UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K
                                   (Mark One)
      [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1998
                                       or
      [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
         For the transition period from______________to________________
                         Commission File Number 0-18672
                                     -------

                             ZOOM TELEPHONICS, INC.
             (Exact Name of Registrant as Specified in Its Charter)

                                     Canada
                                   04-2621506
                     (State or Other Jurisdiction of (I.R.S.
                                    Employer
               Incorporation or Organization) Identification No.)

                  207 South Street, Boston, Massachusetts 02111
               (Address of Principal Executive Offices) (Zip Code)

       Registrant's Telephone Number, Including Area Code: (617) 423-1072
        Securities Registered Pursuant to Section 12 (b) of the Act: None
               Securities Registered Pursuant to Section 12 (g) of
                                    the Act:

                           Common Stock, No Par Value
                                (Title of Class)

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

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
YES  [  ]    NO [X]

The aggregate  market value of the Common Stock, No Par Value, of the registrant
held by  non-affiliates  of the  registrant  as of March 29, 1999  (computed  by
reference to the closing price of such stock on The Nasdaq National  Market) was
$23,116,668.

The number of shares outstanding of the registrant's Common Stock, No Par Value,
as of March 29, 1999 was 7,474,871 shares.

                                         DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Proxy Statement for the registrant's  1999 annual meeting
of  shareholders  to be filed  with the SEC in April  1999 are  incorporated  by
reference into Part III, Items 10-12 of this Form 10-K.



<PAGE>



   CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HABOR" PROVISIONS OF THE
                PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Report contains forward-looking  statements. The words "believe," "expect,"
"anticipate,"  "estimate," "may," "will," "plan," "intend," "could," "estimate,"
"is being," "goal" and other  expressions  which are  predictions of or indicate
future events and trends and which do not relate to historical  matters identify
forward-looking statements. Forward-looking statements involve known and unknown
risks,  uncertainties  and other  factors,  which may cause the actual  results,
performance or achievements of the Company to differ materially from anticipated
future  results,  performance  or  achievements  expressed  or  implied  by such
forward-looking statements.

Examples of these  risks,  uncertainties,  and other  factors  include,  without
limitation,  the overall state of the PC and PC communications markets,  pricing
and other competitive conditions, the timing of orders, market acceptance of the
Company's or its OEM customers'  products,  the timing of the  announcement  and
introduction of new products by the Company and its  competitors,  variations in
the Company's  product mix and component costs,  variations in the proportion of
sales  made to  retailers,  distributors  and OEMs,  the  financial  health  and
inventory levels of the Company's customers, seasonal promotions by the Company,
its customers and  competitors,  the timing of  expenditures  in anticipation of
future sales,  the timing of product  development  costs,  the  availability  of
materials  and labor  necessary  to produce the  Company's  products and general
economic conditions.  In addition to the foregoing,  the Company's actual future
results  could differ  materially  from those  projected in the  forward-looking
statements  as a result of the risk factors set forth in the  Company's  various
filings with the  Securities  and Exchange  Commission and of changes in general
economic  conditions,  changes in interest rates and changes in the  assumptions
used in making  such  forward-looking  statements.  The  Company  undertakes  no
obligation to publicly update or revise any forward-looking  statement,  whether
as a result of new information, future events or otherwise.

                                     PART I


ITEM 1 - BUSINESS

Overview

Zoom  Telephonics,  Inc.  ("Zoom"  or  the  "Company")  is  a  Canadian  holding
corporation  whose operations are carried out by its wholly-owned  United States
subsidiary,  Zoom Telephonics,  Inc., a Delaware  corporation with its principal
executive offices located at 207 South Street, Boston,  Massachusetts 02111. The
discussion  of the  business  of Zoom  in this  report  refers  to the  business
conducted  through the operations of the United States  subsidiary and its other
subsidiaries.

The Company is a leading  designer,  producer  and  marketer of modems and other
personal computer  communications products for the home and office. Modem0s link
personal computers ("PCs") to the local telephone line for transmission of data,
fax, voice, and video through the worldwide  telephone network,  and enable PC's
to connect to other  computers  and  networks,  including the Internet and local
area networks ("LANs").

The  Company  offers a broad line of modems  with top data speeds of 56,000 bits
per second  ("bps"),  available in internal,  external and PCMCIA models (PCMCIA
models plug into a PCMCIA- standard slot typically found in a notebook or laptop
computer).  Most of these modems  connect to a single  telephone  line, but Zoom
also makes the  Zoom/MultiLine  modem to connect up to eight telephone lines. In
addition,  Zoom has a number of products sold as Zoom Business  Products,  which
typically  provide the link between users of a corporate LAN and remote users or
the Internet.

The Company also has a line of  Integrated  Services  Digital  Network  ("ISDN")
products,  which can transmit and receive simultaneously up to 128,000 bps. Zoom
has a broad  line of  internal  and  external  modems  and  ISDN  products  with
interfaces  appropriate  to North  America,  Europe,  and many  other  countries
throughout the rest of the world.

In December 1998 Zoom began  shipping the first models in its ZoomAir tm line of
wireless  products.  These  products  connect a notebook or desktop  computer to
another  computer or an  existing  LAN without  wires,  currently  providing a 2
megabits per second  ("mbps")  data rate using the 802.11 DSSS, a wireless  data
communications  standard running at 2.4 gigahertz.  Zoom currently ships network
interface  cards  that plug into  either a PCMCIA or LAN ISA  (standard  desktop
computer)  slot.  Another  product,  ZoomAir  Access  Point  Software,  connects
wireless and wired networks together,  provides network ID security,  and allows
wired  and  wireless  network  users to  concurrently  share a  single  Internet
connection.

Zoom  also  ships a line of  live-motion  full-color  video  cameras.  One model
interfaces to the PC through a Universal  Serial Bus ("USB") port,  and a second
model interfaces the PC through a parallel port. A third model plugs into either
a specialized video capture card included with the camera, or into modems either
bundled with the camera or sold separately.

Zoom's  objective is to build upon its position as a leading  supplier of modems
and to  capitalize  on a number of  current  and  emerging  trends  in  computer
connectivity, including Internet access, higher data rates, video telephony, and
alternatives to traditional wired local area networks. The Company believes that
the Zoom name is widely  recognized and  associated  with high  performance  per
dollar, breadth of product line and product innovation.


Industry Background

Demand for PC communications products and services has grown significantly.  The
Company  believes  that this  growth  has been  driven by a variety  of  factors
including  (i) the  popularity  of the  Internet  and on-line  services  such as
America Online, the Microsoft Network,  and Prodigy,  (ii) the growing installed
base of PCs, (iii) a significant increase in the use of PCs for remote access to
corporate  networks,  and (iv) advances in  technology,  which have improved the
functionality of the PC as a means of  transferring,  capturing and manipulating
data-intensive  information,  including  graphic images and voice.  These trends
have  resulted in  substantial  growth of modem unit sales,  both for new PCs as
bundled  peripherals  and  for  the  installed  base of  PCs,  as  upgrades  and
first-time  purchases.  Substantially  all modems sold for PCs are now faxmodems
(modems that have the ability to send and receive  faxes),  and many modems have
enhanced voice capabilities and other enhanced extra features.

The rapid expansion of on-line  services and the Internet has greatly  increased
the utility of PCs by making a multitude of information  resources  available to
PC users.  Modems are commonly used to remotely access these  resources.  As the
transfer of large text files and data-intensive  images (like those on the World
Wide Web)  become  more  pervasive,  high  data  transmission  speeds  and other
advanced modem features also become increasingly important to PC users.

Worldwide PC shipments continue to grow, and industry sources estimate that over
200 million PCs are installed worldwide.  Currently 56K modems are often bundled
with a new PC, particularly in North America. However, some of the installed PCs
either have no modem or have a modem with a speed below 56K.  Thus there  should
continue to be  substantial  demand for modems either for bundling into a new PC
or for after-market sales. This is particularly true since the V.90 56K standard
was set  recently,  in 1998.  The Company  believes that modems will continue to
achieve  increasing  penetration  of  the  PC  installed  base  as  applications
requiring data connectivity proliferate.

The growing use of PCs outside the traditional office setting has also increased
the demand for modems that enable users to remotely access  corporate  networks,
the Internet and other PCs. In addition,  notebook  computers have become one of
the fastest growing segments of the PC market.

Advances in modem technology and lower modem prices have created rapid growth in
the installed base of modems. As a result, the high-volume segment of the market
has shifted from modems with a maximum  speed of 2400 bps in 1987, to 33,600 bps
in 1996 and 1997,  to 56,000 bps in 1998.  Modems with high data speeds  require
less time to transmit text files and graphics, thereby reducing phone call costs
and  facilitating  the use of  data-intensive  applications  like World Wide Web
browsing and remote access to corporate networks.  Other technological  advances
that  are  increasing  the use of  modems  in  personal  computing  include  new
voice-related  capabilities,  video telephony, and electronic mail. For example,
voice modems can provide answering machine,  voice mail and other  voice-related
functions by digitizing  incoming voice signals for storage in a computer and by
retrieving stored voice and sending it through the telephone network to a remote
person or computer. As another example, video telephony enables the transmission
of  still or  moving  color  images,  either  exclusively  through  the  dial-up
telephone  network or through the  Internet.  Advances in computer  software are
also stimulating demand for modems with faster speeds and greater functionality.
For example, Microsoft's Windows 95 and Windows 98 include remote access, faxing
and  internet  access  capabilities  that can only be used with a modem or other
wide area networking devices.

The demand for faster speeds and increased  modem  functionality  is expected to
drive  sales of new  generations  of modems  in the  future,  including  Digital
Subscriber  Line ("DSL") and cable modems,  both as upgrades and as  peripherals
bundled with new PCs.

Zoom Strategy

Zoom focuses on the sale and development of PC communications  products tailored
to its channels of distribution,  including high-volume retailers, distributors,
personal computer  manufacturers,  and other OEMs. The Company believes that the
Zoom name is associated  with high  performance  per dollar,  breadth of product
line, broad distribution,  and product innovation. The Company's objective is to
build upon its position as a leading  supplier of modems and to  capitalize on a
number of  current  and  emerging  trends in  computer  connectivity,  including
Internet  access,  higher data  rates,  video  telephony,  and  alternatives  to
traditional wired local area networks.
The Company's strategy includes the following key elements:

Build Upon and Exploit Brand Equity. Zoom has a widely recognized brand name and
established channels of high-volume retailer,  distributor and OEM customers who
buy the Company's  products.  The Company believes that its success has been due
in part to (i)  offering  its  customers a broad range of products  that provide
high  performance  per dollar,  (ii) supporting the installed base of its modems
with multiple  technical  support options,  (iii) promoting its products through
cooperative  advertising  with  its  retailer  customers,   and  (iv)  designing
attractive  and  informative  packaging  for its products.  Personal  Technology
Research  reports  that in January  1999 Zoom brand  modems had the second  most
retail shelf space for modems in North America.  The Company intends to continue
to enhance its brand equity by further  expanding its marketing  channels and by
broadening its product offerings through its established sales channels.

Introduce  Innovative  PC  Communications  Products.  Zoom seeks to identify new
high-volume opportunities for PC communications, to develop competitively priced
leading-edge  products  to address  these  opportunities,  and to build upon and
exploit its brand equity by delivering  these products  quickly and  effectively
through  its  established  sales  channels.  The  Company  was one of the  first
high-volume producers of faxmodems,  voice faxmodems, and  video-capture-enabled
faxmodems.  The Company  also  produces  innovative  ISDN  products,  multi-line
business communications products, wireless LAN products, and video products, and
expects to continue to broaden its product offerings.

Outsource Chipset Technology. Zoom pursues a strategy of outsourcing rather than
internally developing its chipsets,  which are  application-specific  integrated
circuits  that  form  the  technology  base for its  modems  and  certain  other
products.  By  outsourcing  the  chipset  technology,  the  Company  is  able to
concentrate  its research and development  resources on system design,  leverage
the extensive  research and development  capabilities of its chipset  suppliers,
and reduce its development time and associated costs and risks. The Company buys
modem  chipsets   exclusively   from  the  two   highest-volume   modem  chipset
manufacturers,   Lucent  Technologies  and  Conexant  Systems,   Inc.  (formerly
Rockwell).  These companies have significant  resources for semiconductor design
and  fabrication,  analog and  digital  signal  processing,  and  communications
firmware  development.  Integrated  circuit product areas covered by one or both
companies  include modems,  DSL, cable modems,  home phoneline  networking,  and
video. Similarly,  Zoom buys chipsets from Harris Semi-Conductor for its ZoomAir
wireless network interface cards.

Maintain Low Costs.  Zoom continually  seeks ways to improve its product designs
and manufacturing  approach in order to reduce its costs. The Company outsources
aspects of its manufacturing to contract assemblers in Mexico and mainland China
as a means  of  reducing  its  labor  costs  and  capital  expenditures,  and of
providing the Company with flexibility in its capacity planning.

Expand International Sales. Zoom introduced its first modems in selected Western
European  countries in 1993. During 1995 the Company also received approvals and
began shipping its first modems for the Japanese  market.  The Company now sells
its products in 52 countries. The Company's international sales (excluding sales
to OEMs)  have  increased  from 8% of net  sales in 1994 to 22% of net  sales in
1998. The Company plans to continue to expand its international product line and
distribution  network,  and is seeking regulatory  approvals for the sale of its
products in additional international markets.

     Expand OEM Sales.  Zoom continues to target the OEM market as a significant
opportunity for growth and diversification, particularly for PC-bus and embedded
modems and for wireless LAN products. In addition, Zoom sometimes sells packaged
modems private-labeled for its customers and channels.

Explore  Acquisitions.  Zoom  acquired the products and certain  other assets of
Tribe  Computer  Works  ("Tribe")  in  mid-1996,  and in March 1999 has recently
acquired  certain product lines and assets from Hayes  Microcomputers  Products,
Inc.  Zoom  continues  to  consider  acquisitions  of  businesses,  products  or
technologies  complementary to the Company's business. The Company believes that
appropriate  acquisitions  can reduce the  development  risk associated with new
product  offerings,  and that the  Company  can  leverage  its brand  equity and
existing sales channels to enhance the value of these acquisitions. There can be
no assurance that any of these  explorations will lead to an acquisition or that
any acquisitions, if made, will be successful.

Products

Zoom's  products  link  personal  computers  through the  telephone  network and
connected  networks,  enabling remote access to on-line services,  the Internet,
corporate  computer  networks,  and other computers.  The Company offers a broad
line of modems with top data  transmission  speeds of 56,000 bps. Soon after the
V.90 standard for 56K was set in early 1998, Zoom began shipping  Dualmodetm 56K
modems able to  automatically  connect to either a V.90 or K56flex central site.
The Company also ships  internal and external ISDN  products.  Starting with its
acquisition of Tribe in 1996, the Company began shipping  business products that
provide  remote users access to the resources of a LAN, and connect users of the
LAN to the  Internet  and to remote LANs and  computers.  The Company also makes
other related business  products,  including a series of multi-line modems and a
hub for  AppleTalk  networks.  In  addition,  since  late 1997 the  Company  has
introduced a line of full-color  live-motion  video camera and related products.
In December  1998 Zoom began  shipping the ZoomAir  line of wireless  local area
network products.

Zoom has a broad line of modems with top data speeds of 56,000 bps, available in
internal, external and PCMCIA models. The internal modems are designed primarily
for installation in IBM PC-compatibles. The external modems are designed to work
with any terminal or computer,  including IBM PC-compatibles,  the Macintosh and
other  computers.  The Company's  external models include desktop and multi-line
modems that have up to eight modems in a compact  enclosure.  The PCMCIA  modems
are designed for use with  notebook and  sub-notebook  computers as well as PDAs
(personal digital assistants)  equipped with standard PCMCIA slots. When sold as
packaged  retail  products,  the  Company's  modems are  shipped  complete  with
third-party software that supports the hardware capabilities of the modem.

56K modems allow users  connected  to standard  phonelines  to download  data at
speeds  up to  56,000  bps when  communicating  with  compatible  central  sites
connected to digital  lines such as ISDN or T1 lines.  Those  central  sites are
typically online  services,  Internet  Service  Providers,  or remote LAN access
equipment.  Pre-standard  K56flextm  and x2tm 56K modems  began  shipping in the
second  quarter of 1997,  and  Zoom's  first 56K modems  supported  K56flex.  In
February 1998 a committee of the International  Telecommunications Union ("ITU")
agreed upon the V.90 standard for 56K. This standard is neither  K56flex nor x2,
but instead  incorporates  technical  features of each. V.90 enables Zoom's V.90
modems to connect to  interoperable  V.90 central sites,  including  sites using
central site  equipment made by 3Com, an x2 supporter.  Similarly,  V.90 enables
3Com's  V.90  modems to connect  to  inter-operable  V.90  central  sites  using
equipment  made by  Ascend,  Cisco,  Microcom,  Shiva,  and other  central  site
manufacturers who initially backed K56flex. V.90 is now widely deployed,  though
there is still some  equipment  that  incorporates  only K56flex or x2. Zoom has
successfully  transitioned  its 56K product line to Dualmode  modems designed to
connect to either  K56flex or V.90  central  sites,  to provide  flexibility  to
Zoom's customers.

Modem Product  Features.  The following sets forth some of the key features
incorporated in one or more of the Company's modems:

     ZoomGuardtm.  ZoomGuard represents the protective circuitry added to Zoom's
modems to improve their ability to withstand the effects of lightning striking a
phoneline to which the modem is  connected.  Voice Mail.  Voice mail  capability
allows a PC to serve as an answering  machine with message  storage and local or
remote message retrieval.

     Full-duplex Speakerphone. This simultaneous two-way speakerphone capability
allows one or more  people to talk  "hands  free"  rather than using a telephone
handset or headset.  A speakerphone is commonly used for conference calls or for
situations  where  someone  needs  hands  free  for  other  purposes,   such  as
controlling a computer's mouse, keyboard, or joystick. Many office speakerphones
are  half-duplex,  permitting  sound to travel in only one  direction at a time,
similar to a  walkie-talkie.  Full-duplex  speakerphones  provide  more  natural
two-way communication.

     Simultaneous  Voice and Data  ("SVD").  SVD  capability  allows PC users to
converse  over the phone  line at the same time that data is being  transferred,
independent of the  application  software being used.  This capability is useful
for  applications  where two people are working on the same project,  as well as
for video telephony, technical support and interactive computer games.

     Caller ID.  Caller ID is a service  offered  by  telephone  companies  that
provides  the incoming  caller's  phone  number,  and in some cases the caller's
name,  through the incoming ring signal. A modem's Caller ID capability allows a
PC to  recognize,  display and store this  information.  For example,  Caller ID
information can be tied to a database to display detailed  information about the
caller.

     Distinctive  Ring.  Distinctive  Ring is a  service  offered  by  telephone
companies  that assigns more than one phone number to a single  phoneline,  with
each number  ringing  differently.  This service  along with  appropriate  modem
functionality allows someone to arrange for one phone number to be answered as a
voice line, a second number to be answered as a fax line,  and a third number to
be  answered  as a data line.  Zoom has been  issued a US patent  related to its
distinctive ring technology.

     Plug & Play.  Microsoft's  Windows 95 and Windows 98 support Plug & Play, a
standard that is intended to allow the  installation  of Plug &  Play-compatible
peripherals like modems with limited hardware configuration by the end-user.
Cellular-ready  PCMCIA  Modems.  Some  of the
Company's  modems include a  cellular-ready  feature that allows the modem to be
plugged into a cellular phone for wireless communication of fax and data.

International  Modems. Most foreign countries have their own  telecommunications
standards  and  regulatory  approval  requirements  for sales of  communications
products  such as those offered by Zoom. As a result,  the  introduction  of new
products into international  markets can be costly and  time-consuming.  In 1993
the Company  introduced its first modem approved for selected  Western  European
countries,  and since then the  Company  has  continued  to expand  its  product
offerings  internationally.  The Company has received regulatory  approvals for,
and is currently selling modems in a number of countries,  including  Australia,
Austria,  Belgium,  Denmark,  Finland, France, Germany, Hungary, India, Ireland,
Italy, Japan, the Netherlands, Norway, Poland, Portugal, Russia, Slovenia, South
Africa, Spain, Sweden, Switzerland,  and the United Kingdom. The Company intends
to continue to expand and enhance its product line for its existing  markets and
to seek  approvals for the sale of its products in new countries  throughout the
world.  In  1998  the  European  community  adopted  the  CTR  21  standard  for
interconnection of products to the telephone network, and this has significantly
simplified  the  approval  process  for the 15  European  Union  countries  plus
Bulgaria, Iceland, Israel, Norway,  Switzerland,  and Turkey currently accepting
the CTR 21 standard.

ISDN Products.  Zoom has a family of modems for ISDN communications.  ISDN is an
increasingly  available telephone service that allows existing phone lines to be
used  to  transmit  data  digitally.  ISDN  service  permits  much  higher  data
transmission  rates  than  conventional  analog  telephone  service.  Basic ISDN
service  typically  provides two 64,000 bps channels and one 16,000 bps channel.
The higher rates of data  transmission  achievable with ISDN can be particularly
attractive for data-intensive  applications such as the transmission of graphics
and video images, World Wide Web browsing, or video telephony.  In February 1997
Zoom  shipped  its  first  ISDN  product,   the   Zoom/ISDN   Duo,  an  internal
PC-compatible  card that supports use of the ISDN line for analog modem, fax, or
voice   communications;   and  also  supports   analog  modem,   fax,  or  voice
communications  over an analog  phoneline.  In 1998 Zoom began shipping external
ISDN products for the North  American and  international  markets.  In addition,
Zoom continues to integrate ISDN  capability  into some of its new  LAN-oriented
business products.


<PAGE>



Multi-line  Modems.  In 1996 Zoom began  shipping a family of multi-line  modems
targeted  for local area  network  fax and data  server  applications,  computer
bulletin   boards,   multi-line   voice  mail,  and  other   applications.   The
Zoom/MultiLine  products hold up to eight voice  faxmodems in one small external
case that includes status indicators for each modem.

Wireless LAN Products.  In December 1998 Zoom began shipping the first models in
its  ZoomAirtm  line of wireless  local area network  products.  These  products
connect a notebook or desktop  computer to another computer or an existing local
area network without wires, currently providing a 2 megabits per second ("mbps")
data rate  using  the  802.11  DSSS  standard  running  at 2.4  gigahertz.  Zoom
currently  ships network  interface  cards that plug into either a PCMCIA or ISA
slot.  Another  product,  ZoomAir Access Point Software,  connects  wireless and
wired  networks  together,  provides  network ID security,  and allows wired and
wireless network users to concurrently share a single Internet connection.

Remote  Access,  SOHO  Router,  and  Internet  Gateway  Products.   Zoom  has  a
significant  R&D effort aimed at development  of business  products that provide
remote users access to the  resources of a LAN, and connect the users of the LAN
to the  Internet  and to  remote  LANs and  computers.  Some of  these  products
incorporate  technology acquired from Tribe Computer Works in 1996. In 1997 Zoom
extended the product line to include support for Windows,  to incorporate analog
modem and leased line options,  and to add new features.  Zoom plans to continue
to expand this product line, with some models that include DSL, cable modem, and
wireless LAN capabilities.

Full-color  Live-motion  Cameras  and Other  Video  Products.  In late 1997 Zoom
shipped the Zoom/Video  Cam, a full-color  live-motion  camera.  This camera can
plug into an  included  ISA  capture  card or into the video  jack  built into a
number of ISA-bus  internal  modems  approved for sale in North America and in a
large number of other countries.  The Zoom/Video Cam can be used for video phone
calls,  video  conferences,  video mail, and still image  capture.  In 1998 Zoom
continued to introduce  video  products,  including a bundle that includes a 56K
video-ready  modem and the Zoom/Video  Cam, a  parallel-port  camera,  and a USB
camera.  Zoom expects the demand for video products will grow due to a number of
factors  including  improved  video  technology,   higher  data   communications
bandwidth, faster PCs, and improved video-related software.

Dialers. The Company shipped its first telephone dialer, the Demon Dialer(R), in
1981; and in 1983 began shipping the  Hotshot(TM)  dialer.  As the dialer market
shrank, due to equal access, the Company focused on modems and other peripherals
for  the  personal  computer  market.  The  Company  has  begun  shipping  a new
generation of dialers  incorporating  proprietary  technology.  Dailer  products
currently  represent under 1% of Zoom's sales,  but may become more important in
the future.

There can be no assurance  that the Company will be able to develop new products
on a timely basis and within  budget,  if at all, or that once  developed any of
these products will be commercially successful.

Sales Channels

Zoom  sells  its  products   primarily   through   high-volume   retailers   and
distributors,  and to PC manufacturers  and other OEMs. The Company supports its
major accounts in their efforts to discern  strategic  directions in the market,
to maintain  appropriate  inventory levels and to offer a balanced  selection of
products.

During 1998 Best Buy Co., Inc. and Ingram Micro,  Inc.  accounted for 19.7%  and
and 13.6% respectively, of Zoom's net sales. A significant reduction in sales to
these customers could have a material adverse effect on the Company's business.

High-volume  Retailers.  In the United States, Zoom reaches the PC retail market
primarily through high-volume  retailers.  The Company's extensive United States
retail distribution network includes Best Buy, CDW, Fry's, Future Shop, J&R, MEI
Micro  Center,  Micro  Warehouse,  Office  Depot,  PC  Connection,  and Staples.
Personal  Technology  Research  reported  that in January  1999 the Zoom had the
second greatest amount of retail shelf space for modems in North America.

Distributors.  Zoom sells significant quantities of modems through distributors,
who often sell to corporate accounts,  value-added  resellers and other channels
that are  generally  not  served by the  Company's  high-volume  retailers.  The
Company's North American distributors include Ingram Micro, and Tech Data.

OEMs.  The Company's OEM customers  sell the Company's  products under their own
name or incorporate the Company's  products as a component of their pre-packaged
systems,  typically a PC. In addition, the Company's packaging design capability
enables  the  Company  to respond  to an OEM's  need for  customized  or generic
products  and  packaging.  The  Company is  responsive  to the needs of personal
computer manufacturers including on-time delivery of high-quality cost-effective
products  that are  supported  by strong  documentation  of the products and the
products' quality.

International  Channels.  In  international  markets,  Zoom  sells its  products
primarily  through  independent   distributors  and  retailers.   The  Company's
international  distributors  include Actebis,  California  Computer,  Criterium,
Ingram Micro, Northamber,  Pouliadis Associates Corp., TrCom, UMD, Veracomp, and
Yutron  Tech.  The  Company's  major  European  high-volume   retailers  include
Compustore,  Dixons/PC World, Fnac, Multirama, Oneway, Simply Computers, Staples
UK,  Tandy,  Tempo Stores,  and Vobis.  The  Company's  international  net sales
(including  sales to OEMs located  outside the United States) have grown from 8%
in 1994 to 22% in 1998.  The Company  believes that its  continued  sales growth
outside of the United States will require substantial  additional investments of
resources  for product  design and testing,  regulatory  approvals,  production,
marketing  and  tailoring  of  instruction  manuals,   packaging,  and  software
development for various foreign languages. The Company's international sales are
also subject to risks generally associated with international  sales,  including
United States and  international  regulatory  requirements  and policy  changes,
political and economic instability,  currency exchange  fluctuations,  inventory
management,  accounts receivable  collection,  the management of distributors or
representatives, tariff regulations and seasonality of sales.

Sales, Marketing and Support

In North America the Company sells its  Zoom-brand  products  primarily  through
commissioned  independent  sales  representatives  managed and  supported by the
Company's own staff.  For Western Europe,  the Company's  Munich office provides
sales administration and public relations services for Western Europe as well as
sales  outreach  for  Spain,  Greece,  and  Scandinavia.  The  Company  has also
established sales offices in Belgium to service Holland and Belgium, in Germany,
and in the United Kingdom to service the UK and Irish markets. The Company works
with an  independent  representative  for sales and support in France and Italy.
Warehousing,  customs  clearance,  shipping,  and  invoicing  for Europe are now
primarily done under contract with Road Air, an unaffiliated specialist in these
services located in Holland.  Technical  support for Europe is handled by Zoom's
distributors and under contract with an independent  company that specializes in
technical support in the UK. For countries outside North America and Europe, the
Company's   in-house  staff  typically  works  directly  with   country-specific
distributors.  The Company's worldwide OEM sales are primarily handled by Zoom's
Boston-based  staff,  who  are at  times  assisted  by  Zoom's  sales  staff  or
commissioned  sales  representatives.  (See  note 14 to  Consolidated  Financial
Statements.)

The Company  believes that Zoom is a widely  recognized  brand name. The Company
builds  upon its  brand  equity  in a  variety  of ways,  including  cooperative
advertising,  product packaging,  trade shows and public relations.  The Company
generally provides its high-volume  retailers with an allowance to advertise the
Company's products in conjunction with the customers' general  advertising.  The
Company  believes  that  such   advertising   serves  to  both  efficiently  and
effectively target the end-user market for its products.

Zoom  seeks to develop  quality  products  that are  user-friendly  and  require
minimal  support.  The Company supports its claims of quality with warranties of
one to seven years,  depending  upon the product.  To address the needs of those
end-users of the Company's products who require  assistance,  the Company has an
in-house staff of technical  specialists who provide  telephone support six days
per week and also employs an  independent  technical  support team in the United
Kingdom that supports the Company's  European products five day per week. Zoom's
technical support  specialists also maintain a bulletin board and a home page on
the World Wide Web,  forums on America  Online  and  CompuServe,  and a fax-back
service.

Research and Development

The Company's  research and  development  efforts are focused on developing  new
products for PC  communications  markets,  further enhancing the capabilities of
existing  products,  and reducing  production  costs.  The Company has developed
close  collaborative  relationships  with  certain  of  its  OEM  customers  and
component  suppliers,  who work with the  Company  to  identify  and  respond to
emerging  technologies  and market  trends by  developing  products that address
these trends.  In addition,  the Company purchases modem and other chipsets that
incorporate  sophisticated  technology,  thereby  eliminating  the  need for the
Company to develop this  technology  in-house.  As of March 25, 1999 the Company
had 52 employees  engaged  primarily in research and development.  This research
and development team performs electronics hardware design and layout, mechanical
design, prototype construction and testing,  component  specification,  firmware
development,  product testing, foreign and domestic regulatory approval efforts,
end-user and internal  documentation,  and  third-party  software  selection and
testing.  During 1996,  1997, and 1998 the Company  expended $2.9 million,  $4.2
million and $4.4 million, respectively, on research and development activities.

Manufacturing and Suppliers

The Company's products are currently designed for high-volume automated assembly
in North  America or China to help assure low cost,  rapid market  entry,  short
lead times and  reliability.  The Company supplies large kits of parts to one of
several  automated  contract   assemblers  in  Mexico  or  China.  The  contract
assemblers insert most parts automatically by machine, solder the circuit board,
and  in-circuit  test  the  completed  assemblies.  These  assemblies  are  then
typically shipped to the Company,  which completes the manufacturing process and
performs a computerized  functional test for further quality control.  Completed
boards are  typically  then  packaged by the  Company,  allowing  the Company to
tailor the  packaging  and its contents  for its  customers  immediately  before
shipping.  Circuit  design,  circuit  board  layout and  component  sourcing are
currently  performed by the Company.  Zoom typically  uses one primary  contract
assembler  for a given  design,  with  back-up  production  tooling  at a second
assembler  for Zoom's  highest-volume  products.  The Company's  assemblers  are
normally adequate to meet reasonable and properly planned  production needs, but
a fire,  natural calamity,  strike, or other significant event at an assembler's
facility could adversely affect the Company's shipments and revenues.

The  Company's  products  include a large  number  of  parts,  most of which are
available from multiple sources with varying lead times. However, there are only
a limited number of suppliers of modem chipsets,  the most critical component of
the Company's modems. Currently Lucent and Conexant are the Company's only modem
chipset  suppliers.  Due to capacity  constraints,  the Company has  experienced
delays in receiving shipments of modem chipsets in the past, and the Company may
experience such delays in the future.  Moreover,  there can be no assurance that
either supplier will, in the future,  sell chipsets to the Company in quantities
sufficient  to meet the  Company's  needs.  An  interruption  in a modem chipset
supplier's ability to deliver chipsets,  a failure of the Company's suppliers to
produce  chipset  enhancements  or  new  chipsets  on  a  timely  basis  and  at
competitive  prices,  a material  increase in the price of the chipsets,  or any
other adverse change in the Company's  relationship with modem chipset suppliers
would have a material adverse effect on the Company's results of operations.

Competition

The  PC   communications   products   industry  is  intensely   competitive  and
characterized by rapid  technological  advances and emerging industry standards,
resulting  in  constant  pricing  pressures.  These  changes  result in frequent
introductions  of  new  products  with  added  capabilities  and  features,  and
continuous  improvements in the relative  functionality  and price of modems and
other PC communications  products.  The failure of the Company to keep pace with
technological advances would adversely affect the Company's competitive position
and results of operations.

The Company's  primary  competitors  include 3Com,  Action Tec, Best Data,  Boca
Research, Creative Labs Diamond Multimedia, GVC, NewCom, and Viking. Some of the
Company's  competitors and potential  competitors have more extensive financial,
engineering,  product development,  manufacturing,  and marketing resources than
the Company.  In addition,  the difficult modem  environment  during the past 30
months has caused a period of consolidation that has possible benefits, but also
has risks.

The Company's products compete on the basis of product features, price, quality,
reliability, brand name recognition,  product breadth and shelf space, developed
sales channels, product documentation, product warranties, and technical support
and service. The Company believes that it is competitive in each of these areas.
However,  there  can  be  no  assurance  that  competitors  will  not  introduce
comparable or superior products  incorporating more advanced technology at lower
prices,  or that  other  changes in market  conditions  or  technology  will not
adversely affect the Company's ability to compete successfully in the future.

Products  recently  introduced by certain other companies  include DSL and cable
modems that can transmit  data and other  information  at  significantly  faster
speeds than analog  modems such as those sold by the  Company.  These  products,
however, are generally more expensive than analog modems and cannot be used with
conventional  telephone service. In addition, the use of DSL and cable modems is
currently impeded by a number of technical and infrastructure limitations. It is
likely that if these  types of modems  reach the high  market  volume  suited to
Zoom's business and marketing channels,  that the Company will seek to introduce
appropriate  modems.  There can be no  assurance  that the Company  will develop
these modems on a timely basis, if at all, or that once developed,  these modems
will compete effectively.


<PAGE>



Intellectual Property Rights

Zoom relies primarily on a combination of copyrights,  trademarks, trade secrets
and patents to protect its  proprietary  rights.  The Company has trademarks and
copyrights for its firmware (software on a chip), printed circuit board artwork,
instructions,  packaging, and literature. The Company also has three patents and
one pending patent application in the United States.  The issued patents,  which
expire  in  2011,  2013  and  2013,  respectively,  generally  relate  to  modem
distinctive ring, use of a modem as a scanner,  and modified ringback  answering
capabilities.  There can be no  assurance  that any patent  application  will be
granted or that any patent obtained will provide  protection or be of commercial
benefit to the Company, or that the validity of a patent will not be challenged.
Moreover,  there can be no assurance that the Company's  means of protecting its
proprietary  rights will be adequate or that the Company's  competitors will not
independently develop comparable or superior technologies.

Zoom  licenses  certain  technologies  used in its products,  typically  bundled
software,  on a  non-exclusive  basis.  In addition the Company  purchases modem
chipsets  that  incorporate  sophisticated  modem  technology  from  Lucent  and
Conexant. Zoom has received, and may receive in the future,  infringement claims
from third parties  relating to the  Company's  products and  technologies.  The
Company investigates the validity of these claims and, if it believes the claims
have merit, responds through licensing or other appropriate actions.  Certain of
these past claims have related to technology  included in modem chipsets and the
Company forwarded these claims to the appropriate  vendor. If the Company or its
component  manufacturers  were  unable  to  license  necessary  technology  on a
cost-effective  basis,  the Company could be prohibited from marketing  products
containing that  technology,  incur  substantial  costs in redesigning  products
incorporating  that technology,  or incur  substantial costs defending any legal
action taken against it. See Item 3 - LEGAL PROCEEDINGS.

Government Regulation

All of the Company's North American  products are required to meet United States
and Canadian government regulations,  including regulations of the United States
Federal  Communication  Commission  ("FCC") and Industry Canada,  which regulate
equipment,  such as modems,  that connects to the public telephone network.  The
FCC  also  regulates  electromagnetic  radiation  emissions.  For  each  of  the
Company's products sold in most foreign countries, specific regulatory approvals
must be obtained for such matters as electrical safety, manufacturing standards,
country-specific  telecommunications  equipment requirements and electromagnetic
radiation and susceptibility  requirements.  The Company has received regulatory
approvals for certain modems in Australia,  Austria,  Belgium,  Bulgaria, China,
Cypress,  Denmark,  Finland, France, Germany,  Greece, Hungary,  Iceland, India,
Ireland,  Israel, Italy, Japan,  Luxembourg,  the Netherlands,  Norway,  Poland,
Portugal,  Russia, Slovenia, South Africa, South Korea, Spain, Srilanka, Sweden,
Switzerland,  Turkey, and the United Kingdom. The Company expects to continue to
seek and  receive  approvals  for new  products in a large  number of  countries
throughout  the world.  The  regulatory  process can be  time-consuming  and can
require the  expenditure of substantial  resources.  In many foreign  countries,
obtaining required  regulatory  approvals may take significantly  longer than in
the United States.  There can be no assurance that the FCC or foreign regulatory
agencies will grant the requisite approvals for any of the Company's products on
a timely basis, if at all. United States and foreign  regulations  regarding the
manufacture and sale of telecommunications devices are subject to future change.
The Company cannot  predict what impact,  if any, such changes may have upon its
business.

Backlog

The Company's  backlog at March 25, 1999 and March 25, 1998 was $1.6 million and
$2.7 million,  respectively,  most of which was for delivery of products  within
120 days or less.  Orders  included  in backlog  generally  may be  canceled  or
rescheduled  by  customers  without  significant  penalty.  Backlog  as  of  any
particular  date should not be relied upon as  indicative  of the  Company's net
sales for any future period.


<PAGE>



Employees

As of December 31, 1998 Zoom had 323 full-time  employees  (including  employees
hired on a temporary  basis).  Of this total,  44 were  engaged in research  and
development, 164 were involved in purchasing,  assembly, packaging, shipping and
quality control, 62 were engaged in sales,  marketing and technical support, and
the remaining 32 performed accounting,  administrative,  management  information
systems,  and  executive  functions.  The  Company's  temporary  employees  were
comprised  of 21  individuals  at December  31,  1998.  Most of these  temporary
employees were employed in  manufacturing.  None of the Company's  employees are
represented by a labor union.

Subsequent Event

In March 1999,  the Company  entered  into a series of  separate  agreements  to
purchase  various  assets,  licenses,  and  inventory  from Hayes  Microcomputer
Products, Inc. Hayes engaged in the business of design, manufacture, and support
of computer  communications  products for  business,  government,  and consumers
worldwide. On October 9, 1998 Hayes filed for reorganization under Chapter 11 of
the United States  Bankruptcy  Code,  Case No. 98-2276 through  98-2281,  in the
United States Bankruptcy Court ("the Court"). The Company has paid approximately
$5.0 million in aggregate for all of the assets of Hayes Microcomputer  Products
Inc. Europe Region, product and rights for the American modem business, ADSL and
cable modem equipment, and some inventory.

On March 19, 1999 the Court filed  the  Company's  acceptance  for the  American
modem  business,  completing  the  majority of the  purchases.  At this time the
proceedings  are  ongoing  and the  Company is  involved in the bidding for some
remaining  assets.  The purchases are not subject to any financing and are being
paid for through the Company's  cash balances.  The Company  intends to continue
production,  sales,  and support of most of the more popular  Hayes modems under
the Hayes name. The acquisition will be accounted for as a purchase.



<PAGE>



Executive Officers Of The Registrant

The names of the current  executive  officers of Zoom, and certain  biographical
information furnished by them, are set forth below:

      Name            Age           Position with Zoom
 -----------------    ---   -------------------------------------

 Frank B. Manning      50  Chief Executive Officer, President and 
                           Chairman of the Board
 Peter R. Kramer       47  Executive Vice President and Director
 Robert A. Crist       55  Vice President of Finance and Chief Financial Officer
 Terry J. Manning      47  Vice President of Sales and Marketing
 Dean N. Panagopoulos  41  Vice President of Information Systems
 Deena Randall         45  Vice President of Operations
 Dana Whitney          36  Vice President of Engineering and Network Products


Frank B. Manning is a co-founder  of the Company and has been  President,  Chief
Executive Officer, and a Director of the Company since May 1977, and Chairman of
the Board  since  1986.  He  earned  his BS, MS and PhD  degrees  in  Electrical
Engineering  from the  Massachusetts  Institute  of  Technology,  where he was a
National Science Foundation  Fellow.  Since 1993 Mr. Manning has been a director
of MicroTouch Systems, a NASDAQ-listed leader in touchscreen  technology.  Since
1998 Mr.  Manning  has also  been a  director  of the  Massachusetts  Technology
Development  Corporation,  which  invests  in seed  and  early-stage  technology
companies in Massachusetts.

Peter R.  Kramer is a  co-founder  of the Company  and has been  Executive  Vice
President  and a Director of the Company since May 1977. He earned his BA degree
in 1973 from SUNY Stony Brook and his MFA degree from C.W. Post College in 1975.

Robert A. Crist joined Zoom in July 1997 as Vice  President of Finance and Chief
Financial Officer.  From April 1992 until joining the company,  Mr. Crist served
in various  capacities  at Wang  Laboratories,  Inc.,  a computer  software  and
services company,  including Chief Financial Officer for the Software  Business.
Prior to 1992 Mr. Crist served in various  capacities at Unisys  Corporation and
its  predecessor  Burroughs  Corporation,  both  computer  hardware and services
companies,  including  Assistant  Corporate  Controller,  Corporate  Director of
Business   Planning  and  Analysis,   Corporate   Manufacturing   &  Engineering
Controller,  Computer  Systems  and  Networking  Controller,  and  Semiconductor
Business  Controller.  Mr.  Crist earned his BA degree from  Pennsylvania  State
University and he earned his MBA from the University of Rochester in 1971.

Terry J.  Manning  joined  Zoom in 1984 and served as  corporate  communications
director from 1984 until 1989 when he became the director of the Company's sales
and  marketing  department.  Terry  Manning is Frank  Manning's  brother.  Terry
Manning earned his BA degree from Washington University in St. Louis in 1974 and
his MPPA degree from the University of Missouri at St. Louis in 1977.

Dean N. Panagopoulos  joined Zoom in February of 1995 as Director of Information
Systems.  For three  years prior to joining  Zoom,  Mr.  Panagopoulos  served as
Director of Technical Services for Ziff Information Services, a major outsourcer
of  computing  services.  Prior to that,  Mr.  Panagopoulos  worked for  General
Electric's  Aircraft  Engines  Division,   where  he  was  responsible  for  the
development and implementation of advanced  manufacturing  systems for automated
facilities.  He earned his BS degree in  Information  Systems from  Northeastern
University.

Deena  Randall  joined  Zoom in 1977 as its first  employee.  Ms.  Randall has
served in various  senior  positions
within the Company and has directed the Company's  operations  since 1989. 
 Ms.  Randall  earned her BA degree from
Eastern Nazarene College in 1975.

Dana Whitney joined Zoom in 1994 as director of engineering.  From 1990 to 1994,
Mr.  Whitney  served  in  various   capacities   with  Motorola  Codex,  a  data
communications company, including as a senior design engineer from 1990 to 1991,
and as an engineering  manager from 1991 to 1994. As engineering  manager he was
responsible  for the  design and  development  of  digital  data  communications
products.  Mr. Whitney earned his BSEE from the University of  Massachusetts  at
Dartmouth in 1984 and his MBA degree from Bryant College in 1993.

ITEM 2 - PROPERTIES

Zoom  currently  occupies  approximately  48,000  square  feet  of two  adjacent
buildings with a total of approximately  72,000 square feet at 201 and 207 South
Street, Boston, Massachusetts.  These buildings were purchased by the Company in
April 1993 and currently  serve as the corporate  headquarters.  In August 1996,
the  Company   entered  into  a  five  year  lease  for  a  77,428  square  foot
manufacturing and warehousing facility at 655 Summer Street,  Boston, MA. At the
end of the initial lease term, the Company has an option to extend the lease for
an additional five year term.

ITEM 3 - LEGAL PROCEEDINGS

On March 21,  1996,  James A. Storer and REFAC  International,  Ltd.,  a company
engaged in the business of acquiring and licensing patents, filed a complaint in
the United  States  District  Court,  District of  Massachusetts,  naming  Hayes
Microcomputer  Products, Inc. and the Company as defendants in a patent lawsuit.
The  complaint  alleged  that  the  V.42  bis  international  telecommunications
standard for data compression in computer modems is covered by a patent owned by
the  plaintiffs,  and the  defendants'  modems that  incorporate  this  standard
infringe the patent.  The complaint sought to permanently  enjoin the defendants
from infringing the patent and monetary damages for past infringement, and REFAC
had  offered to  negotiate  a royalty  for  licensing  the  patent.  The Company
believed  that the alleged  infringement  involved  technology  incorporated  in
chipsets provided to it from Rockwell International.  By an agreement dated July
12, 1996 Rockwell International agreed, subject to certain conditions, to assume
defense of and indemnify Zoom against the action.

On April 22, 1998 a  stipulation  of dismissal  with  prejudice was filed by the
Company in the United States District Court, District of Massachusetts; on April
23, 1998 the Court entered  judgement  pursuant to the  stipulation and the case
was marked closed. No damages were aseesed against the company.

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

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






<PAGE>


                                     PART II

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

The  Company's  Common Stock is traded on the Nasdaq  National  Market under the
symbol "ZOOM." The following table sets forth,  for the periods  indicated,  the
high and low sale  prices per share of Common  Stock,  as reported by the Nasdaq
National Market.

Fiscal Year Ending December 31, 1997
                                                         High          Low
                                                         ----          ---

           First Quarter...........................   $ 10.625       $ 8.375
           Second Quarter..........................      8.750         6.500
           Third Quarter...........................      8.250         7.000
           Fourth Quarter..........................      7.625         5.125
           

Fiscal Year Ending December 31, 1998

           First Quarter...........................   $  9.625       $ 6.563
           Second Quarter..........................      8.750         5.813
           Third Quarter...........................      6.750         3.125
           Fourth Quarter..........................      8.625         2.250   
  
           
As of March 29,  1999,  there were  approximately  336  holders of record of the
Company's Common Stock.

Recent Sales of Unregistered Securities

Not applicable.


Dividend Policy

The Company has never  declared or paid cash  dividends on its capital stock and
does not plan to pay any cash dividends in the foreseeable future. The Company's
current policy is to retain all of its earnings to finance  future  growth.  The
Company's bank credit facility restricts the payment of cash dividends.

Limitations Affecting Holders of Common Stock

An  investment  in Common  Stock  which  results  in a change of  control of the
Company may be subject to review and approval  under the  Investment  Canada Act
(Canada) (the "ICA"),  if the person acquiring control is not a Canadian person;
provided, however, that if the person acquiring control is a national of a World
Trade Organization member country (which includes the United States),  then such
investment  shall not be  subject  to review  under the ICA so long as the gross
assets  of the  Company  have an  aggregate  value  of less  than  $160  million
Canadian.  This process may have the effect of delaying or preventing the change
in control of the Company.  Under the Canada Business Corporations Act, not less
than  one-third  of the  members of the Board of  Directors  and any  committees
thereof must be resident  Canadians (and not less than one-half if the Company's
gross revenues in Canada exceeds 5%).

Certain Income Tax Considerations

The  following  summary is based on the tax laws of the United States and Canada
as in effect on the date of this  Report,  and is  subject  to changes in United
States and Canadian law,  including changes that could have retroactive  effect.
The summary is further  based on the  Convention  between  Canada and the United
States of America  with  respect to Taxes on Income and on  Capital,  as amended
(the "Convention"),  the published  administrative  practices of Revenue Canada,
Taxation and the Internal Revenue Service and judicial  decisions,  all of which
are subject to change.  The  discussion  summarizes  certain tax  considerations
relevant to individual and corporate holders of Common Stock who, for income tax
purposes, are resident in the United States and not in Canada, hold Common Stock
as  capital  assets,  and do not use or hold the  Common  Stock in  carrying  on
business through a permanent establishment or in connection with a fixed base in
Canada  (collectively,  "Unconnected US Shareholders").  The tax consequences of
holding the Common Stock by individuals or corporations  who are not Unconnected
US Shareholders may differ  substantially  from the tax  consequences  discussed
herein.  The  summary  does not take into  account  the tax laws of the  various
provinces  or  territories  of Canada or the tax laws of the  various  state and
local jurisdictions in the United States.

The summary is intended to be a general  description  of the Canadian and United
States  tax  considerations.  It does  not  take  into  account  the  individual
circumstances of any particular holder of Common Stock. Therefore,  Stockholders
should  consult their own tax advisors with respect to the tax  consequences  of
holding Common Stock.

Canadian Federal Income Tax Considerations

Any  dividends  on the Common  Stock paid or  credited,  or deemed to be paid or
credited to  Unconnected US  Shareholders  generally will be subject to Canadian
withholding  tax. Under the  Convention,  the rate of withholding  tax generally
applicable to Unconnected US Shareholders is 15%. In the case of a United States
corporate  shareholder  owning 10% or more of the voting  shares of the Company,
the applicable  withholding tax is 6% for dividends paid or credited in 1996 and
5% thereafter.

Capital gains  realized on the  disposition  of Common Stock by  Unconnected  US
Shareholders  will not be subject to tax under the Income Tax Act (Canada)  (the
"Tax Act")  unless such Common  Stock is taxable  Canadian  property  within the
meaning of the Tax Act.  Common  Stock will  generally  not be taxable  Canadian
property to a holder unless, at any time during the five year period immediately
preceding a  disposition,  the holder,  or persons  with whom the holder did not
deal at arm's  length,  or any  combination  thereof,  owned  25% or more of the
issued  shares of any class or series of the  Company.  If the  Common  Stock is
considered  taxable Canadian property to a holder, the Convention will generally
exempt  Unconnected US  Shareholders  from tax under the Tax Act in respect of a
disposition  of Common Stock  provided the value of the shares of the Company is
not derived  principally from real property  situated in Canada.  Neither Canada
nor any  province  thereof  currently  imposes  any estate  taxes or  succession
duties.

United States Federal Income Tax Considerations

Unconnected  US  Shareholders  generally will treat the gross amount of any cash
dividends paid by the Company,  without  reduction for the Canadian  withholding
tax, as dividend  income for United  States  federal  income tax purposes to the
extent of the  Company's  current or  accumulated  earnings and profits.  If the
dividend  distribution  is  paid  in  Canadian  dollars,  the  dividend  will be
includable  in income  when  received  in an amount  equal to the United  States
dollar value, on the date of  distribution,  of the amount so  distributed;  any
gain or loss on the  conversion  of the  distribution  into US  dollars  will be
ordinary in nature.  Subject to the  limitations set forth in Section 904 of the
Internal  Revenue Code of 1986, as amended (the "Code") (which limits the extent
to which a United States  taxpayer may credit  against its United States federal
income tax  liability any taxes paid by it to a foreign  country),  the Canadian
tax withheld or paid with respect to distributions on the Common Stock generally
may be credited  against the United  States  federal  income tax liability of an
Unconnected US Shareholder if such holder makes an appropriate  election for the
taxable  year in  which  such  taxes  are  paid  or  accrued;  alternatively,  a
shareholder  who does not elect to credit  any  foreign  taxes  paid  during the
taxable  year may deduct  such  taxes in such  taxable  year.  In  addition,  an
Unconnected US Shareholder that is a domestic  corporation that owns 10% or more
of the Common Stock and receives a dividend and elects to credit  foreign  taxes
is deemed to have  received  (and to have paid as a foreign tax eligible for the
foreign tax credit,  subject to the limitations of Section 904) a portion of the
foreign taxes paid by the Company.  Because the foreign tax credit provisions of
the Code are complex,  investors  should  consult  their own tax  advisors  when
claiming foreign tax credits.  Dividends paid on the Common Stock will generally
not be eligible for the dividends received deduction otherwise allowed to United
States corporate shareholders.

The sale of Common Stock  generally  will result in the  recognition  of gain or
loss to an  Unconnected  US  Shareholder  in an amount  equal to the  difference
between the amount realized and the holder's adjusted basis in the Common Stock.
Gain or loss upon the sale of  Common  Stock  will be  short-term  or  long-term
capital  gain or loss,  depending  on whether the shares have been held for more
than one year.



<PAGE>


ITEM 6 - SELECTED FINANCIAL DATA

The following table contains certain selected consolidated financial data of the
Company  and is  qualified  in its  entirety by the more  detailed  Consolidated
Financial  Statements and Notes thereto included  elsewhere in this report.  The
statement of operations data for the years ending  December 31, 1996,  1997, and
1998 and the  balance  sheet  data as of  December  31,  1997 and 1998 have been
derived from the Consolidated  Financial  Statements of the Company,  which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants,
and are included  elsewhere in this report.  The statement of operations data of
the  Company  for the years  ending  December  31, 1994 and 1995 and the balance
sheet data as of  December  31,  1994,  1995,  and 1996 have been  derived  from
consolidated  financial  statements  of the Company,  which have been audited by
KPMG Peat Marwick LLP and are not  included in this report.  This data should be
read in conjunction with the Consolidated Financial Statements and related Notes
thereto and  "Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations" appearing elsewhere herein.
<TABLE>
<CAPTION>

                                                                   Years Ending December 31,
                                               ----------------------------------------------------------------
                                                    1994          1995       1996         1997         1998   
                                                    ----          ----       ----         ----         ----
<S>                                              <C>          <C>         <C>          <C>          <C>                           
                                                                       (In thousands)
Statement of Operations Data:
Net sales.................................       $ 68,180     $  96,997   $ 100,195    $ 64,478     $ 61,364
Cost of goods sold........................         53,875        73,402      79,803      56,298       44,651
                                                   ------        -------     ------      ------       ------
     Gross profit.........................         14,305        23,595      20,392       8,180       16,713
Operating expenses:
       Selling............................          6,573         9,023      10,216      11,103       11,801
       General and administrative.........          1,776         2,840       3,674       4,957        4,976
       Research and development...........          1,250         1,835       2,940       4,182        4,449
                                                    -----         ------      -----       -----        -----
       Total operating expenses...........          9,599        13,698      16,830      20,242       21,226
                                                    -----        -------     ------      ------       ------
     Operating income (loss) .............          4,706         9,897       3,562     (12,062)      (4,513)
Other income (expense) net ...............            (75)         (33)         293         741        1,074
                                                      ---          ----         ---         ---        -----
     Income (loss) before income taxes....          4,631         9,864       3,855     (11,321)      (3,439)
Income tax expense (benefit)..............          1,817         3,800       1,375      (4,189)      (1,287)
                                                    -----         -----       -----      -------      -------
     Net income (loss)....................          2,814         6,064       2,480      (7,132)      (2,152)
                                                    =====         ======      =====      =======      =======

Income (loss) per common and common equivalent share:
     Basic................................     $      0.47   $     1.00 $             $   (0.95)     $ (0.29)
                                                      ====         ====                   ======     ========
                                                                               0.35
     Diluted..............................     $      0.47   $     0.98 $             $   (0.95)     $ (0.29)
                                                      ====         ====                   ======     ========
                                                                               0.35

Weighted average common and common equivalent shares:
     Basic................................          6,010         6,075       7,068       7,469        7,474
     Diluted..............................          6,014         6,173       7,162       7,469        7,474


                                                                       At December 31,

                                              ----------------------------------------------------------------
                                                                 1995                       1997
                                                                 ----                       ----
                                              1994                      1996                      1998
                                              ------                    -----                     ----
                                                                      (In thousands)
Balance Sheet Data:
Working capital                                 $ 17,146     $  24,135    $  41,557  $  35,064    $  33,376
Total assets                                      26,816        49,595       56,782      48,515       43,560
Long-term debt                                                                   -                         -
                                                       -             -                        -
Total stockholders' equity                        19,303        27,274       47,355      40,503       38,425
</TABLE>




<PAGE>


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTs
         OF OPERATIONS

Overview

Zoom was established in 1977, and initially  produced and marketed speed dialers
and other specialty telephone  accessories.  The Company shipped its first modem
in 1983 and its first faxmodem in 1990.  Sales of faxmodems and related products
now comprise  substantially all of the Company's revenues. The Company sells its
products both domestically and internationally through high-volume retailers and
distributors, and to PC manufacturers and other OEMs.

The Company's  results of operations have been and may continue to be subject to
significant fluctuations.  The results for a particular period may vary due to a
number of factors,  including the overall state of the PC and PC  communications
markets, pricing and other competitive conditions,  the timing of orders, market
acceptance of the Company's or its OEM  customers'  products,  the timing of the
announcement   and   introduction  of  new  products  by  the  Company  and  its
competitors,  variations  in the  Company's  product  mix and  component  costs,
variations in the proportion of sales made to retailers,  distributors and OEMs,
the financial health and inventory levels of the Company's  customers,  seasonal
promotions  by the  Company,  its  customers  and  competitors,  the  timing  of
expenditures in anticipation of future sales, the timing of product  development
costs,  the  availability  of  materials  and labor  necessary  to  produce  the
Company's  products and general economic  conditions.  The Company also believes
that its sales are seasonal,  with increased  sales  generally  occurring in the
fourth quarter  reflecting holiday sales. The Company expects that its quarterly
operating  results will continue to fluctuate in the future as a result of these
and other factors.

The Company  continually  seeks to improve its product designs and manufacturing
approach  in order to reduce  its  costs.  The  Company  pursues a  strategy  of
outsourcing rather than internally  developing its faxmodem chipsets,  which are
application-specific  integrated  circuits that form the technology base for its
faxmodems.  By  outsourcing  the  chipset  technology,  the  Company  is able to
concentrate  its research and  development  resources on faxmodem system design,
leverage the  extensive  research and  development  capabilities  of its chipset
suppliers,  and reduce its development time and associated costs and risks. As a
result  of  this  approach,  the  Company  is able to  quickly  develop  new and
innovative  products  while  maintaining a relatively  low level of research and
development  expense as a  percentage  of sales.  The  Company  also  outsources
aspects of its  manufacturing to contract  assemblers as a means of reducing its
fixed  labor  costs and capital  expenditures,  and to provide the Company  with
greater flexibility in its capacity planning.

The Company's gross margins are typically  significantly  higher for its branded
product  sales to  retailers  and  distributors,  both in the United  States and
internationally,  than for sales to OEMs.  However,  the  increased  margins for
sales to retailers and  distributors  are generally  offset by higher  operating
expenses  associated  with those sales than for sales to OEMs.  These  increased
operating  expenses   typically  include  costs  for  cooperative   advertising,
technical support and sales commissions.

The market for faxmodems has been characterized by rapid  technological  change,
frequent product introductions, evolving industry requirements and short product
life cycles.  When component costs drop and  competitive  and enhanced  products
become available, the Company's products are susceptible to price decreases. The
Company has a policy of offering price protection to certain of its retailer and
distributor  customers for some or all of their on-hand inventory,  whereby when
the Company reduces its prices for a product, the customer receives a credit for
the difference  between the original  purchase  price and the Company's  reduced
price. In 1996, 1997 and 1998 the Company's results of operations were adversely
affected by reductions in prices which  resulted in relatively  high charges for
price  protection.  The impact of price reductions is mitigated by the Company's
introduction  of new  products,  the  adoption of  lower-cost  technologies  and
product  designs,  and the  implementation  of  other  measures  to  reduce  its
manufacturing and other costs.


<PAGE>


Results of Operations

The following table sets forth certain  financial data for the periods indicated
as a percentage of net sales:
<TABLE>
<CAPTION>
                                                                                 Years Ending December 31,
<S>                                                                        <C>            <C>            <C> 
                                                                             --------------------------------
                                                                             1996          1997          1998
                                                                             ----          ----          ----
Net sales.....................................................              100.0%        100.0%        100.0%
Cost of goods sold............................................               79.7          87.3          72.8
                                                                             ----          ----          ----
    Gross profit..............................................               20.3          12.7          27.2
Operating expenses:
    Selling...................................................               10.2          17.2          19.2
    General and administration................................                3.7           7.7           8.1
    Research and development..................................                2.9           6.5           7.2
                                                                              ---           ---           ---
    Total operating expenses..................................               16.8          31.4          34.5
                                                                             ----          ----          ----
Operating income (loss).......................................                3.5         (18.7)         (7.3)
     Other income (expense), net..............................                0.3           1.1           1.7
                                                                              ---           ---           ---
Income before income taxes....................................                3.8         (17.6)         (5.6)
     Income tax expense                                                       1.3          (6.5)         (2.1)
                                                                              ---          -----         -----
(benefit)................................................
Net income (loss).............................................                2.5%        (11.1)%        (3.5)%
                                                                              ===         ======         =====

</TABLE>
Year Ending December 31, 1998 Compared to Year Ending December 31, 1997

Net Sales.  Net sales decreased 5.0% to $61.4 million in 1998 from $64.5 million
in 1997.  Unit sales of modems in 1998 increased 7.3% over 1997, but the average
selling price for modems declined by more than 10%. In 1998 as compared to 1997,
the Company's sales to retailers and distributors in the United States decreased
by 6.0% to $42.8  million and the  Company's  worldwide  sales to OEM  customers
decreased by 9% to $5.2 million. The Company's  international sales to retailers
and distributors held constant at $13.4 million in 1998 and 1997.

Gross Profit.  Gross profit as a percentage  of net sales  increased to 27.2% in
1998 from 12.7% in 1997.  Although  average  selling prices for modems  declined
year  over  year,  the cost of  materials  and  manufacturing  costs,  including
obsolescence and scrap expense, declined to a greater extent, yielding increased
gross  margins.  In addition,  channel price  protection  was less of a negative
impact on gross profit in 1998 than in 1997.  Gross profit for 1998 included the
favorable  impact of  advantageously  negotiated  purchases of modem  materials.
These  purchases  continued  in the first  quarter of 1999.  The impact of these
favorable  purchases  is expected to be realized as units are sold during  1999.
The net impact in gross margin in 1999 is unclear because of expected  continued
erosion of analog modem selling prices.

Selling Expenses.  Selling expenses  increased 6.3% to $11.8 million or 19.2% of
net sales in 1998 from $11.1  million or 17.2% of net sales in 1997.  The dollar
increase was primarily the result of increases in advertising  and promotions in
Zoom's direct sales channel, added technical support personnel and services, and
increased commission expenses.

General and Administrative  Expenses.  General and administrative  expenses were
relatively unchanged from 1997 to 1998. General and administrative expenses were
$5.0  million or 8.1% of net sales in 1998  compared to $5.0  million or 7.7% of
net sales in 1997.  Lower  personnel  costs and bad debt expenses were offset by
increased legal expenses.

Research and Development  Expenses.  Research and development expenses increased
6.4% to $4.5  million or 7.3% of net sales in 1998 from $4.2  million or 6.5% of
net sales in 1997.  The increase in expenses  was  primarily  due to  additional
personnel  consistent  with  the  broadening  of  the  Company's  non-modem  and
international  modem product lines and the  integration  of Lucent  Technologies
modem  chipsets into some of the Company's 56K modem product line.  Amortization
of licenses and higher costs for  recruiting  and  consulting  increased in 1998
while the costs of foreign and domestic government approvals decreased.

Interest  Income.  Net interest income  increased to $840,044 in 1998 from a net
interest  income  of  $503,680  in 1997.  The  increase  was the  result  of the
Company's  higher  average cash balances and higher  interest  rates during 1998
compared to 1997.

Other Income Net.  Other income and  non-interest  income  decreased  slightly 
to $233,979 in 1998 from $237,273 in
1997.

Provision for Income Taxes.  The Company's effective tax rate
 remained unchanged from 1997 at approximately 37.0%.


Year Ending December 31, 1997 Compared to Year Ending December 31, 1996

Net  Sales.  Net sales  decreased  35.6% to $64.5  million  in 1997 from  $100.2
million in 1996. The  availability of pre-standard 56K modems reduced 33.6K unit
volumes and average selling prices.  The lack of a standard for 56K and the slow
deployment of central  sites  compatible  with the Company's  K56flex 56K modems
caused  low sales of 56K modems  until  late in 1997.  The result was an overall
reduction in unit  volumes and average  selling  prices.  The decline in average
selling prices was further exacerbated by severe price competition and a decline
in modem chipset prices. The Company  experienced  decreases in net sales in all
of its sales  channels.  North American  non-OEM sales  decreased 26.0% to $45.4
million in 1997,  non-OEM sales outside North America  decreased  28.0% to $13.4
million, and worldwide OEM sales decreased 70.0% to $5.7 million.

Gross  Profit.  Gross profit as a percentage  of net sales  declined to 12.7% in
1997 from 20.3% in 1996.  This decline in gross margin was caused by a number of
factors,  including  increased channel price protection due to the rapid decline
in prices, increased inventory reserves against slower speed modems, write-downs
of the Company's inventory of modem chipsets including lower speed modems due to
declining  chipset  costs,  and the impact of lower  volumes  on  certain  fixed
manufacturing costs. For most faxmodems models, the decline in selling price was
partially offset by declining part costs.

Selling Expenses.  Selling expenses  increased 8.7% to $11.1 million or 17.2% of
net sales in 1997 from $10.2 million or 10.2% of net sales in 1996. The increase
was  primarily  due  to  increased  cooperative   advertising  expenses  in  the
high-volume retailer and Internet Service Provider channels.

General  and  Administrative  Expenses.   General  and  administrative  expenses
increased  35.0% to $4.9  million or 7.7% of net sales in 1997 from $3.7 million
or 3.7% of net sales in 1996.  This  increase  was  primarily  due to  increased
personnel expenses, bad debt expenses and foreign exchange losses.

Research and Development  Expenses.  Research and development expenses increased
42.0% to $4.2  million or 6.5% of net sales in 1997 from $2.9 million or 2.9% of
net sales in 1996.  The increase was  primarily due to the addition of personnel
to support the Company's development efforts in a number of new areas, including
the remote access video and ISDN areas,  and to costs associated with broadening
the product line and international regulatory approvals.

Interest  Income.  Net interest income  increased to $503,680 in 1997 from a net
interest  income  of  $233,963  in 1996.  The  increase  was the  result  of the
Company's higher average cash balances during the last year compared to 1996.

Other Income (Expense),  Net. Other non-interest income increased to $237,273 in
1997 from  $58,551 in 1996.  The  increase  was  primarily  the result of higher
sublease income compared to 1996.

Provision for Income Taxes. The Company's effective tax rate increased to 37% in
1997 from 35.7% in 1996 due  primarily  to the  inapplicability  of the  foreign
sales corporation provisions to the Company's 1997 loss before income taxes.

Liquidity and Capital Resources

On  December  31,  1998,  the  Company  had  working  capital of $33.4  million,
including $18.9 million in cash and investment securities.  The Company also has
a secured $5 million line of credit  expiring  October 1, 1999.  No amounts were
outstanding  under this line of credit as of  December  31,  1998.  This line of
credit bears interest at the bank's prime rate (7.75% on December 31, 1998). The
line of credit is secured and contains certain financial and other covenants. On
December 31, 1998 the Company was in full compliance with all covenants.

In  1998  the  Company's  net  cash   provided  by  operating   activities   was
approximately $8.2 million. During that period inventory and accounts receivable
decreased  by $3.1  million  and $6.1  million,  respectively.  The  decrease in
inventory  was  primarily  due to lower  sales in the fourth  quarter of 1998 as
compared  to sales in the fourth  quarter of 1997 and the  Company's  efforts to
reduce  inventory  levels.  The decrease in accounts  receivable  was  primarily
attributable  to lower  sales and  improved  collections  in 1998 as compared to
sales in 1997.  These sources of cash were partially  offset by the reduction of
accounts  payable and accrued  expenses of $2.9 million,  and the Company's $2.1
million net loss. In 1998 the Company also recovered  approximately $3.7 million
in  previously  paid income  taxes as a result of carrying  back  available  net
operating losses.

The  Company's  capital  expenditures  in 1998  of  approximately  $0.7  million
consisted  primarily of the Company's computer hardware and software,  purchases
of other equipment and tooling, and continued renovations to its headquarters.

Subsequent  to the year ended  December  31, 1998 the  Company has entered  into
agreements with Hayes Microcomputer  Products,  Inc. to purchase various assets,
rights and  inventory  in a public  bankruptcy  auction for  approximately  $5.0
million. As of March 19, 1999 the Court has filed the acceptance of the majority
of the Company's bids.
See Note 15 to the Consolidated Financial Statements.

The Company believes that its existing cash and investment securities,  together
with funds generated from operations and available sources of financing, will be
sufficient to meet its normal working capital  requirements  for the foreseeable
future.

Year 2000 Readiness Statement

The year 2000  issue is the  potential  for  system  and  processing  failure of
date-related data and the result of computer-controlled systems using two digits
rather than four to define the applicable year. For example,  computer  programs
that have  date-sensitive  software may  recognize a date using "00" as the year
1900  rather  than  the  year  2000.  Systems  that  do not  properly  recognize
date-sensitive  information  when the year changes to 2000 could generate system
failure or miscalculations causing disruptions of operations,  including,  among
other things, a temporary  inability to process  transactions,  send invoices or
engage in similar ordinary business activities.

The Company is evaluating  the year 2000 issue with respect to its financial and
management information systems, its products and its suppliers. At this point in
its  assessment,  the Company is not  currently  aware of any year 2000 problems
that are reasonably likely to have a material effect on the Company's  business,
mission critical systems, results of operations or financial condition,  without
taking into account the Company's efforts to avoid such problems.

The Company is completing its review of its management and  information  systems
for year 2000  compliance and has identified  application  software and hardware
which must be  upgraded to become year 2000  compliant.  The Company  intends to
generally upgrade its management and information systems in conjunction with its
upgrade to become year 2000 compliant by September  1999.  The Company  believes
that the cost of this upgrade will be  approximately  $100,000 to $300,000,  the
majority of which will be capitalized. There is a risk that, notwithstanding its
internal  review,  if the  Company  has not  properly  identified  all year 2000
compliance  issues with respect to its management and information  systems,  the
Company may not be able to implement all necessary changes to these systems on a
timely  basis and  within  budget.  Such a failure  could  result in a  material
disruption  to the  Company's  business,  including  the  inability to track and
timely fill orders,  which could have a material adverse effect on its business,
results of operations and financial condition.

The Company has evaluated  its current  products and believes that they are year
2000  compliant.  The Company  has also  undertaken  a general  review of modems
previously  sold by it that may  continue  to be  under  warranty  to  determine
whether  those  products  are year 2000  compliant.  Based upon its  preliminary
assessment, the Company believes that the proper operation of its modems are not
date dependent and therefore  should continue to function  properly on and after
the year 2000. In order to assure that this is the case,  the Company is seeking
information  from its major  suppliers,  particularly of its modem chipsets,  to
confirm  that they have been year 2000  compliant.  The  Company has sent a year
2000 Readiness Letter/Questionnaire to its major suppliers and initial responses
from  the  Company's   chipset   manufacturers   have  confirmed  the  Company's
understanding  that the chipsets used by the Company are not date  sensitive and
are therefore year 2000 compliant.  However,  the Company cannot assure that its
chipset  manufacturers  will  provide  the  Company  with  accurate  information
regarding   their  year  2000   compliance.   Should  any  critical   components
incorporated  in the  Company's  products fail to be year 2000  compliant,  such
failure could result in warranty  claims and have a material  adverse  effect on
its business, results of operations and financial condition.

The  Company's  products and software  are often sold to be  integrated  into or
interface with third party equipment or software. In addition, the Company often
packages its modems for retail sale with software provided by other vendors. The
Company does not alter this software in any date  sensitive  way. The Company is
in the process of seeking  information  from its software vendors to assure that
the software  packaged  with its products will be year 2000  compliant,  and has
sent a year 2000 Readiness Letter/Questionnaire to its major software suppliers.
While it is possible that some of this software may be adversely affected by the
year  2000,  the  Company  is not aware of any  packaged  software  having  this
problem.  Failure of third-party  equipment or software to operate properly with
regard  to the year 2000 and  thereafter  could  require  the  Company  to incur
unanticipated  expenses  to remedy  any  problems,  which  could have a material
adverse  effect on the Company's  business,  results of operations and financial
condition.

The  Company  is also  exposed  to the risk  that it could  experience  material
shipment  delays from its major  component  suppliers or contract  assemblers or
material sales delays from its major  customers due to year 2000 issues relating
either to their management  information or production  systems.  The Company has
inquired of these  suppliers and contract  assemblers in an attempt to ascertain
their year 2000  readiness.  At this time, the Company is unable to estimate the
nature or extent of any potential  adverse impact  resulting from the failure of
third parties, such as its suppliers,  and contract assemblers and customers, to
achieve year 2000 compliance.  Moreover,  such third parties,  even if year 2000
compliant,  could experience  difficulties  resulting from year 2000 issues that
may affect  their  suppliers,  service  providers  and  customers.  As a result,
although the Company does not currently  anticipate  that it will experience any
material  shipment  delays from their major  product  suppliers  or any material
sales  delays  from its major  customers  due to year 2000  issues,  these third
parties could  experience year 2000 problems that could have a material  adverse
effect on the Company's business, results of operations and financial condition.

Other than its activities  described  above,  the Company does not have and does
not plan to  develop a  contingency  plan to  address  Y2K  issues.  Should  any
unanticipated  significant Y2K issues arise, the Company's  failure to implement
such a contingency  plan could have a material  adverse  affect on its business,
financial condition and results of operation.

To the extent that the Company does not identify any material non-compliant year
2000  issues  affecting  the  Company or third  parties,  such as the  Company's
suppliers,  service  providers and customers,  the most reasonably  likely worst
case year 2000 scenario is a systemic failure beyond the control of the Company,
such as a  prolonged  telecommunications  or  electrical  failure,  or a general
disruption in United States or global business activities that could result in a
significant  economic  downturn.  The Company believes that the primary business
risks, in the event of such failure or other  disruption,  would include but not
be limited to, loss of customers or orders, increased operating costs, inability
to obtain  inventory on a timely basis,  disruptions  in product  shipments,  or
other  business  interruptions  of a  material  nature,  as  well as  claims  of
mismanagement, misrepresentation, or breach of contract, any of which could have
a material adverse effect on the Company's  business,  results of operations and
financial condition.

Euro Conversion

On  January  1,  1999,  11 of the 15  member  countries  of the  European  Union
established a fixed conversion rates between their existing sovereign currencies
and the  euro.  As of  January  1,  2002,  the  transition  to the euro  will be
complete.  The Company has significant  operations within the European Union and
is currently  preparing  for the euro  conversion.  The euro may impact  general
economic  conditions  such as interest  and foreign  exchange  rates  within the
participating  countries  or in other  areas  where the  Company  operates.  The
Company  is in the  process of  analyzing  the impact of the euro with a view to
minimizing the effects on the Company's operations.  The Company does not expect
the costs of upgrading its systems to be material.

A portion of the  Company's  revenues are subject to the risks  associated  with
international  sales.   Although  most  of  the  Company's  product  prices  are
denominated  in the United  States  currency,  customers  in  foreign  countries
generally  evaluate  purchases of products  such as those sold by the Company on
the purchase price expressed in the customer's currency. As a result, the impact
of and  economic  conditions  relating to the euro  (including  fluctuations  in
foreign currency  exchange rates,  particularly with respect to the U.S. dollar)
may have a material  adverse affect on the demand for the Company's  products as
well  as  on  the  Company's  business,   financial  condition  and  results  of
operations.


Recently issued Accounting Standards

The Financial  Accounting Standards Board recently issued Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging  Activities,  which establishes  accounting and reporting  standards for
derivative instruments embedded in other contracts  (collectively referred to as
derivatives),  and for hedging  activities.  This Statement is effective for all
fiscal  quarters of fiscal years  beginning after June 15, 1999. The adoption of
this  Statement  is not  expected  to have a  material  impact on the  Company's
consolidated financial position or results of operations.

The AICPA Accounting  Standards Executive Committee recently issued Statement of
Position (`SOP") 98-1, Accounting for the Cost of Computer Software Developed or
Obtained for Internal  Use.  This SOP requires that certain costs related to the
development and purchase of  internal-use  software be capitalized and amortized
over the  estimated  useful life of the  software,  and is effective  for fiscal
years  beginning  after  December 15,  1998.  The SOP also  requires  that costs
related  to the  preliminary  project  stage and post  implementation/operations
stage in an internal-use  computer software  development  project be expensed as
incurred.  The adoption of this SOP is not expected to have a material impact on
the Company's consolidated financial position or results of operations.

 The AICPA Accounting  Standards  Executive  Committee recently issued SOP 98-5,
Reporting  on the Costs of Start-up  Activities.  This SOP  requires  that costs
incurred during start-up activities,  including  organization costs, be expensed
as incurred,  and is effective for the fiscal years beginning after December 15,
1998.  The  adoption of this SOP is expected to have no impact on the  Company's
consolidated financial position or results of operations.

ITEM 7A.

The Company owns  financial  instruments  that are  sensitive to market risks as
part of its investment  portfolio.  The investment portfolio is used to preserve
the  Company's  capital until it is required to fund  operations,  including the
Company's  research  and  development  activities.  None  of  these  market-risk
sensitive  instruments are held for trading  purposes.  The Company does not own
derivative  financial  instruments in its investment  portfolio.  The investment
portfolio  contains  instruments  that are  subject  to the risk of a decline in
interest rates.

Investment  Rate  Risk  -  The  Company's  investment  portfolio  includes  debt
instruments  that are primarily  United States  government  bonds and high grade
corporate bonds of less than three years in duration. These bonds are subject to
interest  risk,  and could  decline in value if interest  rates  fluctuate.  The
Company's  investment portfolio also consists of certain commercial paper, which
is  also  subject  to  interest  rate  risk.  Due  to  the  short  duration  and
conservative  nature of these instruments,  the Company does not believe that it
has a material exposure to interest rate risk.




<PAGE>


ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                             ZOOM TELEPHONICS, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                  AND SCHEDULE
                                                                             
Index to Consolidated Financial Statements 
                                                                    
Independent Auditors' Report 
Consolidated Balance Sheets as of December 31, 1997 and 1998
                                                  
Consolidated  Statements of Operations  for the years ending  December 31, 1996,
1997 and 1998

Consolidated  Statements of Changes in Stockholders' Equity for the years ending
December 31, 1996, 1997 and 1998

Consolidated  Statements  of Cash Flows for the years ending  December 31, 1996,
1997 and 1998

Notes to Consolidated Financial Statements                                      

Schedule II: Valuation and Qualifying  Accounts for Fiscal Years Ending December
31, 1996, 1997 and 1998
                                                                              

ITEM 9 -  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

There were no changes in or  disagreements  with  accountants  on  accounting or
financial disclosure during the period covered by this report.


<PAGE>


                                                     PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information  required by this item appears under the caption "Executive Officers
of the  Registrant"  in Part 1,  Item 1 --  Business,  and  under  the  captions
"Election of Directors"  and  "Compliance  With Section 16(a) of the  Securities
Exchange Act" in the Company's  definitive  proxy  statement for its 1999 annual
meeting  which will be filed with the SEC in April 1999  pursuant to  Regulation
14A, and is incorporated herein by reference.


ITEM 11 - EXECUTIVE COMPENSATION

Information  required  by  this  item  appears  under  the  captions  "Executive
Compensation,"  "Directors'  Compensation",  in the Company's  definitive  proxy
statement for its 1999 annual  meeting which will be filed with the SEC in April
1999, pursuant to Regulation 14A, and is incorporated herein by reference.


ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information  required  by this item  appears  under the  captions  "Election  of
Directors" and "Security  Ownership of Certain Beneficial Owners and Management"
in the Company's  definitive  proxy  statement for its 1999 annual meeting which
will be filed with the SEC in April 1999,  pursuant to  Regulation  14A,  and is
incorporated herein by reference.


ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.







<PAGE>


                                     PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

    (a)        Financial Statements, Schedules and Exhibits:

       (1),(2) The financial  statements and required  schedules are indexed 
               under Item 8.

       (3)     Exhibits  required by the Exhibit Table of Item 601 of SEC 
               Regulation S-K.(Exhibit  numbers refer to
               numbers in the Exhibit Table of Item 601.)

           3.1 Articles of Continuance,  filed as Exhibit 3.1 to the Annual 
               Report on Form 10-K for the fiscal year ended December 31, 1991 
               (the "1991 Form 10-K"). *

           3.2 By-Law  No. 1 of Zoom Telephonics, Inc., filed as Exhibit 3.2 to 
               the 1991 Form 10-K. *

           3.3 By-Law  No. 2 of Zoom Telephonics, Inc., filed as Exhibit 3.3 to 
               the 1991 Form 10-K. *

        **10.1 1990 Stock Option Plan, as amended,  of Zoom  Telephonics,  Inc.,
               filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for  
               the fiscal quarter ended June 30, 1998. *

        **10.2 1991 Director Stock Option Plan, as amended, of Zoom Telephonics,
               Inc., filed as Exhibit 10.2 to the Quarterly  Report on form 10-Q
               for the fiscal quarter  ended  June 30, 1996 ("the June 1996 Form
               10-Q"). *

          10.3 Letter Agreement Regarding Revolving Line of Credit by and 
               between Zoom Telephonics, Inc.and Fleet National Bank,  filed as 
               Exhibit 10.3 to the Annual  Report on form 10-K for the  fiscal  
               year ended December 31, 1997 ("the 1997 Form 10-K"). *
          10.4 Loan  Modification Agreement by and between Zoom Telephonics,Inc
               and Fleet National Bank, filed as Exhibit 10.4 to the 1997 
               Form 10-K. *

          10.5 Lease between Zoom Telephonics,  Inc. and "E" Street  Associates,
               filed as Exhibit 10.5 to the June 1996 Form 10-Q. *

          10.6 Form of Indemnification Agreement, filed as Exhibit 10.6 to the 
               June 1996 Form 10-Q. *

          10.7 Promissory Note issued by Zoom Telephonics, Inc. in favor of 
               Fleet National Bank.

          10.8 Security  Agreement  between the Company and Fleet National Bank,
               filed as Exhibit 10.8 to the 1997 Form 10-K. *

        **10.9 Employment Agreement,filed as Exhibit 10.9 to the 1997 
               Form 10-K.*

         10.10 Second Loan Modification Agreement by and between Zoom 
               Telephonics, Inc. and Fleet National Bank.

         11.   Statement re computation of per share earnings.

         21.   Subsidiaries,  filed as Exhibit 21 to the Annual  Report on Form 
               10-K for the fiscal year ended  December 31, 1996. *

         23.   Consent of KPMG Peat Marwick LLP.

         27.   Financial Data Schedule.

    (b)        Reports on Form 8-K.

             No  current  reports  on Form 8-K have been  filed  during the last
              quarter for the period covered by this report.

    (c)      Exhibits - See Item 14(a)(3) above for a list of Exhibits  
             incorporated herein by reference or filed with this Report.

    (d)      Schedules  -  Schedule  II:  Valuation  and  Qualifying   Accounts.
             Schedules  other than those listed  above have been  omitted  since
             they are either inapplicable or not required.

      *      In accordance with Rule 12b-32 under the Securities Exchange Act of
             1934,  as amended,  reference is made to the  documents  previously
             filed with the Securities and Exchange Commission,  which documents
             are hereby incorporated by reference.

     **      Compensation Plan or Arrangement.


<PAGE>



                                   SIGNATURES

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


                                             ZOOM TELEPHONICS, INC.
                                             (Registrant)


                                           By: /s/ Frank B. Manning
                                           ------------------------
                                          Frank B. Manning, President

Date:  March 31, 1998

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

<TABLE>
<S>                              <C>                                            <C>
Signature                        Title(s)                                       Date




/s/ Frank B. Manning             Principal Executive Officer and                March 31, 1999
--------------------------                                                                    
Frank  B. Manning                Chairman of the Board




/s/ Robert A. Crist              Principal Financial and Accounting Officer     March 31, 1999
-----------------------------                                                                 
Robert A. Crist




/s/ Peter R. Kramer              Director                                       March 31, 1999
--------------------------                                                                    
Peter R. Kramer




/s/ Bernard Furman               Director                                       March 31, 1999
Bernard Furman



/s/ L. Lamont Gordon             Director                                       March 31, 1999
--------------------------                                                                    
L. Lamont Gordon



    J. Ronald Woods              Director                                       March 31, 1999
--------------------------                                                                    
J. Ronald Woods
</TABLE>
<PAGE>

                             ZOOM TELEPHONICS, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                  AND SCHEDULE

                                                                          

Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1997
and 1998 

Consolidated  Statements of Operations  for the years ending  December 31, 1996,
1997 and 1998

Consolidated Statements of Changes in Stockholders'  Equity for the years ending
December 31, 1996, 1997 and 1998

Consolidated  Statements  of Cash Flows for the years ending  December 31, 1996,
1997 and 1998 Notes to Consolidated Financial Statements

Schedule II: Valuation and Qualifying  Accounts for Fiscal Years Ending December
31, 1996, 1997 and 1998





<PAGE>




                                           Independent Auditors' Report


The Board of Directors and Stockholders
Zoom Telephonics, Inc.:


We  have  audited  the   accompanying   consolidated   balance  sheets  of  Zoom
Telephonics,  Inc. and  subsidiaries  as of December 31, 1997 and 1998,  and the
related consolidated  statements of operations,  changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1998. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Zoom Telephonics,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 1998,  in  conformity  with  generally  accepted  accounting
principles.




                                                           KPMG Peat Marwick LLP



Boston, Massachusetts
February 10, 1999, except for
Note 15, which is as of March 19, 1999















<PAGE>


                                              ZOOM TELEPHONICS, INC.
                                            CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                         -----------------------------------------
<S>                                                                      <C>                    <C>
     Assets                                                                       1997                    1998
     ------                                                                      -----                    ----

Current assets:
    Cash and cash equivalents                                            $  11,281,337           $   5,324,579
    Investment securities                                                                           13,529,052
                                                                              -
    Accounts receivable, net of reserves for doubtful
              accounts, returns, and allowances of
              $4,518,206 in  1997 and $5,687,751 in 1998 (note 9)           13,365,413               7,244,374 
    Inventories (note 3)                                                    12,034,349               8,893,269
    Refundable income taxes                                                  3,793,963                  63,378
    Net deferred tax assets (note 8)                                         2,388,189               3,226,233
    Prepaid expenses and other current assets                                  212,989                 230,355
                                                                                 -----              ----------
             Total current assets                                           43,076,240              38,511,240
                                                                            ----------              ----------

Property, plant and equipment, net (note 4)                                  3,967,767               3,748,303
Goodwill, net of accumulated amortization of $241,039 in 1997                1,393,874               1,226,184
   and $408,728 in 1998 (note 11)
Other assets                                                                    74,668                  77,392
                                                                             ---------              ----------
              Total assets                                               $   43,560,39           $  48,515,273
                                                                             =========              ==========

     Liabilities and Stockholders' Equity


Current liabilities:
    Accounts payable                                                     $   6,204,370           $   3,326,391
    Accrued expenses                                                         1,808,308               1,808,637
                                                                             ---------               ---------
             Total current liabilities                                       8,012,678               5,135,028

Commitments and contingencies (note 5)

Stockholders' equity (note 7):
   Common stock, no par value. Authorized 25,000,000 shares;
   issued and outstanding 7,472,371 shares at December 31,
   1997 and 7,474,871 shares at December 31, 1998                           25,170,267              25,190,579
   Retained earnings                                                        15,332,328              13,180,234
   Accumulated other comprehensive income                                            -                  54,554
                                                                            ----------              ----------

             Total stockholders' equity                                  $  40,502,595           $  38,425,367
                                                                            ==========              ==========

             Total liabilities and stockholders' equity                  $  43,560,395           $  48,515,273
                                                                            ==========              ==========
                                                                            
</TABLE>


See accompanying notes to consolidated financial statements.





<PAGE>


                                              ZOOM TELEPHONICS, INC.
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                   Years Ending December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
                                                                      1996                1997                1998                 
                                                                      ----                ----                ----
<S>                                                        <C>                  <C>                  <C> 
Net sales (notes 9 and 14)                                 $   100,195,021      $   64,478,457       $  61,364,385
Cost of goods sold                                              79,803,297          56,298,264          44,651,448
                                                               -----------          ----------          ----------
                    Gross profit                                20,391,724           8,180,193          16,712,937
                                                               -----------         -----------          ----------

Operating expenses:
        Selling                                                 10,215,528          11,103,437          11,800,948
        General and administrative                               3,674,134           4,956,916           4,976,433
        Research and development                                 2,940,153           4,182,220           4,449,093
                                                              ------------         -----------         -----------
                                                                16,829,815          20,242,573          21,226,474
                                                               -----------          ----------          ----------

                     Operating income (loss)                     3,561,909         (12,062,380)         (4,513,537)

Interest income                                                    233,963             503,680             840,044
Other, net                                                          58,551             237,273             233,979
                                                             -------------        ------------        ------------
                     Total other income (expense), net             292,514             740,953           1,074,023
                                                              ------------        ------------         -----------

                     Income (loss) before income taxes           3,854,423         (11,321,427)         (3,439,514)

Income tax expense (benefit) (note 8)                            1,374,501          (4,189,266)         (1,287,420)
                                                                 ---------         ------------        ------------

                     Net income (loss)                       $   2,479,922       $  (7,132,161)      $  (2,152,094)
                                                               ===========          ===========         ===========
                                                             

Net income (loss) per share (note 2):
        Basic                                                $         .35       $        (.95)      $        (.29)                
                                                                       ===               
        Diluted                                              $         .35       $        (.95)      $        (.29)
                                                                       ===                =====               =====

Weighted average common and common equivalent shares:
        Basic                                                    7,068,314           7,468,758           7,474,371
                                                                 =========           =========           =========
        Diluted                                                  7,162,391           7,468,758           7,474,371
                                                                 =========           =========           =========


</TABLE>


See accompanying notes to consolidated financial statements.




<PAGE>
<TABLE>
<CAPTION>

                                              ZOOM TELEPHONICS, INC.
                            CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY




<S>                                        <C>           <C>             <C>            <C>                <C>
                                                                                           Accumulated
                                                                                              Other            Total
                                                  Common Stock              Retained       Comprehensive    Stockholders'
                                            Shares          Amount          Earnings          Income           Equity

Balance at December 31, 1995                 6,200,930    $   7,289,577   $  19,984,567           -         $  27,274,144
                                                                                                        

Net income                                                                    2,479,922           -             2,479,922          
  Comprehensive income                                                                                          2,479,922         
                                                                                 
  Net proceeds from stock offering             800,000       11,573,218                                        11,573,218
                                                                                    
Stock issuance for product
line  acquisition (note 11)                    102,641        1,590,929               -           -             1,590,929

Exercise of stock options (note 7)             343,271        2,825,543               -           -             2,825,543
                                                                                     
Tax effect of exercises of nonqualified
    stock options (notes 7 and 8)                    -        1,611,201               -           -             1,611,201
                                         -------------------- ---------  ------------------------------------------------
   
Balance at December 31, 1996                 7,446,842    $  24,890,468   $  22,464,489           -         $  47,354,957
                                                                                                       
Net loss                                             -                -      (7,132,161)          -            (7,132,161)          
 Comprehensive income (loss)                         -                                                         (7,132,161)
Exercise of stock options (note 7)              25,529          204,232               -           -               204,232
                                                                                                 
Tax effect of exercises of nonqualified
    stock options (notes 7 and 8)                    -          75,567                -           -                75,567
                                         --------------         ------         ---------       -------       ------------          

Balance at December 31, 1997                 7,472,371    $  25,170,267   $  15,332,328                     $  40,502,595
                                                                                                        -

Net loss                                             -                      (2,152,094)                        (2,152,094)
                                                                      -                                 -
  Unrealized holding gain                            -                                             54,554          54,554
                                                                                                                                   
  Comprehensive income (loss)                        -                                                         (2,097,540)
                                                                      -               -                 -
Exercise of stock options (note 7)               2,500                                -                 -          20,312
                                           -----------    -------------   -------------   ---------------   -------------

Balance at December 31, 1998                 7,474,871    $  25,190,579   $  13,180,234   $        54,554   $  38,425,367
                                             =========    =============   =============   ===============   =============


</TABLE>


See accompanying notes to consolidated financial statements.



<PAGE>
<TABLE>
<CAPTION>

                                              ZOOM TELEPHONICS, INC.
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   Years Ending December 31, 1996, 1997 and 1998
<S>                                                          <C>                 <C>                <C>

                                                                           1996             1997               1998
                                                                           ----             ----               ----

Cash flows from operating activities:
     Net income (loss)                                        $      2,479,922    $   (7,132,161)   $    (2,152,094)
     Adjustments to reconcile net income (loss) to net cash
        provided by (used in) operating activities:
           Depreciation and amortization                               674,162         1,116,443          1,081,987
           Net deferred income taxes                                  (519,222)         (355,506)          (838,044)
           Changes in assets and liabilities:
               Accounts receivable                                   1,426,273         5,604,628          6,121,039
               Inventories                                           5,211,667         7,023,226          3,141,080
               Prepaid expenses and other current assets              (715,728)          400,118            (15,866)
               Refundable income taxes                              (1,219,000)       (2,574,963)         3,730,585
               Accounts payable and accrued expenses               (10,156,983)       (1,414,519)        (2,877,649)
               Income taxes payable                                   (236,493)                              -
                       -
               Tax benefit from exercise of nonqualified
                  stock options                                      1,611,201            75,567
                                                                   -----------      ------------          ---------
                    Net cash provided by (used in)
                             operating activities                   (1,444,201)        2,742,833          8,191,038
                                                                    -----------       ----------          ---------

Cash flows from investing activities:
     Purchases of investment securities                                      -                 -        (13,474,498)
-           (13,474,498)
     Purchase of certain assets of a business product line             (81,375)                -                  -
     Additions to licenses                                                   -                 -(           133,000)
     Additions to property, plant and equipment                     (1,351,670)         (837,914)          (560,610)
                                                                    ----------         ---------       -------------

                    Net cash used in investing activities           (1,433,045)         (837,914)       (14,168,108)
                                                                    -----------        -----------      ------------

Cash flows from financing activities:
     Net borrowings (repayments) under revolving
        bank line of credit (note 6)                                (2,500,000)                        -
                       -
     Net proceeds from issuance of common stock                     11,573,218                         -
                       -
     Exercise of nonqualified stock options                          2,825,543           204,232             20,312
                                                                   -----------      ------------      -------------

                    Net cash provided by financing activities       11,898,761           204,232             20,312
                                                                    ----------      ------------      -------------

Net increase (decrease) in cash and cash equivalents                 9,021,515         2,109,151         (5,956,758)
                                                                    ----------       -----------        ------------

Cash and cash equivalents at beginning of year                         150,671         9,172,186         11,281,337
                                                                   -----------       -----------         ----------

Cash and cash equivalents at end of year                      $      9,172,186    $   11,281,337     $    5,324,579
                                                                    ----------        ----------        -----------


</TABLE>


See accompanying notes to consolidated financial statements.


<PAGE>



                             ZOOM TELEPHONICS, INC.
                   Notes to Consolidated Financial Statements
                  Years Ending December 31, 1996, 1997 and 1998

(1)     Incorporation and Nature of Operations

        Zoom Telephonics, Inc. (the "Company") is incorporated under the federal
           laws of Canada  (Canada  Business  Corporations  Act).  Its principal
           business activity, the design, production, and marketing of faxmodems
           and  other  communication  peripherals,   is  conducted  through  its
           wholly-owned  subsidiary,  Zoom  Telephonics,  Inc.  ("Zoom  US"),  a
           Delaware corporation based in Boston, Massachusetts.

(2)     Summary of Significant Accounting Policies

        (a)  Basis of Presentation
        Theconsolidated  financial  statements  are prepared in accordance  with
           United States generally accepted accounting principles and are stated
           in US dollars.  Any  differences  between US and  Canadian  generally
           accepted accounting  principles would have an insignificant impact on
           the consolidated financial statements.

        The preparation  of 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  financial  statements  and the reported  amounts of
            revenue and expenses during the reporting period. Actual results may
            differ from those estimates.

        (b)  Principles of Consolidation
        Theconsolidated   financial  statements  include  the  accounts  of  the
           Company  and its  wholly-owned  subsidiary,  Zoom US,  and all of its
           wholly-owned subsidiaries. All intercompany balances and transactions
           have been eliminated in consolidation.

        (c)  Cash and Cash Equivalents
        TheCompany  considers all investments  with original  maturities of less
           than 90 days to be cash equivalents.

        (d)  Investment Securities
        On December 31, 1998, the Company adopted the provisions of Statement of
           Financial  Accounting  Standards  (SFAS)  No.  115,  "Accounting  for
           Certain Investments in Debt and Equity Securities."  Previously,  the
           Company's  investments  had  maturities of less than ninety days. The
           Company's investment securities are classified as available-for-sale.
           Available-for-sale securities are stated at fair value and unrealized
           gains and losses are excluded  from  earnings,  and are reported as a
           separate component of other comprehensive income until realized.  The
           cost of  securities  sold is  based  on the  specific  identification
           method and interest earned is included in Other Income

         (e) Inventories
        Inventories  are  stated  at the  lower of cost or  market,  cost  being
           determined using the first-in, first-out (FIFO) method.

        (f)  Property, plant and equipment
        Property,   plant  and   equipment  is  stated  and  recorded  at  cost.
           Depreciation  of property,  plant and  equipment is provided by using
           the straight-line method at rates sufficient to amortize the costs of
           the fixed assets over their  estimated  useful  lives.  In accordance
           with  Financial   Accounting   Standards  Board  Statement  No.  121,
           "Accounting   for  the  Impairment  of  Long-Lived   Assets  and  for
           Long-Lived  Assets  to be  Disposed  Of,"  the  Company  reviews  its
           long-lived  assets  for  impairment  whenever  events or  changes  in
           circumstances  indicate that the carrying  amount of an asset may not
           be  recoverable.  If it is determined  that the carrying amount of an
           asset cannot be fully recovered, an impairment loss is recognized.



                             ZOOM TELEPHONICS, INC.
                   Notes to Consolidated Financial Statements


        (g)  Goodwill
        Goodwill  resulted from the excess of cost over fair value of net assets
           acquired for the purchase of a product line in June 1996 and is being
           amortized  on a  straight-line  basis  over  10  years.  The  Company
           evaluates the  recoverability  and remaining life of its goodwill and
           determines  whether the goodwill  should be  completely  or partially
           written off or the amortization period accelerated.  The Company will
           recognize an impairment of goodwill if undiscounted  estimated future
           operating  cash flows of the acquired  product line are determined to
           be  less  than  the  carrying  amount  of  goodwill.  If the  Company
           determines  that the goodwill has been impaired,  the  measurement of
           the impairment  will be equal to the excess of the carrying amount of
           the  goodwill  over the amount of  discounted  estimated  future cash
           flows. If an impairment of goodwill were to occur,  the Company would
           reflect the  impairment  through a reduction in the carrying value of
           goodwill.  The  assessment  of  recoverability  of  goodwill  will be
           impacted if estimated future operating cash flows are not achieved.


        (h)  Income Taxes
        TheCompany  accounts  for  income  taxes  under the asset and  liability
           method.  Under this method,  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 and
           operating loss and tax credit carry forwards. 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.

        (i)  Earnings (Loss) Per Common Share
        Basic  earnings  (loss) per share is  computed  by  dividing  net income
           (loss) by the weighted  average  number of common shares  outstanding
           during the period. Diluted loss per share is computed by dividing net
           income by the weighted  average  number of common shares and dilutive
           potential  common  shares  outstanding  during the period.  Under the
           treasury  stock  method,  the  unexercised  options are assumed to be
           exercised at the  beginning  of the period or at issuance,  if later.
           The assumed  proceeds are then used to purchase  common shares at the
           average market price during the period.
<TABLE>
<CAPTION>
<S>                                      <C>                         <C>                             <C>

                                               1996                           1997                         1998
                                               ----                           ----                         ----

Basic weighted
    average shares outstanding            7,068,314                      7,468,758                     7,474,371
Net effect of dilutive
    Potential common
    Shares outstanding, based
    on the treasury stock method             94,077                              -                             -
                                         ----------                  -------------                   -----------

Diluted weighted
    average shares outstanding            7,162,391                      7,468,758                     7,474,371
                                          =========                      =========                     =========
</TABLE>
     Potential  common  shares  for which  inclusion  would  have the  effect of
        increasing diluted earnings per share (i.e.,  antidilutive) are excluded
        from the computation.  Anti-dilutive potential common shares outstanding
        at December 31, 1996,  1997 and 1998 were 252,786,  83,573,  and 744,111
        respectively.

        (j)  Revenue Recognition
        Sales are  recognized  upon shipment of products to customers,  at which
           time the Company records  provisions for returns,  warranty and price
           protection.



<PAGE>




                             ZOOM TELEPHONICS, INC.
                   Notes to Consolidated Financial Statements

        (k)   Financial Instruments
        Financial   instruments  of  the  Company   consist  of  cash  and  cash
           equivalents,  investment  securities,  accounts receivable,  accounts
           payable and accrued expenses.  The carrying amount of these financial
           instruments approximates fair value.

        (l)  Stock Based Compensation
         The Company  applies  Accounting  Principles  Board Opinion No. 25 (APB
             25),  "Accounting  for Stock  Issued  to  Employees,"  and  related
             interpretations  in  accounting  for its  stock  option  plans.  No
             compensation  cost  has  been  recognized  for  these  plans in the
             accompanying financial statements.

        (m)  Advertising Costs
        Advertising  costs are  expenses  as incurred  and  reported in selling,
           general, and administrative expenses in the accompanying consolidated
           statements   of  operations   and  include   costs  of   advertising,
           production,  trade shows,  and other  activities  designed to enhance
           demand  for  the  Company's   products.   There  are  no  capitalized
           advertising costs in the accompanying consolidated balance sheets.
<TABLE>
<CAPTION>
(3)     Inventories

        Inventories consist of the following at December 31:
<S>                                                     <C>                     <C>                 <C>
                                                                   1997                   1998
                                                                   ----                   ----

           Raw materials                                  $     7,261,914        $     5,021,373
           Work in process                                      2,542,260              1,764,123
           Finished goods                                       2,230,175              2,107,773
                                                                ---------              ---------

                                                          $    12,034,349        $     8,893,269
                                                              ===========              =========

(4)     Property, Plant and Equipment

        Property, plant and equipment consists of the following at December 31:

                                                                                                       Estimated
                                                                   1997                   1998         useful lives
                                                                   ----                   ----         ------------

           Land                                           $       309,637        $       309,637            -
           Buildings and improvements                           2,097,043              2,205,439        31.5 years
           Leasehold improvements                                 470,777                470,777        5 years
           Computer hardware and software                       1,919,412              2,156,984        3 years
           Machinery and equipment                                444,126                523,971        5 years
           Molds, tools and dies                                  961,968              1,129,028        5 years
           Office furniture and fixtures                          523,936                491,673        5 years
                                                                  -------                -------
                                                                6,726,899              7,287,509

           Less accumulated depreciation                        2,759,132              3,539,206
                                                                ---------              ---------

                                                          $     3,967,767        $     3,748,303
                                                                =========              =========


</TABLE>
<PAGE>



                             ZOOM TELEPHONICS, INC.
                   Notes to Consolidated Financial Statements

(5)   Lease Commitments

        In August  1996,  the  Company  entered  into a  five-year  lease  for a
           manufacturing and warehousing facility in Boston,  Massachusetts.  At
           the end of the  initial  lease  term,  the  Company  has an option to
           extend the lease for an additional five years at a fair market value.
           The  Company  also  leases  office  space  in  Dallas,  Texas.  Under
           non-cancelable operating leases, rent expense was $275,673,  $392,010
           and 334,469 for the years ending  December  31, 1996,  1997 and 1998,
           respectively.  Future minimum rental  payments,  excluding  executory
           costs, required under these operating leases are as follows:

                                        Year                      Total

                                        1999                $     348,426
                                        2000                      348,426
                                        2001                $     203,249


(6)      Credit Lines

        TheCompany has a secured $5 million  line of credit  expiring on October
           1, 1999.  No amounts  were  outstanding  under this line of credit at
           December 31, 1999 or 1998.  The line of credit bears  interest at the
           bank's  prime rate (7.75% at December 31,  1998).  The line of credit
           contains certain financial and other covenants.  On December 31, 1998
           the Company was in full  compliance  with all covenants.  The Company
           anticipates   that  it  will  renew  the  line  of  credit  prior  to
           expiration.

(7)      Stock Option Plans

        At December 31, 1998 the Company had three stock option plans, which are
described below:

        Employee Stock Option Plan
        TheEmployee Stock Option Plan (the "Employee  Stock Option Plan") is for
           officers  and  certain  full-time  and  part-time  employees  of  the
           Company.  Non-employee  directors  of the Company are not entitled to
           participate  under this plan. The Employee Stock Option Plan provides
           for the  availability  of  2,800,000  shares of common  stock for the
           granting  of  employee  stock  options.  Shares of common  stock were
           registered  for issuance  under the 1998  Employee  Equity  Incentive
           Stock  Option Plan in  accordance  with the  Securities  Act of 1933.
           Under this plan,  stock options shall be granted at the discretion of
           the Stock  Option  Committee  of the Board of  Directors at an option
           price not less than the fair market  value of the stock.  The options
           are  exercisable  in  accordance  with terms  specified  by the Stock
           Option  Committee  not to exceed  ten  years  from the date of grant.
           Options outstanding under this plan are as follows:
<TABLE>
<CAPTION>
 <S>                                                                   <C>                         <C>                   
                                                                        Number of shares           exercise price

           Balance at December 31, 1995                                      466,200                     9.54
               Granted                                                       972,850                    12.44
               Exercised                                                    (343,271)                    8.23
               Expired                                                      (526,562)                   16.37
                                                                            --------                    -----

           Balance at December 31, 1996                                      569,217                     8.29
               Granted                                                       196,650                     7.96
               Exercised                                                     (19,529)                    8.00
               Expired                                                      (144,038)                    8.81
                                                                            --------                     ----



<PAGE>


                             ZOOM TELEPHONICS, INC.
                   Notes to Consolidated Financial Statements

           Balance at December 31, 1997                                      602,300                     8.07
               Granted                                                       574,102                     6.53
               Exercised                                                      (2,500)                    8.12
               Expired                                                       (43,900)                    8.12
                                                                             -------                     ----

           Balance at December 31, 1998                                    1,130,002              $      8.09
                                                                           =========                     ====

</TABLE>
The following table summarizes  information  about fixed stock options under the
Employee Stock Option Plan outstanding at December 31, 1998:
<TABLE>
<CAPTION>
<S>                <C>             <C>                   <C>                    <C>              <C>
                                       Options Outstanding                              Options Exercisable
                    ----------------------------------------------------------  -------------------------------------

                                    Weighted Average
     Range of          Number           Remaining          Weighted Average         Number        Weighted Average
 Exercise Prices     Outstanding    Contractual Life        Exercise Price       Exercisable       Exercise Price
$ 4.13   to $ 17.50   1,130,002           2.20             $      7.29             330,729          $     9.59
=================    ===========          ====                    ====             =======          ==============          
</TABLE>
The Company recognized a tax benefit of $1,611,201 and $75,567 in 1996 and 1997,
    respectively,  upon the exercise of  nonqualified  stock  options  under the
    Employee Stock Option Plan. These benefits have been recorded as an increase
    to the value of common stock.

1991 Director Stock Option Plan

In  1991, the Company established the Director Stock Option Plan (the "Directors
    Plan").  Shares of common stock were registered for issuance under this plan
    in  accordance  with the  Securities  Act of 1933.  The  Directors  Plan was
    established  for all directors of the Company except for any director who is
    a  full-time  employee  or  full-time  officer  of the  Company.  Under  the
    Directors Plan,  each eligible  director shall  automatically  be granted an
    option to purchase 6,000 shares of common stock on July 10 and January 10 of
    each year,  beginning  July 10,  1991.  The option  price  shall be the fair
    market  value of the common  stock on the date the option is granted.  There
    are 198,000  shares  authorized  for issuance.  Each option shall expire two
    years  from the  grant  date.  Options  outstanding  under  this plan are as
    follows:
<TABLE>
<CAPTION>
<S>                                                                    <C>                       <C>
                                                                                                  Weighted average
                                                                        Number of shares           exercise price

           Balance at December 31, 1995                                       36,000              $      7.44

               Granted                                                        36,000                    13.97
               Exercised                                                     (18,000)                    7.54
               Expired                                                             -                     -
                                                                            --------                  ----

           Balance at December 31, 1996                                       54,000                    11.76
               Granted                                                        36,000                     8.69
               Exercised                                                      (6,000)                    8.00
               Expired                                                       (12,000)                    7.00
                                                                            ---------                    ----

           Balance at December 31, 1997                                       72,000              $     11.33
               Granted                                                        36,000                     6.94
               Exercised                                                           -                     -
               Expired                                                       (36,000)                   13.96
                                                                             --------                   -----

           Balance at December 31, 1998                                       72,000              $      7.41
                                                                              ======                     ====
</TABLE>


<PAGE>



                             ZOOM TELEPHONICS, INC.
                   Notes to Consolidated Financial Statements

The following table summarizes  information  about fixed stock options under the
    Directors Plan at December 31, 1998:
<TABLE>
<CAPTION>
<S>                 <C>             <C>                  <C>                    <C>              <C>
                                       Options Outstanding                              Options Exercisable
                    ----------------------------------------------------------  -------------------------------------

                                    Weighted Average
     Range of          Number           Remaining          Weighted Average         Number        Weighted Average
 Exercise Prices     Outstanding    Contractual Life        Exercise Price       Exercisable       Exercise Price

  $  6.94 to $8.69       72,000            .8  years        $     7.89              36,000          $    8.69
</TABLE>

        1998 Employee Equity Incentive Stock Option Plan

        The1998 Employee  Equity  Incentive  Stock Option Plan (the "1998 Plan")
           was adopted to attract and retain  employees and provide an incentive
           for them to assist Zoom Telephonics,  Inc. (the "Company") to achieve
           long-range  performance  goals,  and to enable them to participate in
           the long-term  growth of the Company.  Non-employee  directors of the
           Company  and certain  officers  of the  Company  are not  entitled to
           participate   under  this  plan.  The  1998  Plan  provides  for  the
           availability  of 300,00  shares of common  stock for the  granting of
           employee stock options. Under this plan, stock options may be granted
           at the  discretion  of the  Stock  Option  Committee  of the Board of
           Directors  at  an  option  price   determined  by  the  Stock  Option
           Committee.  All  options  under this  grant have been at fair  market
           value  on the date of the  grant.  The  options  are  exercisable  in
           accordance  with  terms  specified  by the  Stock  Option  Committee.
           Options outstanding under this plan are as follows:

<TABLE>
<CAPTION>
<S>                                                                   <C>                      <C>                                  
                                                                       Number of shares           exercise price

Balance at December 31, 1997                                                       -            $          -
               Granted                                                        27,650                       4.13
               Exercised                                                           -                       -
               Expired                                                             -                       -
                                                                         -----------               ---------
Balance at December 31, 1998                                                  27,650            $          4.13
                                                                              ======                     ======
</TABLE>
The following table summarizes  information  about fixed stock options under the
Employee Stock Option Plan outstanding at December 31, 1998:
<TABLE>
<CAPTION>
<S>                <C>             <C>                    <C>                   <C>             <C>

                                       Options Outstanding                              Options Exercisable
                    ----------------------------------------------------------  -------------------------------------

                                    Weighted Average
     Range of          Number           Remaining          Weighted Average         Number        Weighted Average
 Exercise Prices     Outstanding    Contractual Life        Exercise Price       Exercisable       Exercise Price

  $  4.13                 27,650             2.90             $         4.13               -         $         -
     ======               ======             =====                      ====            ====
                                                                        


</TABLE>
<PAGE>



                             ZOOM TELEPHONICS, INC.
                   Notes to Consolidated Financial Statements


At  December 31, 1998,  there were  1,182,950  additional  shares  available for
    grant under all three Plans.  The per share  weighted-average  fair value of
    stock  options  granted  during 1996,  1997 and 1998 was $4.03,  $4.43,  and
    $3.70,  respectively,   on  the  date  of  grant  using  the  Black  Scholes
    option-pricing model with the following weighted-average assumptions: 1996 -
    expected dividend yield 0.0%,  risk-free interest rate of 5.05%,  volatility
    70% and an expected life of 2.9 years;  1997 - expected dividend yield 0.0%,
    risk-free interest rate of 5.69%, volatility 70% and an expected life of 3.5
    years;  1998 - expected  dividend  yield 0.00%,  risk-free  interest rate of
    5.50%, volatility 88% and an expected life of 2.8 years.

The Company  applies APB Opinion No. 25 in accounting for its stock options and,
    accordingly,  no compensation  cost has been recognized in the  accompanying
    consolidated financial statements.  Had the Company determined  compensation
    cost based on the fair value at the grant  date for its  options  under SFAS
    No. 123, the  Company's  net income  (loss) and basic and diluted net income
    (loss) per share would have been reduced to the pro forma amounts  indicated
    below:
<TABLE>
<CAPTION>
<S>                                <C>                   <C>                  <C>                 <C>                   
                                                                 1996                 1997                  1998
                                                                 ----                 ----                  ----

Net income (loss)                   As reported           $   2,479,922       $   (7,132,161)      $(2,152,094)
                                    Pro forma                 2,100,665           (7,718,857)       (2,883,787)

Net income (loss) per share         As reported-basic     $         .35       $        (0.95)      $      (.29)
Pro forma-basic                                                     .29                (1.03)             (.39)
                                    As reported-diluted   $         .35       $        (0.95)      $      (.29)
Pro forma-diluted                                                   .29                (1.03)             (.39)

Pro forma net income (loss)  reflects only options  granted  since January 1, 1995.  Therefore,  the full impact of
    calculating  compensation  cost  for  stock  options  under  SFAS 123 is not
    reflected in the pro forma amounts presented above because compensation cost
    for options granted prior to January 1, 1995 is not considered.
</TABLE>
(8)     Income Taxes

        Income tax expense  (benefit)  attributable  to income  from  operations
consists of:
<TABLE>
<CAPTION>
<S>                                                           <C>                 <C>                <C>
                                                                   Current            Deferred             Total
           Year ending December 31, 1996:
               US federal                                     $   1,632,391       $(428,502) $            1,203,889
               State and local                                      261,332            (90,720)             170,612
                                                                    -------            -------              -------

                                                              $   1,893,723       $(519,222)          $   1,374,501
                                                                  =========        ========               =========

           Year ending December 31, 1997:
               US federal                                     $  (3,842,852)      $    483,213        $  (3,359,639)
               State and local                                        9,092           (838,719)            (829,627)
                                                                      -----           --------             ---------

                                                              $  (3,833,760)      $   (355,506)      $   (4,189,266)
                                                                 ===========          ========           ===========

           Year ending December 31, 1998:
               US federal                                     $     181,609       $(1,295,053)$          (1,113,444)
               State and local                                     (630,985)           457,009             (173,976)
                                                                   --------         ----------             ---------

                                                              $    (449,376)      $   (838,044)      $   (1,287,420)
                                                                   =========          ========           ===========
</TABLE>


<PAGE>


                                                                             
           (Continued)
                                              ZOOM TELEPHONICS, INC.
                                    Notes to Consolidated Financial Statements


           Income  tax  expense  (benefit)  was  $1,374,501,  ($4,189,266),  and
           ($1,287,420)  for the years ending  December 31, 1996, 1997 and 1998,
           respectively,  and differed  from the amounts as computed by applying
           the US federal  income tax rate of 34% to pretax  income  (loss) as a
           result of the following:
<TABLE>
<CAPTION>
<S>                                                          <C>                 <C>                <C>

                                                                     1996               1997                 1998
                                                                     ----               ----                 ----

           Computed "expected" US tax expense (benefit)         $ 1,310,504         $ (3,849,285)        $(1,169,435)
           Increase (reduction) in income taxes resulting from:
               State and local income taxes, net of federal
                  income tax benefit                                112,604           (547,555)             (114,824)
               Tax benefit from foreign sales corp.                 (66,271)                   -                   -
               Other, net                                            17,664            207,574                (3,161)
                                                                     ------            --------            ----------

                                                                $ 1,374,501        $ (4,189,266)        $ (1,287,420)
                                                                ===========         ============           ==========


Total income tax expense (benefit) was allocated as follows:          1996                1997                1998
                                                                      ----                ----                ----


Income (loss) from operations                                $    1,374,501       $  (4,189,266)      $   (1,287,420)
Stockholders' equity, for compensation expense
               for tax purposes in excess of amounts
               recognized for financial statement purposes       (1,611,201)            (75,567)                    -
                                                                -----------            --------          --------------

                                                             $     (236,700)       $  (4,264,833)    $    (1,287,420)
                                                                  =========           ===========        ===========

The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997 and
1998 are presented below:

                                                                                            1997           1998
                                                                                            ----           ----
Deferred tax assets:
               Inventories, primarily non-deductible reserves                        $   541,266      $   1,186,445
               Accounts receivable, primary returns and allowances                       705,046          1,276,054
               Accrued expenses, principally provisions not
                      currently deductible                                               335,489            234,473
               Net operating loss carryforwards and credits                              714,035            316,558
               Other                                                                     118,732            212,703
                      Total current gross deferred tax assets                           2,414,568         3,226,233
                                                                                        ---------        

                      Total gross deferred tax assets                               $    2,414,568   $    3,226,233
                                                                                          =========       =========

Deferred tax liability:
               Property, plant and equipment, principally due to differences in
               depreciation                                                              (26,379)                 -
                                                                                         --------    --------------

                      Net deferred tax assets                                        $   2,388,189     $3,226,233

                                                                                         =========      ==========
</TABLE>
In assessing the  realizability of deferred tax assets,  the Company  considered
whether it is more likely than not that some  portion or all of the deferred tax
assets will be  realized.  Due to the fact that the Company  anticipates  future
taxable income over periods in which the deductible  temporary  differences  are
available,  the  ultimate  realizability  of deferred tax assets for federal and
state tax purposes appears more likely than not.


<PAGE>


                             ZOOM TELEPHONICS, INC.
                   Notes to Consolidated Financial Statements

(9)     Significant Customers

        Onecustomer  accounted for  approximately  15% of net sales for the year
           ending  December  31,  1996 and 17% of net sales for the year  ending
           December 31, 1997. Two customers  accounted for approximately 20% and
           14% of net sales for the year ending  December 31, 1998.  At December
           31, 1997, two customers  comprised  approximately 42% of net accounts
           receivable.   At  December  31,   1998,   two   customers   comprised
           approximately 40% of net accounts receivable.

(10)    Financial Instruments

        TheCompany generates a portion of its revenues in international  markets
           and denominated in foreign currencies,  which subjects its operations
           to exposure to foreign currency fluctuations.  The impact of currency
           fluctuations can be positive or negative in any given period.

        Realized and unrealized foreign exchange gains and losses are recognized
           in  operating  income  and  offset  foreign  gains and  losses on the
           underlying exposures. During the years ending December 31, 1996, 1997
           and 1998  foreign  currency  gains and losses were not  material.  At
           December 31, 1998,  the Company's  foreign  currency-denominated  net
           assets  were  not  material.  The  Company  has no  involvement  with
           derivative financial instruments.

(11)    Product Line Acquisition

        On June 24, 1996,  the Company  issued 102,641 shares of common stock to
           acquire  certain  assets,   including   inventory  and  property  and
           equipment,  associated  with a product line of Tribe Computer  Works,
           Inc.  The  acquisition  was  recorded  using the  purchase  method of
           accounting,  whereby the net assets  acquired  were recorded at their
           estimated  fair  values and the excess of cost over the fair value of
           the assets  acquired of  $1,634,913  was allocated to goodwill and is
           being amortized over 10 years.

(12)    Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
<S>                                                                <C>                          <C>            <C>                  
                                                                              1996               1997                   1998
                                                                              ----               ----                   ----

            Cash paid during year for interest                      $       169,248     $            -           $           -
                                                                            =======        ===========               ==========
                                                                                                                   
            Cash paid during year for income taxes                   $     1,873,000         $    3,650
                                                                          =========              ======           $  ==========
</TABLE>
        During the second  quarter of 1996, the Company issued 102,641 shares of
           common stock to acquire certain assets of Tribe Computer Works, Inc.,
           including   inventory  of  $95,685  and  property  and  equipment  of
           $107,467.  In  addition,  the tax  effect  of the  exercise  of stock
           options  resulted  in  increases  to common  stock and an increase in
           refundable  income taxes of  $1,611,201  in 1996 and $75,567 in 1997.
           These noncash  transactions  have been excluded from the statement of
           cash flows.

(13)     Dependence on Key Suppliers

        The Company  produces its products  using  components  or  subassemblies
          purchased from  third-party  suppliers.  In 1996 and 1997, the Company
          purchased  substantially  all  of its  modem  chipsets  from a  single
          supplier,  Rockwell.  In 1998,  the Company  decided to also  purchase
          chipsets from Lucent  Technologies,  with a goal of  maintaining  good
          supply  relationships  with  both  Conexant  (formerly  Rockwell)  and
          Lucent. This approach has potential strategic and tactical advantages,
          but also has  risks  including  the  likelihood  of  degrading  Zoom's
          business relationship with Conexant, the risk of poor execution of the
          transition of some products to Lucent, and other risks associated with
          using a new supplier and new product designs for modems that represent
          a significant  percentage of Zoom's  revenues.  An interruption in the
          delivery of these  components  could have a material adverse effect on
          the Company's results of operations.


<PAGE>



                             ZOOM TELEPHONICS, INC.
                   Notes to Consolidated Financial Statements

(14)     Segment and Geographic Information

        During 1998, the Company adopted  Financial  Accounting  Standards Board
           Statement of Financial  Standards  No. 131 ("SFAS 131")  "Disclosures
           About  Segments  of an  Enterprise  and  Related  Information.""  The
           Company's  operations  are classified  into one  reportable  segment.
           Substantially  all of the Company's  operations and long-lived assets
           reside  primarily in the United  States.  The Company's  domestic net
           sales and export sales to Europe and other locations for 1996,  1997,
           and 1998 were comprised as follows:

                             1996      % of Total              1997   % of Total
1998    
  % of Total
                             ----      ----------              ----  ----------


North America       $     73,085,465       73%        $     52,227,550      81%
$   50,489,521       82%
Europe                    18,227,729       18%               6,447,846      10%
8%
                                                                               
Other                      8,881,827        9%               5,803,061       9%
 10%
                           ---------        --               ---------       --
 -------             
 ---
                                                                              
6,264,755
Total   $     64,478,457     100%      $   61,364,385    
 100%
                         ===========                                           


(15)     Subsequent Event

        In March 1999, the Company entered into a series of separate  agreements
           to  purchase  various  assets,  licenses,  and  inventory  from Hayes
           Microcomputer Products, Inc. Hayes engaged in the business of design,
           manufacture,  and support of  computer  communications  products  for
           business,  government,  and consumers  worldwide.  On October 9, 1998
           Hayes filed for reorganization  under Chapter 11 of the United States
           Bankruptcy  Code,  Case No. 98-2276  through  98-2281,  in the United
           States   Bankruptcy  Court  ("the  Court").   The  Company  has  paid
           approximately  $5.0  million  in  aggregate  for all of the assets of
           Hayes Microcomputer  Products Inc. Europe Region,  product and rights
           for the American modem business, ADSL and cable modem equipment,  and
           some  inventory.  On March  19,  1999 the Court  filed the  Company's
           acceptance for the American modem  business,  completing the majority
           of the purchases.  At this time the  proceedings  are ongoing and the
           Company is involved in the bidding  for some  remaining  assets.  The
           purchases  are not  subject to any  financing  and are being paid for
           through the Company's cash balances.  The Company intends to continue
           production,  sales,  and  support of most of the more  popular  Hayes
           modems under the Hayes name. The acquisition will be accounted for as
           a purchase.


<PAGE>



                                                   EXHIBIT INDEX
 (a)        Financial Statements, Schedules and Exhibits:

       (1),(2) The financial  statements and required  schedules are indexed 
               under Item 8.

       (3)     Exhibits  required by the Exhibit Table of Item 601 of SEC 
               Regulation S-K.(Exhibit  numbers refer to
               numbers in the Exhibit Table of Item 601.)

           3.1 Articles of Continuance,  filed as Exhibit 3.1 to the Annual 
               Report on Form 10-K for the fiscal year ended December 31, 1991 
               (the "1991 Form 10-K"). *

           3.2 By-Law  No. 1 of Zoom Telephonics, Inc., filed as Exhibit 3.2 to 
               the 1991 Form 10-K. *

           3.3 By-Law  No. 2 of Zoom Telephonics, Inc., filed as Exhibit 3.3 to 
               the 1991 Form 10-K. *

        **10.1 1990 Stock Option Plan, as amended,  of Zoom  Telephonics,  Inc.,
               filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for  
               the fiscal quarter ended June 30, 1998. *

        **10.2 1991 Director Stock Option Plan, as amended, of Zoom Telephonics,
               Inc., filed as Exhibit 10.2 to the Quarterly  Report on form 10-Q
               for the fiscal quarter  ended  June 30, 1996 ("the June 1996 Form
               10-Q"). *

          10.3 Letter Agreement Regarding Revolving Line of Credit by and 
               between Zoom Telephonics, Inc.and Fleet National Bank,  filed as 
               Exhibit 10.3 to the Annual  Report on form 10-K for the  fiscal  
               year ended December 31, 1997 ("the 1997 Form 10-K"). *

          10.4 Loan  Modification Agreement by and between Zoom Telephonics,Inc
               and Fleet National Bank, filed as Exhibit 10.4 to the 1997 
               Form 10-K. *

          10.5 Lease between Zoom Telephonics,  Inc. and "E" Street  Associates
               filed as Exhibit 10.5 to the June 1996 Form 10-Q. *

          10.6 Form of Indemnification Agreement, filed as Exhibit 10.6 to the 
               June 1996 Form 10-Q. *

          10.7 Promissory Note issued by Zoom Telephonics, Inc. in favor of 
               Fleet National Bank.

          10.8 Security  Agreement  between the Company and Fleet National Bank
               filed as Exhibit 10.8 to the 1997 Form 10-K. *

        **10.9 Employment Agreement,filed as Exhibit 10.9 to the 1997 
               Form 10-K.*

         10.10 Second Loan Modification Agreement by and between Zoom 
               Telephonics, Inc. and Fleet National Bank.

         11.   Statement re computation of per share earnings.

         21.   Subsidiaries,  filed as Exhibit 21 to the Annual  Report on Form 
               10-K for the fiscal year ended  December 31, 1996. *

         23.   Consent of KPMG Peat Marwick LLP.

         27.   Financial Data Schedule.

    (b)        Reports on Form 8-K.

             No  current  reports  on Form 8-K have been  filed  during the last
              quarter for the period covered by this report.

    (c)      Exhibits - See Item 14(a)(3) above for a list of Exhibits  
             incorporated herein by reference or filed with this Report.

    (d)      Schedules  -  Schedule  II:  Valuation  and  Qualifying   Accounts.
             Schedules  other than those listed  above have been  omitted  since
             they are either inapplicable or not required.

      *      In accordance with Rule 12b-32 under the Securities Exchange Act of
             1934,  as amended,  reference is made to the  documents  previously
             filed with the Securities and Exchange Commission,  which documents
             are hereby incorporated by reference.

     **      Compensation Plan or Arrangement.