UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1997
                                       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 in the U.S.)  (Zip Code)

               1200 Royal Center
               1055 West Georgia Street, Vancouver, B.C.              V6E 3P3
               (Address of Principal Executive Offices in Canada)    (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 30, 1998  (computed  by
reference to the closing price of such stock on The Nasdaq National  Market) was
$53,195,003.

The number of shares outstanding of the registrant's Common Stock, No Par Value,
as of March 30, 1998 was 7,472,000 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Proxy Statement for the registrant's  1998 annual meeting
of  stockholders  to be filed  with the SEC in April  1998 are  incorporated  by
reference into Part III, Items 10-12 of this Form 10-K.

<PAGE>

                                           PART I

This Report contains  statements that are  "forward-looking  statements" as that
term is defined under the Private Securities  Litigation Reform Act of 1995 (the
"Act") and releases issued by the Securities and Exchange Commission.  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.

ITEM 1 - BUSINESS

Overview

Zoom  Telephonics,  Inc.  ("Zoom"  or  the  "Company")  is  a  Canadian  holding
corporation  whose  operations are solely 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 faxmodems and other
personal  computer  communications  products  for the  home  and  office.  These
products  link  Personal  Computers  ("PCs")  through  the  worldwide  telephone
network,  enabling them to transmit data, fax, voice and video,  and to remotely
access on-line services,  the Internet,  corporate computer networks,  and other
computers.  The Company offers a broad line of faxmodems with top data speeds of
56,000 bps,  available in internal,  external and PCMCIA  models.  Most of these
faxmodems  connect  to  a  single  telephone  line,  but  Zoom  also  makes  the
Zoom/MultiLine  for 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 (local area  network) and remote users or the
Internet.

The  Company  also  has a line of ISDN  (Integrated  Services  Digital  Network)
products,  which can transmit and receive  simultaneously  up to 128,000 bps. To
date all of these products have been internal cards for Windows PCs, but in 1998
Zoom  expects to ship  external  units,  both for single  users and for multiple
users on a LAN.

Late in 1997 the Company  began  shipments  of a  live-motion  full-color  video
camera that plugs into either a specialized video capture card included with the
camera, or into faxmodems either bundled with the camera or sold separately. The
Company is in the process of  expanding  its line of  video-related  products to
include other cameras and related  devices,  including  video capture cards that
work with composite video sources including VCRs and Camcorders.

Zoom's  objective  is to build  upon  its  position  as a  leading  supplier  of
faxmodems  and to  capitalize  on a number of  current  and  emerging  trends in
computer  connectivity,  including Internet access, video telephony,  and higher
data rates.  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,  particularly in the home and mobile settings,  (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 faxmodems 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 personal computers 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 are expected to become  increasingly
important to PC users.

Worldwide PC shipments continue to grow, and industry sources estimate that over
200 million PCs are installed worldwide.  The Company believes that less than 7%
of the  worldwide  installed  base of PCs have a modem  capable  of data  speeds
higher  than  33,600  bps;  and  that  56K  modems  are  in  about  20%  of  the
approximately 34 million consumer PCs with modems in North America. As a result,
the Company  believes that a  substantial  market exists for PC users to upgrade
their existing modems to 56K and higher speeds, and that modems will continue to
achieve  increasing  penetration  of  the  PC  installed  base  as  applications
requiring  data  connectivity  proliferate.  The  recently set V.90 56K standard
should accelerate adoption of 56K faxmodems.

The growing use of PCs outside the traditional office setting has also increased
the demand for modems which 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 today. 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  includes  remote  access,  faxing and  Internet  access
capabilities  that can only be used with a modem.  The demand for faster  speeds
and increased modem  functionality is expected to drive sales of new generations
of modems in the  future,  including  DSL  (Digital  Subscriber  Line) and cable
modems, both as upgrades and as peripherals bundled with new PCs.

Zoom Strategy

Zoom focuses on PC communications  products tailored to high-volume  channels of
distribution.  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  faxmodems  and to  capitalize  on a number of current and  emerging
trends in computer  connectivity,  including  Internet access,  remote access to
corporate  networks,  video  telephony,  and higher data speeds.  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 faxmodems
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  1998 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 base and
by broadening its product offerings  through its established sales channels.  In
1997 Zoom  expanded  its sales  through  Internet  Service  Providers,  and Zoom
intends to continue partnering with these providers.

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  ISDN  products,   multi-line  business
communications  products, and video products, and expects to broaden its product
offerings in these areas.

Outsource Chipset Technology. Zoom 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.  The Company has
established a strong relationship with Rockwell and is currently  purchasing all
of  its  modem  chipsets  from   Rockwell.   Rockwell  is  believed  to  be  the
highest-volume  modem chipset  manufacturer;  and has significant  resources for
semiconductor design and fabrication,  analog and digital signal processing, and
communications  firmware  development.  In  addition,  Rockwell  has  integrated
circuits and development efforts for faxmodems, fax machines, DSL, cable modems,
multimedia,  and video. Rockwell has significant competitors,  including Lucent,
and Zoom  intends to  continue  to  evaluate  and  consider  using  competitors'
offerings.

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 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  faxmodems in selected
Western  European  countries  in 1993.  During  1995 the Company  also  received
approvals and began shipping its first  faxmodems for the Japanese  market.  The
Company's international sales (excluding sales to OEMs) increased from 8% of net
sales in 1994 to 19% of net sales in 1997.  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 has been increasing its original  equipment  manufacturer
("OEM")  sales and  support  efforts,  and intends to continue to target the OEM
market as a significant opportunity for growth and diversification.

Explore  Acquisitions.  Zoom  acquired the products and certain  other assets of
Tribe  Computer  Works  ("Tribe")  in mid-1996,  and 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 worldwide telephone network,
enabling them to remotely  access  on-line  services,  the  Internet,  corporate
computer  networks,  and other  computers.  The  Company  offers a broad line of
faxmodems with top data transmission speeds of 56,000 bps. The V.90 standard for
56K was  recently  adopted,  and in  late  February  1998  Zoom  began  shipping
Dualmodetm 56K modems able to automatically  connect to either a V.90 or K56flex
central site. The Company also ships ISDN products, and soon will begin shipping
its first  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 full-color
live-motion video camera and related products.

Zoom has a broad line of faxmodems with top data speeds of 56,000 bps, available
in internal, external and PCMCIA models. The internal faxmodems are designed for
installation in IBM PC-compatibles.  The external faxmodems 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 smaller
"pocket" faxmodems.  The PCMCIA faxmodems 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
faxmodems  are shipped  complete  with  third-party  software  that supports the
hardware capabilities of the faxmodem.

56K faxmodems 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 have been shipping since
the second quarter of 1997. Zoom's first 56K modems incorporated K56flex,  which
was backed by  semiconductor  manufacturers  Rockwell  and Lucent,  central site
equipment  manufacturers Ascend, Cisco,  Microcom,  Shiva, and others; and modem
companies Boca, Diamond,  Motorola,  and others;  Compaq and many other computer
manufacturers,  and hundreds of Internet Service  Providers and online services.
x2 was backed by client modems and central site equipment by U.S.  Robotics (now
merged with 3Com);  semiconductor  manufacturers  Texas  Instruments  and Cirrus
Logic,  as well as Newcom  and other  modem  manufacturers.  x2  benefited  from
earlier introduction and faster initial rollout; but K56flex is now installed on
more  central  site ports and  supported  by more  Internet  Service  Providers.
Central site deployment is critical,  because this helps create customer utility
and demand.

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. Like preceding data
communications standards, V.90 is expected to accelerate the adoption of 56K. In
addition,  V.90 will enable Zoom's V.90 modems to connect to interoperable  V.90
central sites, even ones using 3Com central site equipment. Similarly, V.90 will
enable 3Com's V.90 modems to connect to  interoperable  V.90 central sites using
equipment  made by  Ascend,  Cisco,  Microcom,  Shiva,  and other  central  site
manufacturers who initially backed K56flex.  It will take a number of months for
V.90 to be widely  deployed.  In the meantime Zoom has begun  shipping  Dualmode
modems  designed to connect to either K56flex or V.90 central sites.  Zoom has a
broad line of K56flex modems for North America and for many other countries, and
Zoom plans to transition these products to V.90/K56flex Dualmode products during
the first half of 1998.

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

    ZoomGuardtm.    ZoomGuard  is  a  trademark  of  Zoom,  and  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. Advanced
    options include multiple mailboxes and pager notification.

    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 faxmodem'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 supports Plug & Play, a standard that
    is intended to allow the installation of Plug & Play-compatible  peripherals
    like faxmodems with limited hardware configuration by the end-user.

    Cellular-ready PCMCIA Faxmodems.   Some of the Company's faxmodems include a
    cellular-ready  feature  that  allows  the  faxmodem  to be  plugged  into a
    cellular phone for wireless communication of fax and data.

International  Faxmodems.                  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 faxmodem 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  faxmodems 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, 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.

ISDN Products.   Zoom is developing 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.  Zoom is completing the development of
external ISDN products for the North  American and  international  markets,  and
Zoom continues to integrate ISDN  capability  into some of its new  LAN-oriented
business products.

Multi-line Faxmodems.   In 1996  Zoom  began  shipping  a family  of  multi-line
faxmodems  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 faxmodem.

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.

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 has
continued to introduce  video  products,  including a bundle that includes a 56K
video-ready  faxmodem and the  Zoom/Video  Cam. Zoom plans to offer new cameras,
including  a parallel  port  connected  camera,  and to  introduce  other  video
products.  Video products fit Zoom's marketing channel.  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.

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 1997, Best Buy Co., Inc. and CompUSA,  Inc. accounted for 17.2% and 10.9%
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 AAFES, Best Buy, CompUSA,  Computer City,
Fry's, Future Shop, J&R, MEI Micro Center, Office Depot, OfficeMax, and Staples.
Personal  Technology  Research reported that in January 1998 the Company 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,  MicroAge,  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. 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
distributors  include Actebis,  California  Computer,  Criterium,  Ingram Micro,
Northamber, TURCom, UMD, Veracomp, and Yutron Tech. The Company's major European
high-volume  retailers include Argos,  Byte, Exell, PC World,  Tandy, and Vobis.
The Company's  international  net sales (including sales to OEMs located outside
the  United  States)  have  grown  from 8% in 1994 to 19% in 1997.  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,  in 1996 the Company  performed  most
marketing, sales, credit, collections,  customer support and warehousing through
an independent  organization  compensated on a commission basis. Zoom terminated
this relationship in early 1997. The Company then established a Munich office to
provide sales administration and public relations services for Western Europe as
well as sales outreach for Italy,  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.
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 an independent company which 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 commissioned  sales  representatives.  (See
note 15 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 a
week.  These  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 chipsets from Rockwell that incorporate
sophisticated modem technology,  thereby eliminating the need for the Company to
develop this  technology  in- house.  As of February 25, 1998 the Company had 37
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 1997,  1996 and 1995 the Company  expended $4.2  million,  $2.9
million and $1.8 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  faxmodems.  Currently Rockwell is
the  Company's  only modem  chipset  supplier.  Due to capacity  constraints  of
Rockwell,  the Company has experienced delays in receiving shipments of chipsets
in the past,  and the Company  may  experience  such  delays in the future.  The
Company believes its relationship with Rockwell is good.  However,  there can be
no assurance that Rockwell will, in the future,  sell chipsets to the Company in
quantities sufficient to meet the Company's needs. An interruption in Rockwell's
ability  to  deliver  chipsets,   a  failure  of  Rockwell  to  produce  chipset
enhancements  or new chipsets on a timely  basis and at  competitive  prices,  a
material  increase  in the price of  Rockwell's  chipsets  or any other  adverse
change in the Company's relationship with Rockwell 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 faxmodems 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 Boca Research,  Diamond  Multimedia,
GVC, Global Village, Hayes Microcomputer  Products,  Motorola,  Newcom and 3Com.
Motorola  has  announced  plans  to sell  its  retail  modem  division,  but the
purchaser may continue to be a  competitor,  albeit  without the Motorola  name.
Many 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 18  months  may bring on 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 lack of  widely  accepted  standards  and 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.

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 patents,  which expire
in 2011, 2013 and 2013,  respectively,  generally relate to faxmodem distinctive
ring,  use  of  a  faxmodem  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 Rockwell. 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 claims have
related to  technology  included in  Rockwell  and other  chipsets.  The Company
forwards 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  faxmodems  in  Australia,  Austria,  Belgium,  Denmark,
Finland,   France,   Germany,   Hungary,   India,  Ireland,  Italy,  Japan,  the
Netherlands,  Norway, Poland, Portugal,  Russia, Slovenia, South Africa, Sweden,
Switzerland 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 January 31, 1998 and January 31, 1997 was $6.5 million
and $5.1  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.

Employees

As of February 25, 1998 Zoom had 342 full-time  employees  (including  employees
hired on a temporary  basis).  Of this total,  37 were  engaged in research  and
development, 195 were involved in purchasing,  assembly, packaging, shipping and
quality control, 73 were engaged in sales,  marketing and technical support, and
the remaining 37 performed  accounting,  administrative and executive functions.
The Company's  temporary  employees were comprised of 34 individuals at February
25, 1998. Most of these temporary employees were employed in manufacturing.  The
Company  considers its  relationship  with its employees to be good. None of the
Company's employees are represented by a labor union.











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            49       Chief Executive  Officer,  President and
                                      Chairman of the Board
 Peter R. Kramer             46       Executive Vice President and Director
 Robert A. Crist             54       Vice President of Finance and
                                      Chief Financial Officer
 Terry J. Manning            46       Vice President of Sales and Marketing
 Dean N. Panagopoulos        40       Vice President of Information Systems
 Deena Randall               44       Vice President of Operations
 Dana Whitney                35       Vice President of Engineering




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.

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 Manufacturing &
Engineering   Controller,    Computer   Systems   and   Networking   Controller,
Semiconductor  Business  Controller and Corporate  Director of Business Planning
and Analysis.  Mr. Crist earned his BA degree from Pennsylvania State University
and 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  57,000  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.  Under the lease  agreement,  the Company has the
right to cancel the lease at any time after 24 months of the initial lease 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  alleges  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.  While the  complaint  seeks to  permanently  enjoin  the
defendants   from   infringing   the  patent  and  monetary   damages  for  past
infringement, REFAC has offered to negotiate a royalty for licensing the patent.
The  Company  believes  that  the  alleged   infringement   involves  technology
incorporated in chipsets provided to it from Rockwell International and that, if
so, the Company will be indemnified by Rockwell.  By an agreement dated July 12,
1996 Rockwell has agreed,  subject to certain  conditions,  to assume defense of
Zoom against the action.

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

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































                                           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, 1996
                                                       High              Low

          First                                   $  20.875          $ 13.750
          Quarter............................................................
          Second                                     27.000            13.375
          Quarter............................................................
          Third                                      16.125             7.500
          Quarter............................................................
          Fourth                                     13.125             8.250
          Quarter............................................................

Fiscal Year Ending December 31, 1997

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

As of March 25,  1998,  there were  approximately  369  holders of record of the
Company's Common Stock.

Recent Sales of Unregistered Securities

N/A

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.






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, 1995,  1996 and
1997 and the  balance  sheet  data as of  December  31,  1996 and 1997 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, 1993 and 1994 and the balance
sheet  data as of  December  31,  1993,  1994 and 1995  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,

                                       ----------------------------------------------------

                                           1993      1994       1995      1996      1997
                                           ----      ----       ----      ----      ----
                                              (In thousands, except per share data)
<S>                                    <C>        <C>       <C>       <C>        <C>
Statement of Operations Data:
Net sales..........................    $  55,230  $ 68,180  $  96,997 $ 100,195  $ 64,478
Cost of goods sold.................       42,324    53,875     73,402    79,803    56,298
                                          ------    ------     -------   ------    ------
    Gross profit...................        2,906    14,305     23,595    20,392     8,180
Operating expenses:
       Selling.....................        4,562     6,573      9,023    10,216    11,103
       General and administrative..        1,204     1,776      2,840     3,674     4,957
       Research and development....        1,101     1,250      1,835     2,940     4,182
                                           -----     -----      ------    -----     -----
       Total operating expenses....        6,867     9,599     13,698    16,830    20,242
                                           -----     -----     ------    ------    ------
    Income (loss) from operations..        6,039     4,706      9,897     3,562   (12,062)
Interest income (expense) net .....           90       (75)       (33)      293       741
                                            ----     -----      ------    -----    ------

    Income (loss) before income taxes      6,129     4,631      9,864     3,855   (11,321)
Income tax expense (benefit).......        2,342     1,817      3,800     1,375    (4,189)
                                           -----     -----      -----     -----    -------
    Net income (loss)..............        3,787     2,814      6,064     2,480    (7,132)
                                           =====     =====      ======    =====    =======

Income (loss) per common and common equivalent share:
    Basic..........................     $   0.63   $  0.47   $   1.00  $   0.35   $ (0.95)
                                            ====      ====       ====      ====     ======

    Diluted........................     $   0.63   $  0.47   $   0.98  $   0.35   $ (0.95)
                                            ====      ====       ====      ====     ======

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


                                                         At December 31,

                                      ----------------------------------------------------

                                          1993       1994      1995       1996       1997
                                          ----       ----      ----       ----       ----
                                                        (In thousands)
Balance Sheet Data:
Working capital                         $14,618     $17,146  $24,135  $ 41,557   $ 35,064
Total assets                             23,993      26,816   49,595    56,782     48,515
Long-term debt                              -           -        -         -          -
Total stockholders' equity               16,199      19,303   27,274    47,355     40,503
</TABLE>





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

This Report contains  statements that are  "forward-looking  statements" as that
term is defined under the Private Securities  Litigation Reform Act of 1995 (the
"Act") and releases issued by the Securities and Exchange Commission.  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.

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.  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.

In 1997 the Company's net sales decreased by 35.6% to $64.5 million.  In 1997 as
compared to 1996,  the  Company's  sales to retailers  and  distributors  in the
United States decreased by 19% to $45.4 million,  the Company's  worldwide sales
to  OEM  customers  decreased  by  70%  to  $5.7  million,   and  the  Company's
international sales (excluding sales to OEMs) decreased by 28% to $13.4 million.

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 1995, 1996 and 1997 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.



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>
                                                               1995       1996        1997
                                                               ----       ----        ----
Net sales..........................................            100.0%     100.0%      100.0%
Cost of goods sold.................................             75.7       79.7        87.3
                                                                ----       ----        ----
    Gross profit...................................             24.3       20.3        12.7
Operating expenses:
    Selling........................................              9.3       10.2        17.2
    General and administration.....................              2.9        3.7         7.7
    Research and development.......................              1.9        2.9         6.5
                                                                 ---        ---         ---
    Total operating expenses.......................             14.1       16.8        31.4
                                                                ----       ----        ----
Operating income (loss)............................             10.2        3.5       (18.7)
     Interest income (expense), net................             (0.0)       0.3         1.1
                                                                -----       ---         ---
Income before income taxes.........................             10.2        3.8       (17.6)
     Income tax expense                                          3.9        1.3        (6.5)
                                                                 ---        ---        -----
(benefit)................................................
Net income (loss)..................................              6.3%       2.5%      (11.1)%
                                                                 ===        ===       ======
</TABLE>


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% to $45.4
million in 1997,  non-OEM sales  outside  North  America  decreased 28% to $13.4
million, and worldwide OEM sales decreased 70% 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% 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% 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.

Year Ending December 31, 1996 Compared to Year Ending December 31, 1995

Net Sales.  Net sales  increased 3% to $100.2 million in 1996 from $97.0 million
in 1995. Unit volumes  declined as significant  increases in V.34 28,800 bps and
33,600 bps  shipments  did not fully  offset  dramatic  declines in shipments of
14,400 bps  faxmodems.  Overall,  the  average  selling  price of the  Company's
faxmodems  rose as the product mix shifted to V.34  faxmodems,  which  typically
have higher prices than 14,400 faxmodems.  The Company experienced  increases in
net sales in its worldwide OEM and international (excluding sales to OEMs) sales
channels  during 1996 compared to 1995 as worldwide  OEM sales  increased 57% to
$19.0 million and international sales (excluding sales to OEMs) increased by 28%
to $18.7  million.  Sales to retailers  and  distributors  in the United  States
decreased 12% to $61.0 million in 1996 compared to 1995.

Gross  Profit.  Gross profit as a percentage  of net sales  declined to 20.3% in
1996 from 24.3% in 1995.  This  decline in gross  margin  was  primarily  due to
increased price  protection  afforded certain  retailers and inventory  reserves
against slower speed modems recognized during the year. In addition, the Company
increased its percentage of sales to OEM customers,  which typically carry lower
gross margins.  These  decreases were partially  offset by declining parts costs
for most faxmodem models.

Selling  Expenses.  Selling expenses  increased 13% to $10.2 million or 10.2% of
net sales in 1996 from $9.0  million or 9.3% of net sales in 1995.  The increase
was  primarily  due to added costs  associated  with the sales and  marketing of
products  acquired from Tribe Computer Works and to increased  payroll  expenses
for sales,  technical  support and customer service  personnel.  These increases
were  partially  offset by lower  selling  costs  associated  with the Company's
increased  percentage  of OEM sales,  which  generally  require a lower level of
selling expense than other sales.

General  and  Administrative  Expenses.   General  and  administrative  expenses
increased  29% to $3.7 million or 3.7% of net sales in 1996 from $2.8 million or
2.9% of net sales in 1995. This increase was primarily due to increased  payroll
expense for  management  information  systems and new business  development,  to
enhance infrastructure and explore new areas for growth.

Research and Development  Expenses.  Research and development expenses increased
60% to $2.9  million  or 2.9% of net sales in 1996 from $1.8  million or 1.9% of
net sales in 1995.  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 and ISDN areas,  and to costs  associated  with  domestic and
international regulatory approvals.

Interest Income,  Net. Net interest income increased to $233,963 in 1996 from an
expense of $81,893 in 1995. The increase was the result of the Company's  higher
average cash balances  during the last three  quarters of 1996 compared to 1995.
The Company  completed a secondary  offering in April of 1996 which raised a net
$11,573,218.  These funds were used to pay off the line of credit which was used
during  1995 as well as to fund  future  operations.  Any  remaining  funds were
invested in various financial instruments generating interest income.

Provision for Income Taxes. The Company's  effective tax rate decreased to 35.7%
in 1996 from 38.5% in 1995 due to the benefit of increased foreign sales through
the Company's Foreign Sales Corporation  ("FSC") and a decrease in the effective
state income tax rate.

Liquidity and Capital Resources

On  December  31,  1997,  the  Company  had  working  capital of $35.1  million,
including $11.3 in cash and cash equivalents.  The Company also has a secured $5
million line of credit expiring  September 30, 1998. No amounts were outstanding
under this line of credit as of December  31,  1997.  This line of credit  bears
interest  at the bank's  prime rate (8.50% on December  31,  1997).  The line of
credit is secured and contains certain financial and other covenants.

In  1997  the  Company's  net  cash   provided  by  operating   activities   was
approximately $2.7 million. During that period inventory and accounts receivable
decreased  by $7.0  million  and $5.6  million,  respectively.  The  decrease in
inventory  was primarily due to lower sales in 1997 as compared to sales in 1996
and the Company's efforts to reduce inventory levels,  particularly with respect
to lower speed  faxmodems.  The Company  designs its  faxmodems  to  accommodate
last-minute  insertion of the high-cost  chipsets and  unexpected  delays in the
delivery  of  these   chipsets  can  result  in  increased   raw  materials  and
work-in-process  inventory.  Increased  levels of inventory may adversely affect
the  Company's  liquidity and increase the risk of inventory  obsolescence  or a
decline  in the  market  value  of such  inventory.  The  decrease  in  accounts
receivable  was  primarily  attributable  to lower  sales in 1997 as compared to
sales in 1996.  These  sources of cash were offset by the  reduction of accounts
payable and accrued expenses of $1.4 million, and the Company's $7.1 million net
loss.

The  Company's  capital  expenditures  in 1997  of  approximately  $0.8  million
consisted  primarily of the Company's computer hardware and software,  continued
renovations to its headquarters, and purchases of other equipment and tooling.

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

Year 2000 Date Conversion

The Company has implemented a comprehensive  Enterprise Resource Planning System
which is fully  prepared  for the year 2000.  The  Company is in the  process of
implementing  new  systems for all  remaining  non  mission  critical,  computer
systems. All major conversions are complete and the implementation  schedule for
minor systems  anticipates a complete  conversion  prior to January 1, 2000. The
Company presently believes that, with the completed  conversions and anticipated
conversions  to new software,  the year 2000 problem will not pose a significant
operational problem to the Company.  However, there can be no assurance that the
systems  of other  parties  upon  which  the  Company's  businesses  also  rely,
including but not limited to the  Company's  customers  and  suppliers,  will be
converted on a timely basis. The Company's  business,  financial  condition,  or
results of operations could be materially  adversely  affected by the failure of
its systems or those of other parties to operate or properly manage dates beyond
1999.

Other

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.  Therefore,  changes in
foreign  currency  exchange  rates  may  adversely  affect  the  demand  for the
Company's products.

New Accounting Pronouncements

In 1997,  the  Company  adopted  Statement  of  Financial  Accounting  Standards
("SFAS") No. 128,  "Earnings per Share." SFAS 128 establishes a different method
of computing net income (loss) per share than was required  under the provisions
of  Accounting  Principles  Board  Opinion No. 15.  Under SFAS 128,  the Company
presents  both basic net income  (loss) per share and diluted net income  (loss)
per share.  The impact on diluted net income  (loss) per share was not material.
Prior periods presented have been restated to comply with the provisions of SFAS
128.

In June 1997,  the Financial  Accounting  Standards  Board issued  Statement 130
(SFAS 130),  "Reporting  Comprehensive  Income," which establishes standards for
reporting and display of  comprehensive  income and its components in a full set
of  general-purpose  financial  statements.  Under this  concept,  all revenues,
expenses,  gains and losses recognized during the period are included in income,
regardless of whether they are considered to be the results of operations of the
period.  SFAS 130,  which  becomes  effective for the Company in its year ending
December 31, 1998, is not expected to have a material impact on the consolidated
financial statements of the Company.



In June 1997,  the Financial  Accounting  Standards  Board issued  Statement 131
(SFAS  131),   "Disclosures   about   Segments  of  an  Enterprise  and  Related
Information,"  which  establishes  standards  for the way that  public  business
enterprises  report  selected  information  about  operating  segments in annual
financial  statements  and  requires  that  those  enterprises  report  selected
information   about  operating   segments  in  interim   financial   reports  to
shareholders.  It also  establishes  standards  for  related  disclosures  about
products and services,  geographic  areas and major  customers.  SFAS 131, which
becomes  effective  for the Company in its year ending  December  31,  1998,  is
currently not expected to have a material  impact on the Company's  consolidated
financial  statements  and  disclosures  as the Company  does not have  multiple
reportable operating segments.






ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                    ZOOM TELEPHONICS, INC.
                          INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                         AND SCHEDULE
<TABLE>
<S>                                                                                       <C>
                                                                                          Page
Index to Consolidated Financial Statements                                                  27
Independent Auditors' Report                                                                28
Consolidated Balance Sheets as of December 31, 1996 and 1997                                29
Consolidated Statements of Operations for the years ending December 31, 1995, 1996 and      30
1997
Consolidated Statements of Stockholders' Equity for the years ending December 31,           31
1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years ending December 31, 1995, 1996 and      32
1997
Notes to Consolidated Financial Statements                                                  33
Schedule II:  Valuation and Qualifying Accounts for Fiscal Years Ending December 31,
1995, 1996 and 1997                                                                         85
</TABLE>

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 1998 annual
meeting  which will be filed with the SEC in April 1998  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" and "Proposal No. 2", in the Company's
definitive  proxy statement for its 1998 annual meeting which will be filed with
the SEC in April 1998, 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 1998 annual meeting which
will be filed with the SEC in April 1998,  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

<TABLE>
<S><C>    <C>    <C>
(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    1991 Stock Option Plan, as amended, of Zoom Telephonics,  Inc., filed
                 as Exhibit 10.1 to the Annual Report on Form 10-K for the fiscal year
                 ended December 31, 1994 (the "1994 Form 10-K"). *

       **10.2    1991  Director  Stock Option Plan, as amended,  of Zoom  Telephonics,  Inc.,  filed as
                 Exhibit 10.2 to 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.

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

         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    Amended and Restated  Promissory  Note issued by the Company in favor
                 of Fleet National Bank.

         10.8    Security Agreement between the Company and Fleet National Bank.

       **10.9    Employment Agreement.

         11.     Statement re: computation of per share income (loss).

         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.

         27.1    Financial Data Schedule.  1996

         27.2    Financial Data Schedule.  1995

(b)              Reports on Form 8-K.

                 No 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.
</TABLE>

     *     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, 1998
--------------------------
Frank  B. Manning                Chairman of the Board




/s/ Robert A. Crist              Principal Financial and Accounting Officer     March 31, 1998
-----------------------------
Robert A. Crist




/s/ Peter R. Kramer              Director                                       March 31, 1998
--------------------------
Peter R. Kramer




/s/ Bernard Furman               Director                                       March 31, 1998
Bernard Furman



/s/ L. Lamont Gordon             Director                                       March 31, 1998
--------------------------
L. Lamont Gordon



/s/ J. Ronald Woods              Director                                       March 31, 1998
--------------------------
J. Ronald Woods
</TABLE>
<PAGE>




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

<TABLE>
<S>                                                                                        <C>
                                                                                           Page

Independent Auditors' Report                                                                28
Consolidated Balance Sheets as of December 31, 1996 and 1997                                29
Consolidated Statements of Operations for the years ending December 31, 1995, 1996 and      30
1997
Consolidated Statements of Stockholders' Equity for the years ending December 31, 1995,     31
1996 and 1997
Consolidated Statements of Cash Flows for the years ending December 31, 1995, 1996 and      32
1997
Notes to Consolidated Financial Statements                                                  33
Schedule II:  Valuation and Qualifying Accounts for Fiscal Years Ending December 31,
1995, 1996 and 1997                                                                         85
</TABLE>
<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 1996,  and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the years in the  three-year  period ended  December 31, 1997.
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 1996, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 1997,  in  conformity  with  generally  accepted  accounting
principles.




                                                     KPMG Peat Marwick LLP



Boston, Massachusetts
February 13, 1998
<PAGE>

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


                                                                       December 31,
    Assets                                                       1996              1997
    ------                                                       ----              ----

<S>                                                       <C>               <C>
Current assets:
    Cash and cash equivalents                             $   9,172,186     $   11,281,337

    Accounts receivable, net of reserves for doubtful
      accounts, returns, and allowances of $3,564,101
      in 1996 and $4,518,206 in 1997 (note 10)               18,970,041         13,365,413
    Inventories (note 3)                                     19,057,575         12,034,349
    Refundable income taxes                                   1,219,000          3,793,963
    Net deferred tax assets (note 9)                          2,032,683          2,388,189
    Prepaid expenses and other current assets                   532,808            212,989
                                                                -------            -------
             Total current assets                            50,984,293         43,076,240
                                                             ----------         ----------

Property, plant and equipment, net (note 4)                   4,081,406          3,967,767
  Goodwill, net of accumulated amortization of                1,558,764          1,393,874
  $76,149 in 1996 and $241,039 in 1997 (note 12)
Other assets                                                    157,691             77,392
                                                                -------             ------

              Total assets                                 $  56,782,154    $   48,515,273



    Liabilities and Stockholders' Equity


Current liabilities:
    Accounts payable                                       $   8,074,472    $    6,204,370
    Accrued expenses                                           1,352,725         1,808,308
                                                               ---------         ---------
             Total current liabilities                         9,427,197         8,012,678
                                                               ---------         ---------

Commitments and contingencies (note 5)

Stockholders' equity (notes 7 and 8):
  Common stock, no par value. Authorized
  25,000,000 shares; issued and outstanding
  7,446,842 shares at December 31, 1996 and
  7,472,371 shares at December 31, 1997                       24,890,468         25,170,267
  Retained earnings                                           22,464,489         15,332,328
                                                              ----------         ----------
             Total stockholders' equity                    $  47,354,957    $    40,502,595
                                                             ===========         ==========

             Total liabilities and stockholders'equity     $  56,782,154    $    48,515,273
                                                             ===========         ==========

</TABLE>




See accompanying notes to consolidated financial statements.


<PAGE>



                                    ZOOM TELEPHONICS, INC.
                            CONSOLIDATED STATEMENTS OF OPERATIONS
                        Years Ending December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>


                                                         1995              1996           1997
                                                         ----              ----           ----

<S>                                            <C>              <C>              <C>
Net sales (notes 10 and 15)                    $    96,997,313  $   100,195,021  $  64,478,457
Cost of goods sold                                  73,401,620       79,803,297     56,298,264
                                                    ----------       ----------     ----------
            Gross profit                            23,595,693       20,391,724      8,180,193
                                                    ----------       ----------      ---------

Operating expenses:
        Selling                                      9,023,443       10,215,528     11,103,437
        General and administrative                   2,839,775        3,674,134      4,956,916
        Research and development                     1,835,482        2,940,153      4,182,220
                                                     ---------        ---------      ---------
                                                    13,698,700       16,829,815     20,242,573
                                                    ----------       ----------     ----------

             Operating income (loss)                 9,896,993        3,561,909    (12,062,380)

Interest income                                         81,893          233,963        503,680
Other, net                                            (115,206)          58,551        237,273
                                                      ---------          ------        -------
             Total other income(expense), net          (33,313)         292,514        740,953
                                                       -------          -------        -------

             Income (loss) before income taxes       9,863,680        3,854,423    (11,321,427)

Income tax expense (benefit) (note 9)                3,800,000        1,374,501     (4,189,266)
                                                     ---------        ---------     -----------

                     Net income (loss)         $     6,063,680      $ 2,479,922   $ (7,132,161)
                                                     =========        =========     ===========

Net income (loss) per share (note 2):
        Basic                                  $          1.00      $       .35   $       (.95)
                                                          ====              ===           =====
        Diluted                                $           .98      $       .35   $       (.95)
                                                           ===              ===           =====

Weighted average common and common equivalent shares (note 8):
        Basic                                        6,074,788        7,068,314       7,468,758
                                                     =========        =========       =========
        Diluted                                      6,173,265        7,162,391       7,468,758
                                                     =========        =========       =========

</TABLE>


See accompanying notes to consolidated financial statements.
<PAGE>

                                    ZOOM TELEPHONICS, INC.
                       CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>

                                                                                       Total
                                                       Common Stock            Retained      stockholders'
                                                   Shares         Amount       earnings         equity

<S>                                               <C>        <C>           <C>             <C>
Balance at December 31, 1994                      6,014,480  $  5,382,134  $  13,920,887   $ 19,303,021
   Net income                                       -            -             6,063,680      6,063,680
   Exercise of stock options (note 8)               186,450     1,570,350        -            1,570,350
   Tax benefit from exercise of nonqualified
     stock options (notes 8 and 9)                   -            337,093          -            337,093
                                                ------------      -------   --------------      -------

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
   Net proceeds from stock offering (note 7)        800,000    11,573,218       -            11,573,218
   Stock issuance for product line acquisition
    (note 12)                                       102,641     1,590,929        -            1,590,929
   Exercise of stock options (note 8)               343,271     2,825,543        -            2,825,543
   Tax benefit from exercise of nonqualified
     stock options (notes 8 and 9)                   -          1,611,201        -            1,611,201
                                                     -------    ---------        -------      ---------

Balance at December 31, 1996                      7,446,842    24,890,468     22,464,489     47,354,957

   Net income (loss)                                 -             -          (7,132,161)    (7,132,161)
   Exercise of stock options (note 8)                25,529       204,232         -             204,232
   Tax benefit from exercise of nonqualified
     stock options (notes 8 and 9)                   -             75,567         -              75,567
                                                   --------      --------      ----------     ---------



Balance at December 31, 1997                      7,472,371  $ 25,170,267  $  15,332,328   $ 40,502,595
                                                  =========    ==========     ==========     ==========
</TABLE>


See accompanying notes to consolidated financial statements.
<PAGE>

                                    ZOOM TELEPHONICS, INC.
                            CONSOLIDATED STATEMENTS OF CASH FLOWS
                        Years Ending December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>

                                                                    1995           1996            1997
                                                                    ----           ----            ----

<S>                                                           <C>           <C>            <C>
Cash flows from operating activities:
    Net income (loss)                                         $ 6,063,680   $  2,479,922   $  (7,132,161)
    Adjustments to reconcile net income (loss) to net cash
       provided by (used in) operating activities:
         Depreciation and amortization                            252,400        674,162       1,116,443
         Net deferred income taxes                               (416,789)      (519,222)       (355,506)
         Changes in assets and liabilities:
            Accounts receivable                                (7,609,226)     1,426,273       5,604,628
            Inventories                                       (14,624,140)     5,211,667       7,023,226
            Prepaid expenses and other current assets              28,553       (715,728)        400,118
            Refundable income taxes                                 -         (1,219,000)     (2,574,963)
            Accounts payable and accrued expenses              12,280,557    (10,156,983)     (1,414,519)
            Income taxes payable                                   27,252       (236,493)        -
            Tax benefit from exercise of nonqualified
               stock options                                      337,093      1,611,201          75,567
                                                                  -------      ---------          ------
                    Net cash provided by (used in)
                        operating activities                   (3,660,620)    (1,444,201)      2,742,833
                                                               -----------    -----------     -----------


Cash flows from investing activities:
    Purchase of certain assets of a business product line           -            (81,375)         -
    Additions to property, plant and equipment                 (1,234,459)    (1,351,670)       (837,914)
                                                                ----------     ----------       ---------

                    Net cash used in investing activities      (1,234,459)    (1,433,045)       (837,914)
                                                               -----------    -----------       ---------


Cash flows from financing activities:
    Net borrowings (repayments) under revolving
       bank line of credit (note 6)                              2,500,000     (2,500,000)         -
    Net proceeds from issuance of common stock                      -          11,573,218          -
    Exercise of nonqualified stock options                       1,570,350      2,825,543        204,232
                                                                 ---------      ---------        -------
                    Net cash provided by financing
                        activities                               4,070,350     11,898,761        204,232
                                                                 ---------     ----------        -------

Net increase (decrease) in cash and cash equivalents              (824,729)     9,021,515      2,109,151

Cash and cash equivalents at beginning of year                     975,400        150,671      9,172,186
                                                                   -------        -------      ---------

Cash and cash equivalents at end of year                     $     150,671   $  9,172,186  $  11,281,337
                                                                   =======      =========     ==========

</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>


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

(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
       The consolidated  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.

       Thepreparation  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
       The consolidated financial statements include the accounts of the Company
         and  its  wholly-owned  subsidiary,   Zoom  US,  and  its  wholly-owned
         subsidiaries, Zoom Foreign Sales Corporation, Zoom Telephonics, Ltd. (a
         United Kingdom  corporation),  and Tribe Acquisition  Corporation.  All
         significant intercompany balances and transactions have been eliminated
         in consolidation.

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

       (d) Inventories
       Inventories  are  carried  at the  lower  of  cost  or  market.  Cost  is
         determined using the first-in, first-out (FIFO) method.

       (e)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.

       (f)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.
<PAGE>

                                    ZOOM TELEPHONICS, INC.
                          Notes to Consolidated Financial Statements

       (g)Income Taxes
       The Company  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.

       (h)Income (Loss) Per Common Share
       The Company  has  adopted  SFAS No.  128,  "Earnings  per  Share,"  which
         establishes  standards for computing and presenting earnings per share,
         simplifying   previous   standards   and  making  them   comparable  to
         international earnings per share standards.

       Basic  earnings  per share is  computed  by  dividing  net  income by the
         weighted average number of common shares outstanding during the period.
         Diluted  earnings  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 begining 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.

       Potential  common  shares  for which  inclusion  would have the effect of
         increasing diluted earnings per share (i.e., antidilutive) are excluded
         from the computation.

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

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

       (k)Stock Based Compensation
        The Company has adopted Statement of Financial  Accounting Standards No.
          123,  "Accounting  for Stock  Based  Compensation"  ("SFAS  123").  As
          permitted by SFAS 123, the Company  continues to measure  compensation
          cost in accordance  with  Accounting  Principles  Board Opinion No. 25
          (APB 25), "Accounting for Stock Issued to Employees."  Therefore,  the
          adoption  of SFAS  123 was not  material  to the  Company's  financial
          condition or results of operations;  however,  the pro forma impact on
          earnings  (loss) and earnings  (loss) per share have been disclosed in
          the Notes to Consolidated Financial Statements as required by SFAS 123
          for companies  that continue to account for  stock-based  compensation
          under APB 25.

       (l)Advertising Costs
       Advertising costs are 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.

       (m)Reclassifications
       Certain  reclassifications  to the 1995 and 1996  consolidated  financial
         statements  have been made to conform to the 1997  presentation.  These
         reclassifications were not material.



<PAGE>

                                    ZOOM TELEPHONICS, INC.
                          Notes to Consolidated Financial Statements


(3)    Inventories

       Inventories consist of the following at December 31:
<TABLE>
<CAPTION>

                                                      1996               1997
                                                      ----               ----

<S>                                            <C>                <C>
         Raw materials                         $   11,778,311     $   7,261,914
         Work in process                           2,968,064          2,542,260
         Finished goods                            4,311,200          2,230,175
                                                   ---------          ---------

                                               $   19,057,575     $  12,034,349
                                                   ==========        ==========
</TABLE>

(4)    Property, Plant and Equipment

       Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>

                                                                                    Estimated
                                                      1996               1997       useful lives
                                                      ----               ----       ------

<S>                                            <C>                <C>                <C>
         Land                                  $     309,637      $     309,637          -
         Buildings and improvements                1,939,071          2,097,044      31.5
         years
         Leasehold improvements                      469,583            470,777      5 years
         Computer hardware and software            1,666,175          1,919,412      3 years
         Machinery and equipment                     427,186            444,126      5 years
         Molds, tools and dies                       807,573            961,968      5 years
         Office furniture and fixtures               433,968            523,936      5 years
                                                     -------            -------
                                                   6,053,193          6,726,899

         Less accumulated depreciation             1,971,787          2,759,132
                                                   ---------          ---------

                                               $   4,081,406      $   3,967,767
                                                   =========          =========
</TABLE>

(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.  In July 1996, the Company entered
         into a two-year  lease for an office  facility in Alameda,  California.
         The Company  also leases  office  space in Dallas,  Texas and  off-site
         storage  facilities  in  Boston,  Massachusetts.  Under  non-cancelable
         operating leases,  rent expense was $46,897,  $275,673 and $392,010 for
         the years ending December 31, 1995, 1996 and 1997, respectively. Future
         minimum rental  payments,  excluding  executory  costs,  required under
         these operating leases for the next four years are as follows:
                                 Year                 Total

                                1998             $   351,492
                                1999                 309,708
                                2000                 309,708
                                2001                 309,708





                                    ZOOM TELEPHONICS, INC.
                          Notes to Consolidated Financial Statements


(6)    Credit Lines

       The Company's  $10 million line of credit  expired on August 31, 1997. It
         was replaced by a secured $5 million line of credit effective  November
         13, 1997 and expiring  September 30, 1998. No amounts were  outstanding
         under this line of credit as of December 31, 1997.

(7)    Secondary Stock Offering

       On April 11, 1996, the Company sold 800,000 shares of its common stock in
          a  registered  offering on a direct  placement  basis for  proceeds of
          $11,573,218,  net of expenses and underwriters  fees of $926,782.  The
          net proceeds were used to repay certain obligations of the Company and
          for general business purposes.

(8)    Stock Option Plans

       Employee Stock Option Plan
The  Employee  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 1,500,000
shares of common stock for the  granting of employee  stock  options.  Shares of
common stock were  registered  for issuance under the Employee 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>

                                                                               Weighted average
                                                         Number of shares       exercise price

<S>                                                          <C>                 <C>
         Balance at December 31, 1994                         442,800            $    8.00
            Granted                                           229,950                11.13
            Exercised                                        (150,450)                8.00
            Expired                                           (56,100)                8.00
                                                              -------                 ----

         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
                                                             --------                 ----

         Balance at December 31, 1997                         602,300            $    8.07
                                                              =======                 ====

</TABLE>

The following table summarizes  information  about fixed stock options under the
Employee Stock Option Plan outstanding at December 31, 1997:
<TABLE>
<CAPTION>


                              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

<S>               <C>          <C>               <C>               <C>                <C>
$ 6.50 to $8.63   602,300      2.66 years        $  8.07           141,327            $8.13
  =============   =======      =========          =======          =======             ====
</TABLE>
<PAGE>

                                    ZOOM TELEPHONICS, INC.
                          Notes to Consolidated Financial Statements

The Company recognized  a tax  benefit of  $337,093,  $1,611,201  and $75,567 in
   1995, 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. This 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.  Each option  shall  expire two years from
   the grant date. Options outstanding under this plan are as follows:
<TABLE>
<CAPTION>

                                                                               Weighted average
                                                         Number of shares       exercise price

<S>                                                            <C>               <C>
         Balance at December 31, 1994                          72,000            $   13.22
            Granted                                            36,000                 7.50
            Exercised                                          (36,000)              10.19
            Expired                                            (36,000)              16.31
                                                               --------              -----

         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

                                                               ======                =====
</TABLE>

The following table  summarizes information  about fixed stock options under the
   Directors' Stock Option Plan at December 31, 1997:

<TABLE>
<CAPTION>

                              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

<S>                   <C>      <C>               <C>              <C>           <C>
  $  7.25 to 10.13    36,000   1.25  years       $   8.69         18,000        $   10.13
  $ 10.14 to 17.19    36,000    .25  years       $  13.97         36,000        $   13.97
                      ------                                      ------
                      72,000    .75  years       $  11.33         54,000        $   12.69
                      ======                                      ======
</TABLE>


At December 31, 1997, there were 129,613  additional  shares available for grant
   under both Plans. The per share  weighted-average fair value of stock options
   granted during 1997, 1996 and 1995 was $4.43, $4.03 and $3.58,  respectively,
   on the date of grant using the Black  Scholes  option-pricing  model with the
   following weighted-average assumptions: 1997 - expected dividend yield 0.00%,
   risk-free interest rate of 5.69%,  volatility 70% and an expected life of 3.5
   years; 1996 - expected dividend yield 0.0%, risk-free interest rate of 5.05%,
   volatility  70% and an expected life of 2.9 years;  1995 - expected  dividend
   yield 0.0%,  risk-free interest rate of 5.07,  volatility 70% and an expected
   life of 2.0 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>

                                                    1995              1996              1997
                                                    ----              ----              ----

<S>                                              <C>              <C>              <C>
Net income (loss)            As reported         $ 6,063,680      $  2,479,922     $  (7,132,161)
                             Pro forma             5,929,829         2,100,665        (7,718,857)

Net income (loss) per share  As reported-basic   $      1.00      $       0.35     $       (0.95)
                             Pro forma-basic            0.97              0.29             (1.03)

                             As reported-diluted $      0.98      $      0.35      $       (0.95)
                             Pro forma-diluted          0.96             0.29              (1.03)
</TABLE>

Proforma net income  (loss)  reflects  only  options  granted in 1997,  1996 and
   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.

The  following  reconciles  the  denominators  of the diluted net income  (loss)
computations:
<TABLE>
<CAPTION>

                                      1995                     1996                    1997
                                      ----                     ----                    ----

<S>                              <C>                       <C>                      <C>
Weighted average
   number of shares
   outstanding                   6,074,788                 7,068,314                7,468,758
Incremental shares
   from the assumed
   exercise of dilutive
   stock options                   383,291                   121,027                      -
Common shares
   assumed to have
   been repurchased,
   treasury stock method          (284,814)                 (26,950)                     -
                                  ---------                 --------                --------

Weighted average
   common and common
   equivalent shares
   outstanding                    6,173,265                7,162,391                7,468,758
                                  =========                =========                =========

</TABLE>

<PAGE>

                                    ZOOM TELEPHONICS, INC.
                          Notes to Consolidated Financial Statements

(9)    Income Taxes

       Income tax  expense  (benefit)  attributable  to income  from  operations
consists of:
<TABLE>
<CAPTION>

                                                     Current         Deferred          Total


<S>                                                <C>             <C>             <C>
         Year ending December 31, 1995:
            US federal                             $ 3,299,680     $ (343,359)     $ 2,956,321
            State and local                            917,109        (73,430)         843,679
                                                       -------        -------          -------

                                                   $ 4,216,789     $ (416,789)     $ 3,800,000
                                                      =========      ========        =========

         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)
                                                      ===========    ========       ===========
</TABLE>

         Income  tax  expense   (benefit)   was   $3,800,000,   $1,374,501   and
         ($4,189,266)  for the years ending  December  31, 1995,  1996 and 1997,
         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>

                                                                     1995             1996            1997
                                                                     ----             ----            ----

<S>                                                            <C>              <C>           <C>
         Computed "expected" US tax expense (benefit)          $ 3,353,651      $ 1,310,504   $  (3,849,285)
         Increase (reduction) in income taxes resulting from:
            State and local income taxes, net of federal
               income tax benefit                                  556,829          112,604        (547,555)
            Tax benefit from foreign sales corp.                  (116,382)         (66,271)           -
            Other, net                                               5,902           17,664         207,574
                                                                  --------        ---------       ----------

                                                               $ 3,800,000      $ 1,374,501   $  (4,189,266)
                                                                 =========        =========      ===========
</TABLE>

                                                                    (Continued)
<PAGE>



                                    ZOOM TELEPHONICS, INC.
                          Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>

Total income tax expense (benefit) was allocated as follows:        1995                1996            1997
                                                                    ----                ----            ----


<S>                                                          <C>                 <C>            <C>
Income (loss) from operations                                $ 3,800,000         $ 1,374,501    $ (4,189,266)
Stockholders' equity, for compensation expense
            for tax purposes in excess of amounts
            recognized for financial statement purposes         (337,093)         (1,611,201)        (75,567)
                                                                ---------         -----------      ----------


                                                              $ 3,462,907        $  (236,700)   $ (4,264,833)
                                                                =========           =========     ===========
</TABLE>

The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1997 are presented below:
<TABLE>
<CAPTION>

                                                                           1996          1997
                                                                           ----          ----
Deferred tax assets:
<S>                                                                  <C>          <C>
            Allowance for bad debt                                   $   421,298  $    181,394
            Sales returns reserve                                        280,029       400,688
            Price protection reserve                                     160,281        -
            Other accounts receivable reserves                            43,896       122,964
            Uniform capitalization                                       236,007       135,414
            Inventory reserve                                            816,690       405,852
            Vacation accrual                                              81,073       102,940
            Warranty reserve                                               6,035        50,343
            Amortization of goodwill                                        -           82,935
            Legal accrual                                                   -           94,816
            Accrued royalties                                               -           87,390
            State net operating loss carry forward                          -          596,520
            Federal tax credits                                             -          117,515
            Other                                                         40,597        35,797
                                                                          ------        ------
                  Total current gross deferred tax assets              2,085,906     2,414,568
                                                                       ---------     ---------

                  Total gross deferred tax assets                    $ 2,085,906  $  2,414,568
                                                                       =========     =========

Deferred tax liability:
            Property, plant and equipment, principally due
            to differences indepreciation                                (53,223)      (26,379)

                  Net deferred tax assets                            $ 2,032,683  $  2,388,189
                                                                       =========     =========
</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 has sufficient taxable
income in the federal  carryback  periods and 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.
                                                                     (Continued)


<PAGE>

                                   ZOOM TELEPHONICS, INC.
                          Notes to Consolidated Financial Statements


(10)   Significant Customers

       One customer  accounted for  approximately  19% of net sales for the year
         ending  December  31,  1995 and 15% of net  sales  for the year  ending
         December 31, 1996. One customer  accounted for 17% of net sales for the
         year ending  December 31, 1997.  At December  31, 1997,  two  customers
         comprised approximately 42% of net accounts receivable. At December 31,
         1996,  two  customers  comprised  approximately  40%  of  net  accounts
         receivable.

(11)   Financial Instruments

       The Company 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.

       Tominimize  the  adverse  impact of foreign  currency  fluctuations,  the
         Company  may  use  certain  financial  instruments,  primarily  forward
         exchange  contracts,  in its management of foreign  currency  exposure.
         These contracts require the Company to sell certain foreign  currencies
         for US dollars at  contractual  rates.  The  Company  does not hold any
         forward exchange contracts for trading purposes.

       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 and
         1997,  foreign  currency  gains  and  losses  were  not  material.  The
         Company's forward exchange  contracts are revalued at the balance sheet
         date  and the  carrying  amount  approximates  the  fair  value  of the
         instruments.    At   December   31,   1997,   the   Company's   foreign
         currency-denominated   net  assets  were not material.  Other than the
         forward exchange contracts described above,  the Company has no other
         involvement with derivative financial instruments.

(12)   Product Line Acquisition

       OnJune 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.

                                                                     (Continued)
<PAGE>

                                    ZOOM TELEPHONICS, INC.
                          Notes to Consolidated Financial Statements



(13)   Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>

                                                             1995            1996        1997
                                                             ----            ----        ----



<S>                                                   <C>              <C>             <C>
         Cash paid during year for interest           $    115,206     $   169,248     $    -
                                                           =======         =======     =======


         Cash paid during year for income taxes       $  3,516,000     $ 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.  These noncash  transactions have been excluded from the
         statement of cash flows.

(14)    Dependence on a Single Supplier

       The Company  produces  its products  using  components  or  subassemblies
         purchased from third-party  suppliers.  Certain of these components are
         available only from a single or limited sources.  In 1996 and 1997, the
         Company purchased substantially all of its modem chipsets from only one
         supplier.  An  interruption in the delivery of these  components  could
         have a material adverse effect on the Company's results of operations.

(15)    Geographic Information

       The  Company's  domestic  net sales and export  sales to Europe and other
         locations for 1995, 1996, and 1997 were comprised as follows:
<TABLE>
<CAPTION>

                        1995   % of Total          1996   % of Total           1997   % of Total
                        ----   ----------          ----   ----------           ----   ----------


<S>               <C>              <C>      <C>               <C>       <C>              <C>
North America     $ 69,452,313     72%      $ 73,085,465      73%       $ 52,227,550     81%
Europe              14,605,000     15%        18,227,729      18%          6,447,846     10%
Other               12,940,000     13%         8,881,827       9%          5,803,061      9%
                   ----------      ---         ---------       --          ---------      --
Total             $ 96,997,313    100%      $100,195,021     100%       $ 64,478,457    100%
                    ==========    ====       ===========     ====         ==========    ====

</TABLE>


<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<S>       <C>    <C>
          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    1991 Stock Option Plan, as amended, of Zoom Telephonics,  Inc.,
                 filed as Exhibit 10.1 to the Annual Report on Form 10-K for the
                 fiscal year ended December 31, 1994 (the "1994 Form 10-K"). *

       **10.2    1991  Director  Stock Option Plan,  as amended,  of Zoom  Telephonics,  Inc.,
                 filed as Exhibit 10.2 to 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.

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

         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    Amended and Restated  Promissory  Note issued by the Company in
                 favor of Fleet National Bank.

         10.8    Security Agreement between the Company and Fleet National Bank.

       **10.9    Employment Agreement.

         11.     Statement re: computation of per share income (loss).

         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.

         27.1    Financial Data Schedule. 1996

         27.2    Financial Data Schedule. 1995

</TABLE>


*                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.