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>  16

                       FARMSTEAD TELEPHONE GROUP, INC.
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                   Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>

(In thousands, except per share amounts)                               1998       1997
---------------------------------------------------------------------------------------

<S>                                                                  <C>        <C>
Revenues                                                             $27,738    $20,559
Cost of revenues                                                      20,816     15,460
---------------------------------------------------------------------------------------
Gross Profit                                                           6,922      5,099
Selling, general and administrative expenses                           5,926      5,108
---------------------------------------------------------------------------------------
Operating Income (Loss)                                                  996         (9)
---------------------------------------------------------------------------------------
Interest expense                                                         272        204
Equity in losses of unconsolidated subsidiaries (Note 9)                   -         40
Write-down of investments in unconsolidated subsidiaries (Note 9)          -        404
Other income                                                             (72)      (100)
---------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes             796       (557)
Provision for income taxes                                                16         43
---------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations                                 780       (600)
---------------------------------------------------------------------------------------
Discontinued Operations (Note 6):
  Loss from operations                                                   (14)    (1,058)
   Loss on sale of discontinued operation                               (195)      (208)
---------------------------------------------------------------------------------------
Loss From Discontinued Operations                                       (209)    (1,266)
---------------------------------------------------------------------------------------
Net Income (Loss)                                                    $   571    $(1,866)
=======================================================================================

Net Income (Loss) per Common Share
Basic and diluted net income (loss) per common share:
  From continuing operations                                         $   .23    $  (.18)
  From discontinued operations                                          (.06)      (.39)
---------------------------------------------------------------------------------------
Basic and diluted net income (loss) per common share                 $   .17    $  (.57)
---------------------------------------------------------------------------------------

Weighted Average Common Shares Outstanding
Basic weighted average common shares                                   3,264      3,262
Dilutive effect of stock options                                         140          -
---------------------------------------------------------------------------------------
Diluted weighted average common and common equivalent shares           3,404      3,262
---------------------------------------------------------------------------------------

</TABLE>

        See accompanying notes to consolidated financial statements.

<PAGE>  17

                       FARMSTEAD TELEPHONE GROUP, INC.
                     CONSOLIDATED STATEMENTS OF CHANGES 
                           IN STOCKHOLDERS' EQUITY
                   Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>

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

<S>                             <C>        <C>       <C>            <C>         <C>
Balance at December 31, 1996    3,262      $  3      $12,196        $(4,564)    $ 7,635
Net loss                            -         -            -         (1,866)     (1,866)
---------------------------------------------------------------------------------------
Balance at December 31, 1997    3,262         3       12,196         (6,430)      5,769
Stock options exercised             2         -            4              -           4
Net income                          -         -            -            571         571
---------------------------------------------------------------------------------------
Balance at December 31, 1998    3,264      $  3      $12,200        $(5,859)    $ 6,344
=======================================================================================

</TABLE>

        See accompanying notes to consolidated financial statements.

<PAGE>  18

                       FARMSTEAD TELEPHONE GROUP, INC.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                   Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>

(In thousands)                                                            1998       1997
------------------------------------------------------------------------------------------

<S>                                                                      <C>       <C>
Operating Activities:
Net income (loss)                                                        $  571    $(1,866)
Adjustments to reconcile net income (loss) to net cash flows
 used by operating activities:
  Depreciation and amortization                                             309        308
  Equity in undistributed losses of unconsolidated subsidiaries               -         40
  Write-down of investments in unconsolidated subsidiaries                    -         77
  Write-down of accounts receivable from unconsolidated subsidiary            -        265
Changes in operating assets and liabilities:
  Decrease (increase) in accounts receivable                                127     (1,550)
  (Increase) decrease in inventories                                     (4,267)       528
  Decrease (increase) in other assets                                       303        (32)
  Decrease in accounts payable, accrued expenses and
   other current liabilities                                                (27)      (431)
  Decrease in net assets of discontinued operations                         560        462
------------------------------------------------------------------------------------------
Net cash used by operating activities                                    (2,424)    (2,199)
------------------------------------------------------------------------------------------
Investing Activities:
Purchases of property and equipment                                        (214)      (552)
Redemptions of coupons                                                        -         60
------------------------------------------------------------------------------------------
Net cash used in investing activities                                      (214)      (492)
------------------------------------------------------------------------------------------
Financing Activities:
Bank and inventory finance borrowings                                     2,185        682
Repayments of capital lease obligation                                      (63)       (50)
Proceeds from exercise of stock options                                       4          -
------------------------------------------------------------------------------------------
Net cash provided by financing activities                                 2,126        632
------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents                                  (512)    (2,059)
Cash and cash equivalents at beginning of year                            1,102      3,161
------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                 $  590    $ 1,102
==========================================================================================

Supplemental schedule of non-cash financing and investing activities:
Purchase of assets under capital lease obligation                        $    -    $   419

Supplemental disclosure of cash flow information:
Cash paid during the year for:
  Interest                                                               $  272    $   204
  Income taxes                                                               14         49

</TABLE>

        See accompanying notes to consolidated financial statements.

<PAGE>  19

                       FARMSTEAD TELEPHONE GROUP, INC.
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Operations

      Farmstead Telephone Group, Inc. ("Farmstead" or the "Company")  is 
principally engaged as (i) a secondary market reseller, and authorized 
Lucent Dealer of remanufactured and refurbished Lucent Technologies, Inc. 
("Lucent")  telecommunications parts and systems, and (ii) as an 
authorized Lucent dealer for certain new telecommunications products. These 
Lucent products are primarily customer premises-based private switching 
systems and peripheral products, including voice processing systems.  The 
Company also provides telecommunications equipment repair and refurbishing, 
rental, inventory management, and related value-added services.  The 
Company sells its products and services primarily to both large and small 
end-user businesses, government agencies, and other secondary market 
dealers.  During the two years ended December 31, 1998, no single customer 
accounted for more than 10% of revenues from continuing operations except 
for Lucent, which accounted for 15% of 1998 revenues.

Principles of Consolidation

      The consolidated financial statements presented herein include the 
accounts of the Company and its wholly-owned subsidiary, FTG Venture 
Corporation (inactive).  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.  
All material intercompany transactions 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.  Estimates are used when accounting for the 
allowance for uncollectible accounts and notes receivable, inventory 
obsolescence, depreciation, taxes and contingencies, among others.

Revenue Recognition

      Revenues are recognized when products are shipped or when services 
are 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 ten years.  Maintenance, repairs 
and minor renewals are charged to operations as incurred.

Income Taxes

      The Company provides for income taxes under the asset and liability 
method, under which deferred tax  assets and liabilities are recognized for 
the future tax consequences attributable to differences between the 
financial statement carrying amounts of existing assets and liabilities and 
their respective tax basis.  Deferred tax assets and liabilities are 
measured using enacted tax rates expected to apply to taxable income in the 
years in which those temporary differences are expected to be recovered or 
settled.  The effect on deferred tax assets and liabilities of a change in 
tax rates is recognized in income in the period that includes  the 
enactment date.  Due to the availability of net operating loss 
carryforwards, federal tax expense consisted of alternative minimum taxes 
in 1998 and 1997, and state income tax expense consisted of minimum taxes 
in both years.

<PAGE>  20

Net Income (Loss) Per Share

      Basic earnings (loss) per share was computed by dividing net income 
(loss) (the numerator) by the weighted average number of common shares 
outstanding (the denominator) during the period.  Diluted earnings (loss) 
per share was computed by increasing the denominator by the weighted 
average number of additional shares that could have been outstanding from 
securities convertible into common stock, such as stock options and 
warrants, unless their effect on net income (loss) per share is 
antidilutive. 

Segment Information

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

2.    CASH AND CASH EQUIVALENTS

      Cash and cash equivalents at December 31, 1998 includes an investment 
in a money market fund consisting of high quality short term instruments, 
principally U.S. Government and Agency issues and commercial paper.

3.    PROPERTY AND EQUIPMENT, NET

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

<TABLE>
<CAPTION>

                                                         1998      1997
      ------------------------------------------------------------------

      <S>                                               <C>       <C>
      Equipment                                         $  925    $  820
      Furniture and fixtures                                84       102
      Leasehold improvements                                85        78
      Leased equipment under capital lease                 415       419
      ------------------------------------------------------------------
                                                         1,509     1,419
      Less accumulated depreciation and amortization      (664)     (484)
      ------------------------------------------------------------------
      Property and equipment, net                       $  845    $  935
      ==================================================================

</TABLE>

      Leased equipment under capital lease at December 31, 1998 and 1997 
consisted principally of office furniture, equipment and computer equipment 
acquired in connection with the Company's 1997 facility relocation.  The 
accumulated amortization of the leased equipment was $150,000 and $61,000 
at December 31, 1998 and 1997, respectively.

4.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

<TABLE>
<CAPTION>

                                                          1998    1997
        --------------------------------------------------------------

        <S>                                               <C>     <C>
        Salaries, commissions and benefits                $501    $480
        Other                                               82      65
        --------------------------------------------------------------
        Accrued expenses and other current liabilities    $583    $545
        ==============================================================

</TABLE>

5.    DEBT OBLIGATIONS 

      Inventory Financing Agreement:
      ------------------------------

      On June 6, 1997, the Company entered into a $2 million line of credit 
agreement with AT&T Commercial Finance Corporation which, in December 1997 
was transferred to Finova Capital Corporation ("Finova").  The agreement 
formally expired in April 1998, however it has since continued on a 
discretionary basis.  On October 1, 1998 the credit facility was increased 
to $4 million, and on February 4, 1999 further increased to $5 million, 
until March 31, 1999 at which time it will revert back to a $2 million 
facility.  The credit line has been used to finance Lucent products 
purchased directly from Lucent or from approved Lucent distributors.  Such 
advances are  repayable, interest-free, in either two or three equal 
monthly 

<PAGE>  21

installments, depending upon the product purchased.  Advances to 
finance Lucent products purchased from other vendors ("Other Eligible 
Inventory") are repayable in two equal monthly installments, bear interest 
at prime plus 1.5%, and are subject to a $500,000 borrowing limit.  For 
products purchased directly from Lucent, the ratio of total collateral 
available to Finova (after deduction of any senior liens), to total Finova 
indebtedness must be at least 1.5 to 1.  The ratio of Other Eligible 
Inventory to advances on Other Eligible Inventory must be at least 2 to 1.  
The Company is currently in compliance with these requirements.  As of 
December 31, 1998, outstanding borrowings aggregated $3,082,000, and all 
borrowings are secured by the Company's inventories.  The Company expects 
to either maintain the Finova credit facility at its present level, or 
obtain a similar facility with a new lender, on terms not materially less 
favorable to the Company than its present terms.

      Long-term  Debt:
      ----------------

      As of  December 31, long-term debt obligations consisted of the 
following (in thousands):

<TABLE>
<CAPTION>

                                                    1998      1997
            -------------------------------------------------------

            <S>                                    <C>       <C>
            Bank revolving credit agreement (a)    $1,688    $1,697
            Obligation under capital lease (b)        306       369
            -------------------------------------------------------
                                                    1,994     2,066
            Less current portion                      (78)      (69)
            -------------------------------------------------------
            Long-term debt                         $1,916    $1,997
            =======================================================

</TABLE>

      (a)  On May 30, 1997, the Company entered into a two year, $3.5 
million revolving loan agreement with First Union Bank of Connecticut 
(subsequently renamed First Union National Bank, hereinafter referred to as 
"First Union"), modifying and replacing a $2.5 million agreement with First 
Union.  The agreement was further modified in December 1997 and, in October 
1998, the credit facility was increased to $6 million and the expiration 
date was extended to May 30, 2000.  The current agreement, which became 
effective January 1, 1999, reduced the rate charged on borrowings to LIBOR 
plus 2.75% (7.8% at December 31, 1998), borrowings are advanced at 75% of 
eligible accounts receivable and are secured by all of the Company's assets 
excluding inventories.  The agreement requires the Company to maintain a 
minimum tangible net worth of $5.75 million, increasing to $6 million at 
December 31, 1999, and to maintain certain debt to net worth and debt 
service coverage ratios.  In addition, the agreement restricts fixed asset 
purchases and does not allow the payment of cash dividends without the 
consent of the lender.  There is no requirement to maintain compensating 
balances under the agreement.  The Company was in compliance with these 
covenants and loan requirements at December 31, 1998.  As of  December 31, 
1998, the unused portion of the credit facility was $4.3 million, of which 
approximately $1.2 million was available under the borrowing formula.  The 
average and highest amounts borrowed during the year ended December 31, 
1998 were approximately $2,329,000 and $3,673,000, respectively.  
Borrowings are dependent upon the continuing generation of collateral, 
subject to the credit limit.  The weighted average interest rate on the 
Company's outstanding debt was 9.5% for 1998 and 10.1% for 1997.

      (b)  In May 1997, the Company entered into a five year, noncancelable 
lease agreement to finance $419,000 of office furniture, equipment and 
computer equipment acquired in connection with the Company's facility 
relocation.  Monthly lease payments are $9,589, with a $1.00 purchase 
option at the end of the lease.  The effective interest rate on the 
capitalized lease obligation is 13.29%.  As of  December 31, 1998 the 
future minimum annual lease payments are as follows (in thousands):

<TABLE>
<CAPTION>

                  Year ending December 31:
                  ------------------------------------------

                  <S>                                   <C>
                    1999                                $115
                    2000                                 115
                    2001                                 115
                    2002                                  29
                  ------------------------------------------
                  Total minimum lease payments           374
                  Less amount representing interest      (68)
                  ------------------------------------------
                  Present value of net minimum lease
                   payments under capital lease         $306
                  ==========================================

</TABLE>

<PAGE>  22

      The carrying values of the Company's borrowings approximated their 
fair values at December 31, 1998 and 1997.

6.    DISCONTINUED OPERATIONS

      FAMS
      ----

      In February, 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 used the purchased assets in a similar operation in 
Piscataway, New Jersey.

      In September 1997, due to declining revenues and resulting operating 
losses, the Company entered into negotiations with an employee of FAMS for 
the sale of the Company's interest in FAMS.  The sale transaction was 
completed in December 1997, effective October 1,1997.  FAMS, LLC, a newly 
formed New Jersey corporation (the "Buyer") acquired all of the Company's 
interest in FAMS for $40,000 in cash and a $360,000 10% Note, payable in 60 
monthly installments.  The Note is secured by the assets of  FAMS.  For the 
year ended December 31, 1997, the Company recorded a loss on disposal of 
FAMS of $208,000,  consisting of  $116,000 representing the excess of the 
book value of the net assets sold over the sales proceeds, and $92,000 of 
other costs and expenses of the sale. During 1998 the Company recorded an 
additional $195,000 charge to reduce the carrying value of the FAMS, LLC 
note receivable to its estimated realizable value.  During 1997, prior to 
the effective date of sale,  FAMS recorded revenues of $799,000 and 
incurred an operating loss of approximately $578,000.

      Voice Processing Products 
      --------------------------

      In January, 1994, the Company acquired certain operating assets of 
Cobotyx Corporation, Inc., a designer,  manufacturer and supplier of voice 
processing systems, and expanded its entry into this marketplace and formed 
a voice processing products division operating under the trade name 
"Cobotyx". In December 1997, the Company decided to begin the process of 
divesting itself from this business, and during 1998, while actively 
looking for a buyer for certain of its assets and developed technologies, 
significantly downsized all related operations, including terminating 
product development activities.  To date, the Company has not located a 
buyer for this business.  For the years ended December 31, 1998 and 1997, 
Cobotyx voice processing product revenues approximated $605,000 and 
$1,479,000, respectively.  The Company's loss from the operations of its 
voice processing products business was approximately $14,000 in 1998 and 
$480,000 in 1997. Net assets of discontinued operations at December 31, 
1997 aggregated $560,000, and consisted principally of inventories and  
fixed assets.

7.    STOCK OPTIONS

      The Company's 1992 Stock Option Plan ("1992 Plan") permits the 
granting of options to employees, directors and consultants of the Company, 
which shall be either incentive stock options ("ISOs") as defined under 
Section 422 of the Internal Revenue Code, or non-qualified stock options 
("NSOs").  ISOs may be granted at no less than market value at the time of 
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.  NSOs may be granted at no less 
than 50% of market value at the time of granting, with a maximum of 10 
years.  The maximum number of shares issuable under the 1992 Plan, which 
expires in 2002, is 3,500,000.

      The Company's 1986 and 1987 Key Employees and Key Personnel Stock 
Option Plans have expired, however options previously granted under these 
plans may continue to be exercised in accordance with the terms of the 
individual grants.   Options currently granted under all plans expire on 
various dates through 2008.

<PAGE>  23

      A summary of stock option transactions for each of the two years in 
the period ended December 31, 1998 is as follows:

<TABLE>
<CAPTION>

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

<S>                                 <C>           <C>                <C>
Outstanding at December 31, 1996      821,650     $1.56 - 11.80      $3.69
Granted                             1,000,109      1.88 -  3.75       2.18
Exercised                                   -                 -          -
Canceled or expired                  (914,150)     2.13 - 10.00       3.58
---------------------------------------------------------------------------
Outstanding at December 31, 1997      907,609      1.56 - 11.80       2.14
Granted                               919,570      1.19 -  2.69       1.94
Exercised                              (2,250)             2.00       2.00
Canceled or expired                   (63,500)     1.56 -  2.38       1.95
---------------------------------------------------------------------------
Outstanding at December 31, 1998    1,761,429     $1.19 - 11.80      $2.04
==========================================================================

As of December 31, 1998:
  Exercisable                       1,168,587     $1.56 - 11.80      $2.08
  Available for future grant        1,748,763

</TABLE>

      The following summarizes information about stock options outstanding 
and exercisable as of December 31, 1998:

<TABLE>
<CAPTION>

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

 <S>                <C>                 <C>                <C>           <C>                <C>
 $1.19 -  2.00      1,727,079           8.5                $1.96         1,139,237          $1.97
 $2.01 -  5.00         18,000           4.6                 3.65            15,000           3.84
 $5.01 - 11.80         16,350           5.0                 8.33            14,350           8.47

</TABLE>

      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 basic and diluted net 
income (loss) per share would have approximated the pro forma amounts shown 
below for each of the years ended December 31 (in thousands except per 
share data):

<TABLE>
<CAPTION>

                                               1998                     1997
                                       ---------------------    ---------------------
                                          As                       As
                                       Reported    Pro forma    Reported    Pro forma
                                       --------    ---------    --------    ---------

<S>                                      <C>         <C>        <C>         <C>
Net income (loss)                        $571        $(525)     $(1,866)    $(2,315)
Basic net income (loss) per share         .17         (.16)        (.57)       (.71)
Diluted net income (loss) per share       .17         (.15)        (.57)       (.71)

</TABLE>

      The fair value of stock options used to compute pro forma net loss 
and net loss per share disclosures was estimated on the date of grant using 
the Black-Scholes option-pricing model with the following weighted average 
assumptions: dividend yield of 0% for both 1998 and 1997; expected 
volatility of 124% for 1998 (80% for 1997); risk-free interest rate of 
4.93% for 1998 (5.37% for 1997), and an expected option holding period of 5 
years for both 1998 and 1997.

<PAGE>  24

8.    STOCKHOLDERS' EQUITY

      As of December 31, 1998, the following securities were outstanding:

      (a)  331,363 Underwriter Options, exercisable at $7.50 per unit, each 
unit consisting of one share of common stock, and one warrant to purchase 
1.07 shares of common stock at $4.67.  These options, and the underlying 
warrants, expire June 30, 2002. The Underwriter Options were issued in 
connection with the Company's 1987 initial public offering.

      (b)  183,579 warrants  issued in connection with the Company's 1987 
initial public offering, exercisable at $4.67 per share, and entitling the 
holder to purchase 1.07 shares of common stock.  The warrants expire June 
30, 2002.  The warrants are redeemable at the option of the Company at $.05 
per warrant, provided the average of the last reported sales price for ten 
consecutive business days, ending five days before notice of the redemption 
is given, of the common stock exceeds $11.25 per share.

      (c)  1,137,923 Redeemable Class A Common Stock Purchase Warrants 
("Class A Warrant"), and 1,137,923 Redeemable Class B Common Stock Purchase 
Warrants ("Class B Warrant"), each exercisable at $2.00 per share, and 
entitling the holder to purchase one share of common stock.  These warrants 
expire August 12, 2001.  The warrants are redeemable at the option of the 
Company at $.10 per warrant, provided the average of the last reported 
sales price for twenty consecutive business days, ending five days before 
notice of the redemption is given, of the common stock exceeds $2.90 per 
share.

      Effective September 3, 1998, the Company obtained the written consent 
of the holders of its Class A and Class B Warrants of a unified proposal to 
(a) reduce the present exercise price of the Class A and Class B Warrants 
from $5.28 and $6.09, respectively to $2.00, (b) reduce the Target Price 
(as defined in the Warrant Agreements) of these Warrants from $6.09 and 
$6.90, respectively,  to $2.90, (c) establish the minimum period by which 
the Company must notify holders of the Warrants of future modifications to 
the Warrant Agreements at 20 calendar days, and (d) provide for 
proportional increases and decreases in the Target Price of the Warrants 
upon future changes (if any) in the exercise price of the Warrants without 
the need of the Company to seek additional approval from the Warrant 
holders.  The primary purpose of soliciting the consent of the warrant 
holders was to raise capital in the near term for general working capital 
purposes, by increasing the likelihood that, due to the proposed reductions 
in the exercise prices and Target Prices, the warrants may be exercised 
sooner than as currently contemplated under their present exercise and 
Target Prices.

      (d)  89,948 Representative Warrants to purchase 89,948 units at an 
exercise price of $2.90 per unit.  Each unit consists of one share of 
common stock, one Class A Warrant and one Class B Warrant.  The 
Representative Warrants were issued in 1986 to the Company's underwriter in 
connection with a secondary offering of securities, at an original exercise 
price of $6.70 per unit.  During 1998 the Company's Board of Directors 
voted to reduce the exercise price to $2.90 per unit.  The Representative 
Warrants expire September 16, 2001.

9.    INVESTMENT IN  UNCONSOLIDATED SUBSIDIARIES

      In May 1995, the Company acquired 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 Products Inc.  
ATC, previously a distributor for the Company in the PRC, was acquired by 
the Company to market, install and service telecommunications products 
which were developed for use in the PRC.  These products included used 
Lucent PBX equipment, and central office equipment, consisting of 
proprietary Chinese system software, proprietary digital and analog 
interfaces, and a proprietary billing system, the combination of which 
would enable the PBX equipment to be operated as a small central office.   
In June 1997, due principally to fiscal year 1997 operating losses at ATC, 
and a shift in the Company's focus to domestic business development, the 
Company established a full reserve against both the $77,000 balance of its 
investment in, and its $265,000 accounts receivable from, ATC, resulting in 
a $342,000 non-cash charge against 1997 earnings. The Company expects to 
divest its ownership interest in ATC in 1999.

      In June 1996, the Company acquired a 40% interest in TeleSolutions, 
Inc., formed in association with other Philippine investors for the purpose 
of refurbishing, installing and selling telecommunications equipment in the 
Republic of the Philippines.  In June 1997, the owners decided to close the 
operation.  As a result, in 1997 the Company wrote off $52,000 of inventory 
located at TeleSolutions, Inc., and expensed $10,000 in closing costs.

<PAGE>  25

      The following table shows the changes in the Company's investment in 
unconsolidated subsidiaries during the year ended December 31, 1997 
($000's):

<TABLE>
<CAPTION>

                                                         1997
                 --------------------------------------------

                 <S>                                     <C>
                 Investment at beginning of year         $117
                 Equity in unconsolidated subsidiary:
                 Equity in net losses                     (34)
                 Amortization of excess of cost over
                  equity in net assets                     (6)
                 Write-down of investment balance         (77)
                 --------------------------------------------
                 Investment at end of year               $  -
                 ============================================

</TABLE>

10.   LEASES AND OTHER COMMITMENTS AND CONTINGENCIES

      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 into which it relocated its operations.  Under the terms of 
the lease agreement, the minimum monthly rental is $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.  Rent expense 
was $173,796 in 1998 and $197,000 in 1997.  Future minimum lease payments 
at December 31, 1998 are as follows:  $172,348 for 1999, $181,036 for 2000, 
$182,484 for 2001, and $30,414 for 2002, totaling $566,282.

      Effective January 1, 1998, the Company entered into a ten year 
employment agreement with the Chief Executive Officer ("CEO").  The 
agreement provides for five years of full-time employment (the "Active 
Period"), and five years of limited employment (the "Limited Period") 
commencing January 1, 2003.  During the Active Period, a minimum annual 
base salary will be paid as follows: $200,000 in 1998, $250,000 in 1999, 
and $300,000 for 2000 to 2003.  During the Limited Period, the CEO will be 
paid an annual amount equal to one-third of the base salary rate in effect 
at the commencement of the Limited Period, as consideration for up to fifty 
days of active service per year.  The agreement provides for an annual 
bonus of up to 50% of base salary during the term of the agreement, an 
option to purchase up to 500,000 shares of common stock at the fair market 
value on the date of grant, and $1,500,000 in life insurance for the 
benefit of the CEO's named designee.

      The agreement provides severance pay for the CEO during the term 
should the Company terminate the agreement without cause, or in the event 
of a change in control of the Company, as defined.  During the Active 
Period, severance pay will equal three times (i) the amount of the then-
current base pay, plus (ii) the average bonus paid during the three most 
recent years.  During the Limited Period, severance pay will equal three 
times the total amount that would have been due for the time remaining in 
the Limited Period. 

11.   EMPLOYEE BENEFIT PLANS

      Effective January 1, 1998, the Company adopted a Supplemental 
Executive Retirement Plan ("SERP") for the benefit of its CEO.  The SERP is 
a "target" benefit plan, structured to provide the CEO with an annual 
retirement benefit, payable over 15 years beginning at age 65, in an amount 
equal to one-third of the CEO's average final three-year salary, however in 
no event less than $100,000 per year.  The SERP is being funded through a 
Company-owned life insurance policy which has a projected $50,000 annual 
premium for ten years.  The cash surrender value of this policy was $23,382 
at December 31, 1998.  For the year ended December 31, 1998, the Company 
expensed $53,009, consisting of service cost of $49,541 and interest cost 
of $3,468.  The Company used the Projected Unit Credit Method and a 7% 
interest rate in determining these amounts.

      Effective July 1, 1998, the Company adopted a split dollar life 
insurance program for its officers and certain key employees as a means of 
providing a life insurance benefit and a future retirement benefit.  Under 
this program, the Company may make discretionary contributions of up to 10% 
of each participant's annual compensation, which amounted to $46,248 in 
1998.  For the year ended December 31, 1998, the Company expensed $18,603.  
The accumulated value of each participant's account vests with the 
participant over a ten year period, based on years of service, with each 
participant 100% vested upon the later of attainment of age 65 or the 
completion of five years of service with the Company.

<PAGE>  26

12.   INCOME TAXES

      Current income tax expense attributable to income from continuing 
operations consisted of state income tax expense of $6,000 and federal 
income tax expense of $10,000 in 1998, and state income tax expense of 
$24,000 and federal income tax expense of $19,000 in 1997.  There was no 
deferred federal or state income 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):

<TABLE>
<CAPTION>

                                                                  1998     1997
-------------------------------------------------------------------------------

<S>                                                               <C>     <C>
Computed "expected" tax expense (benefit)                         $199    $(634)
Increase (reduction) in income taxes
 resulting from:
State and local income taxes, net of federal
 income tax benefit                                                  9       16
Nondeductible life insurance                                        20        -
Unutilized loss of foreign subsidiary                                -      133
(Realized) unrealized benefit of operating  loss carryforwards    (228)     506
Other                                                               16       22
-------------------------------------------------------------------------------
Income tax expense                                                $ 16    $  43
===============================================================================

</TABLE>

      The tax effects of temporary differences that give rise to 
significant portions of deferred tax assets and liabilities at December 31, 
1998 and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>

                                                      1998      1997
---------------------------------------------------------------------

<S>                                                  <C>       <C>
Deferred tax assets:
Accounts receivable, principally due to allowance
 for doubtful accounts                               $  221    $  125
Inventories, principally due to additional costs
 inventoried for tax purposes pursuant to the
 Tax Reform Act of 1986                                 155       139
Net operating loss and capital loss carryforwards       961     1,133
Other                                                    43         8
---------------------------------------------------------------------
Total gross deferred tax assets                       1,380     1,405
Less valuation allowance                             (1,380)   (1,405)
---------------------------------------------------------------------
Net deferred tax assets                              $    -    $    -
=====================================================================
Deferred tax liabilities                             $    -    $    -
=====================================================================

</TABLE>

      The valuation allowance is considered prudent as of December 31, 1998 
due to the Company's past history of cumulative operating losses.  The 
Company has net operating loss carryforwards for federal income tax 
purposes of approximately $2,759,000 available at December 31, 1998.  No 
federal income tax provision has been made in the accompanying financial 
statements, except for alternative minimum taxes, because of the presence 
of these net operating loss carryforwards which expire on various dates 
through 2017.

<PAGE>  27

INDEX TO EXHIBITS

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

 3(a)    Certificate of Incorporation [Exhibit 3(a) to the S-18 
         Registration Statement of the Company's securities declared 
         effective on April 13, 1987 (File No. 3-9556B)]
 3(b)    Amendment of Certificate of Incorporation [Exhibit 3(a) to 
         Amendment No. 2 to SB-2 Registration Statement dated July 22, 1996 
         (Registration No. 333-5103)]
 3(c)    By-Laws [Exhibit 3(b) to the S-18 Registration Statement of the 
         Company's securities declared effective on April 13, 1987 (File 
         No. 3-9556B)]
 4(a)    Form of Unit Warrant [ Exhibit 4(a) to the S-18 Registration 
         Statement of the Company's securities declared effective on April 
         13, 1987 (File No. 3-9556B)]
 4(b)    Amended Form of Underwriter's Option [ Exhibit 4(b) to the S-18 
         Registration Statement of the Company's securities declared 
         effective on April 13, 1987 (File No. 3-9556B)]
 4(c)    Resolutions adopted by Unanimous Written Consent of the Company's 
         Board Of Directors dated as of July 9, 1992 amending terms of 
         Warrants and Underwriter's Options [Exhibit 4(a) to the Form S-3
         Registration Statement of the Company's securities declared 
         effective on October 29, 1992 (Registration No. 33-50432)]
 4(d)    1992 Stock Option Plan [Exhibit 4(e) to the Annual Report on Form 
         10-K for the year ended December 31, 1992]
 4(e)    Form of Underwriter's Warrant Agreement (including Form of 
         Underwriter's Warrant) [Exhibit 4.2 to the SB-2 Registration 
         Statement dated June 3, 1996 (Registration No. 333-5103)]
 4(f)    Form of Warrant Certificate [Exhibit 4.1 to Amendment No. 2 to SB-2
         Registration Statement dated July 22, 1996 (Registration No. 
         333-5103)]
 4(g)    Form of Warrant Agreement  [Exhibit 4.3 to Amendment No. 2 to SB-2 
         Registration Statement dated July 22, 1996 (Registration No. 
         333-5103)]
 4(h)    Form of Unit Certificate  [Exhibit 4.4 to Amendment No. 2 to SB-2 
         Registration Statement dated July 22, 1996 (Registration No. 
         333-5103)]
 4(i)    Resolutions adopted by the Company's Board of Directors June 18, 
         1998, amending terms of Warrants and Underwriter's Options 
10(a)    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 [Exhibit 10.5 to the Annual Report for 
         the year ended December 31, 1988 on Form 10-K] 
10(b)    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 [Exhibit 10.6 to the Annual Report 
         for the year ended December 31, 1988 on Form 10-K]
10(c)    Certificate of Amendment of Certificate of Incorporation of 
         Farmstead Telephone Group, Inc., dated July 10, 1991 [ Exhibit 
         10.12 to the Annual Report for the year ended December 31, 1991 on 
         Form 10-K]
10(d)    Commercial Revolving Loan and Security Agreement dated June 5, 
         1995, between Farmstead Telephone Group, Inc. and Affiliated 
         Business Credit Corporation [Exhibit 10.2 to the Quarterly Report 
         on Form 10-QSB for the quarter ended June 30, 1995]
10(e)    Contract for Beijing Antai Communication Equipment Company Ltd., 
         dated September 23, 1992 [Exhibit 10.3 to the Quarterly  Report on 
         Form 10-QSB for the quarter ended June 30, 1995]
10(f)    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 [Exhibit 10.1 to the Annual report on Form 10-KSB for 
         the year ended December 31, 1995]
10(g)    Form of Underwriter's Consulting Agreement [ Exhibit 10.1 to the  
         SB-2 Registration Statement dated June 3, 1996 (Registration No. 
         333-5103)]

<PAGE>  28

10(h)    Letter of Agreement dated June 3, 1996 between Farmstead Telephone 
         Group, Inc. and Lucent Technologies, Inc. [Exhibit 10.2 to 
         Amendment No. 1 to SB-2 Registration Statement dated July 22, 1996 
         (Registration No. 333-5103)]
10(i)    Agreement of Lease By and between Tolland Enterprises and 
         Farmstead Telephone Group, Inc., dated November 5, 1996 [Exhibit 
         10.1 to the Quarterly  Report on Form 10-QSB for the quarter ended
         September 30, 1996]
10(j)    Letter agreement dated as of May 30, 1997 by and among Farmstead 
         Telephone Group, Inc. (the "Borrower"), Farmstead Asset Management 
         Services, LLC (the "Guarantor") and First Union Bank of 
         Connecticut (successor-in-interest to Affiliated Business Credit 
         Corporation) (the "Lender"), amending the Commercial Revolving 
         Loan and Security Agreement dated June 5, 1995, as amended, 
         between Borrower and Lender [Exhibit 10.1 to the Quarterly  Report 
         on Form 10-QSB for the quarter ended June 30, 1997]
10(k)    Third Amended and Restated Revolving Promissory Note, dated June 
         6, 1997, in the amount of $3,500,000 [Exhibit 10.2 to the 
         Quarterly  Report on Form 10-QSB for the quarter ended June 30, 
         1997]
10(l)    Agreement for Wholesale Financing, dated June 6, 1997, and related 
         letter agreement dated June 3, 1997 [Exhibit 10.3 to the Quarterly  
         Report on Form 10-QSB for the quarter ended June 30, 1997]
10(m)    Purchase and Sale Agreement, dated December 1, 1997 by and among 
         Farmstead Telephone Group, Inc., FTG Venture Corporation, FAMS, 
         LLC and Farmstead Asset Management Services, LLC [Exhibit 10.1 to 
         the Annual report on Form 10-KSB for the year ended December 31, 
         1997]
10(n)    Letter agreement dated December 1, 1997  by and among Farmstead 
         Telephone Group, Inc., FTG Venture Corporation, FAMS, LLC and 
         Farmstead Asset Management Services, LLC, amending the Purchase 
         and Sale Agreement  [Exhibit 10.2 to the Annual report on Form 10-
         KSB for the year ended December 31, 1997]
10(o)    FAMS, LLC Promissory Note, dated December 1, 1997 in the principal 
         amount of  $360,000 [Exhibit 10.3 to the Annual report on Form 
         10-KSB for the year ended December 31, 1997]
10(p)    Letter agreement dated as of December 1, 1997 by and among 
         Farmstead Telephone Group, Inc. (the "Borrower"), Farmstead Asset 
         Management Services, LLC (the "Guarantor") and First Union 
         National Bank (successor-in-interest to Affiliated Business Credit 
         Corporation), amending the Commercial Revolving Loan and Security 
         Agreement dated June 5, 1995, and as amended May 30, 1997  
         [Exhibit 10.4 to the Annual report on Form 10-KSB for the year 
         ended December 31, 1997]
10(q)    Employment Agreement dated as of January 1, 1998 between Farmstead 
         Telephone Group, Inc. and George J. Taylor, Jr  [Exhibit 10.5 to 
         the Annual report on Form 10-KSB for the year ended December 31, 
         1997]
10(r)    Supplemental Executive Retirement Plan, effective as of January 1, 
         1998  [Exhibit 10.6 to the Annual report on Form 10-KSB for the 
         year ended December 31, 1997]
10(s)    ARS Dealer Agreement Between Lucent Technologies and Farmstead 
         Telephone Group, Inc. For Business Communications Systems
10(t)    ARS License Agreement Between Lucent Technologies and Farmstead 
         Telephone Group, Inc. For Authorized Remarketing Supplier Program
10(u)    Letter agreement dated as of August 24, 1998 between Farmstead 
         Telephone Group, Inc. and First Union National Bank, amending the 
         Commercial Revolving Loan and Security Agreement dated June 5, 
         1995, as amended
10(v)    Letter agreement dated as of September 29, 1998 between Farmstead 
         Telephone Group, Inc. and First Union National Bank, amending the 
         Commercial Revolving Loan and Security Agreement dated June 5, 
         1995, as amended
10(w)    Letter agreement dated as of October 15, 1998 between Farmstead 
         Telephone Group, Inc.and First Union National Bank, amending the 
         Commercial Revolving Loan and Security Agreement dated June 5, 
         1995, as amended
10(x)    Letter agreement dated as of January 1, 1999 between Farmstead 
         Telephone Group, Inc.and First Union National Bank, amending the 
         Commercial Revolving Loan and Security Agreement dated June 5, 
         1995, as amended
10(y)    Finova Capital Corporation letter agreement dated October 5, 1998 
10(z)    Finova Capital Corporation letter agreement dated February 4, 1999 
21       Subsidiaries of Small Business Issuer
27       Financial data schedule

<PAGE>  29