**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**


(Mark
      One)




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




**For
      the fiscal year ended December 31, 2006**





or





o
            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
      TECHNOLOGIES, INC.**


(Exact
      Name of Registrant as Specified in Its Charter)





**Delaware**
            **51-0448969**(State
                or Other Jurisdiction of
            (I.R.S.
                EmployerIncorporation
                or Organization)
            Identification
                No.)**207
                South Street, Boston, Massachusetts**
            **02111**(Address
                of Principal Executive Offices)
            (Zip
                Code)





Registrant's
      Telephone Number, Including Area Code: **(617)
      423-1072**




Securities
      Registered Pursuant to Section 12 (b) of the Act: **None**




Securities
      Registered Pursuant to Section 12 (g) of the Act:




**Common
      Stock, $0.01 Par Value**


(Title
      of
      Class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o  No x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or 15(d) of the Exchange Act. Yes o  No x





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 o





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 x  No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.


Large
                  Accelerated Filero
              Accelerated
                  Filero
              Non-Accelerated
                  Filerx





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o  No x





The
      aggregate market value of the common stock, $0.01 par value, of the registrant
      held by non-affiliates of the registrant as of June 30, 2006 (computed by
      reference to the closing price of such stock on The Nasdaq Capital Market on
      such date) was approximately $8,632,475.




The
      number of shares outstanding of the registrant's common stock, $0.01 par value,
      as of March 14, 2007 was 9,346,966 shares.




**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the registrant's proxy statement for the registrant's 2007 annual meeting
      of
      shareholders to be filed with the SEC in April 2007 are incorporated by
      reference into Part III, Items 10-14 of this Form 10-K.












**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





**Some
      of the statements contained in this report are forward-looking statements within
      the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
      the
      Securities Exchange Act of 1934. These statements involve known and unknown
      risks, uncertainties and other factors which may cause our or our industry's
      actual results, performance or achievements to be materially different from
      any
      future results, performance or achievements expressed or implied by the
      forward-looking statements. Forward-looking statements include, but are not
      limited to statements regarding:**





·
            **the
                sufficiency of our capital
                resources;**


·
            **market
                acceptance of our products and
                services;**


·
            **the
                anticipated development, timing and success of new product and service
                introductions;**


·
            **the
                anticipated development and expansion of our existing technologies,
                markets and sales channels;**


·
            **the
                decline of the dial-up modem
                market;**


·
            **investment
                in resources for product design in foreign
                markets;**


·
            **the
                development of new competitive technologies, products and
                services;**


·
            **approvals,
                certifications and clearances for our products and
                services;**


·
            **production
                schedules for our
                products;**


·
            **business
                strategies;**


·
            **the
                availability of debt and equity
                financing;**


·
            **general
                economic conditions;**


·
            **trends
                relating to our results of operations;
                and**


·
            **our
                ability to service our debt
                obligations.**





***In
      some cases, you can identify forward-looking statements by terms such as "may,"
      "will," "should," "could," "would," "expects," "plans," "anticipates,"
      "believes," "estimates," "projects," "predicts," "potential" and similar
      expressions intended to identify forward-looking statements. These statements
      are only predictions and involve known and unknown risks, uncertainties, and
      other factors that may cause our actual results, levels of activity,
      performance, or achievements to be materially different from any future results,
      levels of activity, performance, or achievements expressed or implied by such
      forward-looking statements. Given these uncertainties, you should not place
      undue reliance on these forward-looking statements. Also, these forward-looking
      statements represent our estimates and assumptions only as of the date of this
      report. Except as otherwise required by law, we expressly disclaim any
      obligation or undertaking to release publicly any updates or revisions to any
      forward-looking statement contained in this report to reflect any change in
      our
      expectations or any change in events, conditions or circumstances on which
      any
      of our forward-looking statements are based. Factors that could cause or
      contribute to differences in our future financial results include those
      discussed in the risk factors set forth in Item 7 below as well as those
      discussed elsewhere in this report. We qualify all of***  ***our
      forward-looking statements by these cautionary
      statements.***




2


**PART
      I**





**ITEM
      1 - BUSINESS**





We
      design, produce, market, sell, and support broadband and dial-up modems, Voice
      over Internet Protocol or "VoIP" products and services, and other
      communication-related products. Our primary objective is to build upon our
      position as a leading producer of Internet access devices, and to take advantage
      of a number of trends in communications including enhanced Internet access,
      higher data rates, and voice calls traveling over the Internet.





Dial-up
      modems were Zoom®'s highest revenue category for many years. Generally our sales
      of dial-up modems have been declining and other product categories have become
      increasingly important.





Our
      dial-up modems connect personal computers and other devices to the local
      telephone line for transmission of data, fax, voice, and images. Our dial-up
      modems enable personal computers and other devices to connect to other computers
      and networks, including the Internet and local area networks, at top data speeds
      up to 56,000 bits per second.





In
      response to increased demand for faster connection speeds, we have expanded
      our
      product line to include DSL modems, cable modems, and related broadband access
      products. Our Asymmetric Digital Subscriber Line modems, known as ADSL modems
      or
      DSL modems, provide a high-bandwidth connection to the Internet through a
      telephone line that typically connects to compatible DSL equipment in or near
      the central telephone office. Zoom® is shipping a broad line of DSL modems,
      mostly external. Some are fairly basic, designed to connect to the USB port
      of a
      Windows computer or the Ethernet port of a computer, router, or other device.
      Other Zoom DSL modems are more complex, and may include a router, a four-port
      switch, a firewall, a wireless access point, or other enhanced features. For
      a
      given DSL hardware platform, we often provide model variations with a different
      power supply, filters, firmware, packaging, or other customer-specific
      items.





Cable
      modems provide a high-bandwidth connection to the Internet through a cable-TV
      cable that connects to compatible equipment that is typically at or near the
      cable service provider. We began shipping cable modems during 2000. Our cable
      modem customers in the U.S., the U.K., and other countries include cable service
      providers, original equipment manufacturers, and retailers.





We
      are
      currently shipping VoIP products which enable broadband users to make phone
      calls through the Internet, potentially lowering the cost of the call and
      providing other benefits such as the ability to manage and track calls using
      a
      Web browser. 2005 volume shipments included a multi-function DSL gateway with
      VoIP, and we also ship a router with VoIP for use with either a DSL modem or
      cable modem. In February 2006 we began shipping the first products in a line
      of
      analog telephone adapters (ATAs), which connect to a router and one or more
      phones, and provide VoIP capabilities to the connected phones. Some of our
      VoIP
      products are targeted for sale to service providers, and some others are
      targeted for sale through our sales channels to end-users. Some of the products
      aimed at end-users include Zoom’s Web-based Chooser, which allows an end-user to
      easily select a VoIP service and configure the Zoom hardware for that service.
      Some of Zoom’s first VoIP products do not allow use of a Chooser, and these
      products benefit from Zoom's Global VillageTM VoIP service. Global Village's VoIP
      service enables an end-user to make free VoIP phone calls to end-users of
      several VoIP service providers, including Global Village, and also allows a
      user
      to pay to call almost any phone in the world. Zoom also has a private-label
      VoIP
      service called VoIP ASAP, which enables a service provider to offer VoIP service
      using that service provider’s name and logo.





Zoom’s
      product line includes wireless products, including wireless-G network products
      and Bluetooth ® products. Generally Zoom’s revenues for wireless products have been growing.





We
      have
      designed a new generation of telephone dialers and related telephony products.
      In the early 1980s Zoom introduced its first generation of dialers, including
      the Demon Dialer® and HotshotTM. Dialers simplify the placing of a phone call by
      dialing digits automatically. Zoom's new generation of dialers includes a model
      designed for alternative long distance companies, and a second model designed
      for use with prepaid phone cards.





We
      are
      incorporated in Delaware under the name Zoom Technologies, Inc. We conduct
      our
      business through our operating subsidiary, Zoom Telephonics, Inc. Zoom
      Telephonics, Inc., was originally incorporated in New York in 1977 and changed
      its state of incorporation to Delaware in 1993. Our principal executive offices
      are located at 207 South Street, Boston, MA 02111 and our telephone number
      is
      (617) 423-1072.





*Available
      Information*





Our
      Internet website address is www.zoom.com. Through our website we make available,
      free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q,
      current reports on Form 8-K, and any amendments to those reports, as soon as
      reasonably practicable after we electronically file such material with, or
      furnish it to, the SEC. These SEC reports can be accessed through the investor
      relations section of our website.




3





**Products**





*General*





The
      vast
      majority of our products facilitate communication of data through the Internet.
      Our dial-up modems can also link computers, point-of-purchase terminals, or
      other modem-equipped devices to each other through the traditional network
      without using the Internet. Our cable modems use the cable-TV cable and our
      DSL
      modems use the local telephone line to provide a high-speed link to the
      Internet. Our wireless-G network products typically communicate with a broadband
      modem for access to the Internet. Some of our Bluetooth wireless products,
      such
      as our Bluetooth modem, are designed for Internet access. Our dialers can be
      used to route voice calls to a VoIP network that may include the Internet.
      Our
      modems and dialers typically connect to a single phone line in a home, office,
      or other location.





*Dial-Up
      Modems*





We
      have a
      broad line of dial-up modems with top data speeds up to 56,000 bps, available
      in
      internal, external, and PCMCIA models. PC-oriented internal modems are designed
      primarily for installation in the PCI slot of IBM PC-compatibles. Embedded
      internal modems are designed to be embedded in non-PC equipment such as
      point-of-purchase terminals, kiosks, and set-top boxes. Many of our external
      modems are designed to work with almost any terminal or computer, including
      Windows computers, the Apple Macintosh, Linux computers, and other computers.
      Our PCMCIA modems are designed for use with notebook and sub-notebook computers
      equipped with standard PCMCIA slots. When sold as packaged retail products,
      our
      dial-up modems are typically shipped complete with third-party software that
      supports the hardware capabilities of the modem.





56K
      modems allow users connected to standard phone lines to download data at speeds
      up to 56,000 bps ("56K") when communicating with compatible central sites
      connected to digital lines such as T1 lines. Those central sites are typically
      online services, Internet Service Providers, or remote LAN access equipment.
      Our
      56K modems typically support the V.90 standard as well as lower-speed standards,
      and many of our 56K modems also support the newer V.92 standard.





In
      March
      and April of 1999 we acquired substantially all of the modem product and
      trademark assets of Hayes Microcomputer Products, Inc., an early leader in
      the
      modem industry. In July 2000 we acquired the trademark and product rights to
      Global Village products. Global Village was a modem brand for Apple Macintosh
      computers. We now sell and market dial-up modems under the Zoom®, Hayes® and
      Global Village® names, as well as under various other private-label brands
      developed for some of our large accounts. In addition, we offer a VoIP service
      under the Global Village name.





In
      2004,
      2005,and 2006 our dial-up modems and related products accounted for
      approximately 52%, 40%, and 48% of our net sales, respectively.





*DSL
      Modems*





Our
      DSL
      modems incorporate the ADSL standards that are currently most popular worldwide,
      including ADSL2/2+, G.dmt, G.Lite, and ANSI T1.413 issue 2. In 2000 we designed
      and shipped our first DSL modems, an external USB model and an internal PCI
      model. In 2002 we introduced new USB and PCI models, and also introduced an
      Ethernet model and a USB/Ethernet model with router features. In 2003 we
      introduced a DSL modem with a built-in router, a USB port, and four switched
      Ethernet ports. In September 2004 Zoom began shipping its first DSL modem with
      built-in VoIP, which also included a router, a 4-port switch, and a firewall.
      During the fourth quarter of 2004 Zoom introduced new modem hardware designs
      for
      its USB, Ethernet, Ethernet/USB, and 4-port router models, shifting to newer
      modem chipsets and lowering Zoom's cost of goods. In March 2005 Zoom introduced
      a DSL modem with wireless networking using the 802.11b and 802.11g standards,
      a
      4-port switching hub, router, and firewall. In 2006 Zoom began shipping a
      software Install Assistant with most of its DSL modems to simplify end-user
      installation. In January 2007 Zoom began shipping QOS Quality-of-Service
      capability with some of its DSL modems, to provide a “fast lane” for
      bandwidth-sensitive applications such as VoIP, gaming, and video. During 2007
      Zoom expects to add QOS to more of its DSL products, to add other features
      including TR-69 to some of its DSL products, and to continue Zoom’s efforts
      toward lowering the cost of goods for its DSL products.





The
      maximum speed for the ADSL standard is 8 megabits per second for short phone
      lines, with lower speeds for longer phone lines. In 2005 Zoom began shipping
      some models with hardware that supports the ADSL 2 and 2+ standards. These
      modems work with central site equipment incorporating the ADSL standard, and
      typically offer enhanced functionality for central site equipment incorporating
      the ADSL 2 and ADSL 2+ standards. This enhanced functionality includes speeds
      up
      to 24 megabits per second for short phone lines, generally higher speeds for
      most phone line lengths, the ability to transmit at high speeds for longer
      phone
      lines (extended "reach"), and other features including lower overall power
      consumption and better diagnostics. Zoom now ships ADSL products with ADSL
      2/2+
      for Ethernet, Ethernet/USB, 4-port switch, and wireless models.




4





In
      2004,
      2005, and 2006 our DSL modems and related products accounted for approximately
      38%, 53%, and 44% of our net sales.





*Bluetooth®
      Modems and Adapters*





In
      2003
      we began shipping a Bluetooth modem, a Bluetooth USB adapter, and a Bluetooth
      PC
      Card adapter. Bluetooth is a wire-elimination technology that is increasingly
      popular for mobile phone and computer products. In 2006 we introduced our
      iHiFi TM line of
      Bluetooth products for transmission of music and other audio from one device
      to
      another - for instance, from an iPod or other sound source to a stereo or
      powered speakers. In 2007 we plan to introduce a number of new iHiFi products,
      including Bluetooth headphones and a transmitter that works for any iPod that
      has an iPod docking station.





*Cable
      Modems*





Each
      cable service provider has its own approval process, in which the cable service
      provider may require CableLabs® certification and may also require the service
      provider’s own company test and approval. We have obtained CableLabs®
certification for four types of DOCSIS-standard cable modems - PCI, USB,
      Ethernet, and Ethernet/USB models. Some of these models have also received
      a
      number of cable service provider company approvals **.** The
      approval process has been and continues to be a significant barrier to entry,
      as
      are the strong relationships with cable service providers enjoyed by incumbent
      cable equipment providers like Motorola and Cisco Systems.





In
      2006
      we continued to sell cable modems to cable service providers and original
      equipment manufacturers, both inside and outside the US, and to computer
      retailers in the US. Sales through the retail channel have been handicapped
      by a
      number of factors, including the fact that most cable service providers offer
      cable modems with their service and the fact that some cable service providers
      do not provide a financial incentive to a customer who purchases his own modem
      rather than leasing it from the cable service provider. However, Zoom has been
      expanding the number of U.S. retail outlets carrying Zoom’s cable modems, and we
      should be positioned for increased cable modem sales in 2007.





*Voice
      over Internet Protocol*





In
      2004
      we introduced a line of products that support VoIP or "Voice over Internet
      Protocol". Our first VoIP products used the standards-based Session Initiation
      Protocol, or SIP protocol, and are thus compatible with a wide range of other
      SIP-compatible VoIP products and services. SIP allows devices to establish
      and
      manage voice calls on the Internet. Zoom’s VoIP product line includes the X5v,
      the V3, and a line of Analog Telephone Adapters. The X5v includes a DSL modem,
      a
      router, a firewall, a 4-port switching hub, Zoom’s TelePort, and other features.
      The V3 has the same features as the X5v, except instead of having a built-in
      DSL
      modem, the V3 has an Ethernet port for connecting to the Ethernet port of an
      external DSL modem or cable modem. Zoom’s Analog Telephone Adapters connect to a
      router’s Ethernet port and to one or more telephones to provide those phones
      with VoIP capabilities. Some of Zoom’s Analog Telephone Adapters include
      TelePort.





Zoom’s
      TeleportTM phone port lets an end-user plug in a normal phone to place and
      receive voice calls over the Internet, or to place and receive calls over the
      familiar switched telephone network. Because the TelePort typically routes
      emergency calls over the familiar switched telephone network, those calls are
      handled correctly without relying on proper handling by a VoIP service provider.
      In addition, the TelePort can be used to provide a “second phone line” and to
      provide other advantages.





Some
      versions of these VoIP products are bundled with Global Village phone service,
      a
      Zoom-developed SIP-based service that includes a free VoIP phone service and
      an
      optional paid service for communicating with phones that can be reached through
      the switched phone network. Other versions of Zoom’s VoIP products do not come
      with Global Village service, since they are designed to be used by service
      providers offering some other VoIP service. Global Village has a wide array
      of
      features for routing calls, recording voice mail, conference calling, and
      tracking customer usage and costs. Global Village phone service helps Zoom
      to
      address the specific needs of its end-user, retailer, and service provider
      customers. For instance, Zoom makes Global Village available in a number of
      different languages and with a number of payment options to address specific
      market needs. Global Village can be offered to end-users, but it can also be
      offered to service providers either under the Global Village brand or as a
      private-label VoIP service.




5





Some
      of
      our Analog Telephone Adapters (ATAs) for end-users include a Web-based Chooser
      that allows the end-user to shop for a suitable VoIP service, select it, and
      then automatically configure the ATA for that service. This is consistent with
      Zoom’s goal of providing freedom of choice to its VoIP customers.





Zoom
      devoted significant resources to the VoIP product area in 2004 through 2006,
      and
      we continue to devote considerable resources to VoIP hardware, firmware, and
      test, and to Zoom's Global Village phone service.





In
      2007
      Zoom expects to improve and extend its VoIP product line by improving the
      performance of its existing SIP products, introducing new multiple-phone-port
      SIP products, and introducing its first Skype TM products. While SIP has been the most successful approach to VoIP for enterprise
      use and for VoIP offerings by telephone companies, Skype has been most
      successful for end-users using personal computers. We believe that Skype has
      tens of millions of active users worldwide. In 2007 we expect to introduce
      at
      least two Skype products. One is an adapter that plugs into the USB port of
      a PC
      and allows the use of a normal corded or cordless phone, and one is a wireless
      PC headset that lets a user switch easily between phone calls and
      music.





*Wireless
      Local Area Networking*





In
      2005
      Zoom began shipping DSL modems with Wireless-G local area network capability
      and
      introduced other Wireless-G products, including USB and PC Card clients, a
      wireless access point, and a wireless gaming adapter. In late 2006 Zoom
      introduced a Wireless-G router and a Wireless-G PCI client. Zoom is considering
      extensions of its wireless local area network product line, and is also
      considering other local area network products including powerline networking
      products.





*Dialers
      and Related Telephony Products*





Our
      dialers simplify the placing of a phone call by dialing digits automatically.
      We
      shipped our first telephone dialer, the Demon Dialer®, in 1981, and in 1983
      began shipping the HotshotTM dialer. As the dialer market diminished due to equal
      access, we focused on modems and other peripherals for the personal computer
      market. In 1996 we began shipping a new generation of dialers incorporating
      proprietary technology that is now covered by four issued U.S. patents.
      Some of these dialers are well-suited for routing appropriate calls through
      money-saving long-distance service providers, including prepaid phone card
      service providers.





*Products
      for Markets outside North America*





Products
      for countries outside the US often differ from a similar product for the US
      due
      to different regulatory requirements, country-specific phone jacks and AC power
      adapters, and language-related specifics. As a result, the introduction of
      new
      products into markets outside North America markets can be costly and
      time-consuming. In 1993 we introduced our first dial-up modem approved for
      selected Western European countries. Since then we have continued to expand
      our
      product offerings into markets outside North America, including DSL modems
      and
      VoIP products and services. We have received regulatory approvals for, and
      are
      currently selling our products in a number of countries, including many European
      Union and South American countries, Canada, Mexico, Poland, Saudi Arabia,
      Switzerland, Turkey, the USA, and Vietnam. We intend to continue to expand
      and
      enhance our product line for our existing markets and to seek approvals for
      the
      sale of our products in new countries throughout the world.





*ROHS
      Restriction on Hazardous Substances*





The
      European Union’s Directive 2002/95/EC, Restriction on Use of Hazardous
      Substances (RoHS), has strict rules regarding products put on the European
      market after July 1, 2006. Those products have defined limits on their content
      of lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyls, and
      polybrominated diphenyl ethers. Most electronics manufacturers including Zoom
      consequently needed to change their manufacturing processes and component
      choices to conform to RoHS. Zoom has completed the work required to affect
      this
      change for products where it is practical to make this change, including almost
      all of Zoom’s high-volume products.





*CEC
      Appliance Efficiency Regulations*





The
      California Energy Commission (CEC) has rules that will affect many of our
      products manufactured on or after July 1, 2007. These rules apply to our
      products with power cubes, which typically plug into an AC outlet and provide
      low-voltage AC or DC to a modem or other device. CEC rules will require that
      the
      power cubes used in our products be highly efficient, so that most of the input
      energy is used by our device and not dissipated as heat. This typically requires
      a power cube that costs about $1.50 more per unit than the power cubes we
      currently use, resulting in a smaller, lower-weight power cube that will reduce
      the customer’s energy usage for the power cube. Because California is the
      largest state in the US and because many of our customers have sales outlets
      in
      California, we are planning to meet the CEC rules for all our significant US
      products. This may negatively impact our gross profit per unit, and may reduce
      our shipping costs for some customers.




6





**Sales
      Channels**





*General*





We
      sell
      our products primarily through high-volume distributors and retailers, Internet
      service providers, telephone service providers, value-added resellers, PC system
      integrators, and original equipment manufacturers ("OEMs"). We support our
      major
      accounts in their efforts to discern strategic directions in the market, to
      maintain appropriate inventory levels, and to offer a balanced selection of
      attractive products.





During
      2006 one customer, Dixon’s Store Group, accounted for 10% or more of our total
      net sales. Two customers each accounted for 9% of total net sales. Together
      these three customers accounted for 30% of our total net sales.





*Distributors
      and Retailers outside North America*





In
      markets outside North America we sell and ship our products primarily to
      independent distributors and retailers. Our European high-volume retailers
      include Dixons Store Group, a major customer, and many others. Our revenues
      from
      sales outside North America were $17.4 million in 2004, $14.0 million in 2005,
      and $8.0 million in 2006. Approximately 47%, 37%, and 46% of our net sales
      outside North America in 2004, 2005, and 2006, respectively, were to customers
      in the United Kingdom. Sales to Turkey accounted for 28%, 40%, and 17% of our
      net sales outside North America in 2004, 2005, and 2006, respectively. We
      believe sales growth outside North America will continue to require substantial
      additional investments of resources for product design and testing, regulatory
      approvals, native-language instruction manuals and software, packaging, sales
      support, and technical support. We have made this investment in the past for
      many countries, and we expect to make this investment for many countries and
      products in the future. Areas of focus include Western Europe, Eastern Europe,
      the Middle East, and Latin America.





*North
      American High-volume Retailers and Distributors*





In
      North
      America we reach the modem retail market primarily through high-volume
      retailers. Our North American retailers include Staples, a major customer,
      and
      many others. Our revenues from sales in North America were $14.0 million in
      2004, $11.6 million in 2005, and $10.3 million in 2006. Although we offer a
      number of our products, including DSL modems and cable modems, through
      high-volume retailers in North America, most of our sales in North America
      to
      high-volume retailers have historically been sales of our dial-up modems.
      However, our broadband modems have been increasing their share of our sales
      through high-volume retailers, and in early 2007 we began supplying a cable
      modem and a DSL modem to Best Buy.





We
      sell
      significant quantities of our products through distributors, who often sell
      to
      corporate accounts, retailers, service providers, value-added resellers and
      other customers. Our North American distributors include our major customers
      Ingram Micro and Tech Data, and several others.





*Internet
      and Telephone Service Providers*





A
      rapidly
      growing portion of our business has been the sale of DSL modems to DSL service
      providers in the U.S. and in some other countries. We plan to continue to devote
      significant efforts toward selling and supporting these customers. In addition,
      we will continue to offer some of our VoIP products and services to telephone
      service providers.





*System
      Integrators and Original Equipment Manufacturers*





Our
      system integrator and OEM customers sell our products under their own name
      or
      incorporate our products as a component of their systems. We seek to be
      responsive to the needs of these customers by providing on-time delivery of
      high-quality, reliable, cost-effective products with strong engineering and
      sales support. We believe many of these customers also appreciate the
      improvement in their products' image due to use of a Zoom or Hayes brand
      modem.




7





**Sales,
      Marketing and Support**





Our
      sales, marketing, and support are primarily managed from our headquarters in
      Boston, Massachusetts. In North America we sell our Zoom, Hayes, Global Village,
      and private-label dial-up modem products through Zoom's sales force and through
      commissioned independent sales representatives managed and supported by our
      own
      staff. Most service providers are serviced by Zoom's sales force. North American
      technical support is primarily handled from our Boston headquarters and from
      our
      technical support office in Boca Raton, Florida. We also maintain a sales,
      support, and logistics office in the United Kingdom for the UK and a number
      of
      other European countries.





We
      believe that Zoom, Hayes, and Global Village are widely recognized brand names.
      We build upon our brand equity in a variety of ways, including cooperative
      advertising, product packaging, Web advertising, trade shows, and public
      relations.





We
      attempt to develop quality products that are user-friendly and require minimal
      support. We typically support our claims of quality with product warranties
      of
      one to seven years, depending upon the product. To address the needs of those
      end-users of our products who require assistance, we have our own staff of
      technical specialists who currently provide telephone support six days per
      week.
      Our technical support specialists also maintain a significant Internet support
      facility that includes email, firmware and software downloads, and the
      SmartFactsTM Q&A search engine. In 2001 we expanded our European technical
      support to enable users in other countries to access support in languages other
      than English. This support is generally provided by our support staff in Boston
      and Florida.





**Research
      and Development**





Our
      research and development efforts are focused on developing new communications
      network access products and VoIP services, further enhancing the capabilities
      of
      existing products, and reducing production costs. We have developed close
      collaborative relationships with certain of our OEM customers and component
      suppliers. We work with these partners and other sources to identify and respond
      to emerging technologies and market trends by developing products that address
      these trends. In addition, we purchase modems and other chipsets that
      incorporate sophisticated technology from third parties, thereby eliminating
      the
      need for us to develop this technology in-house. As of December 31, 2006 we
      had
      14 employees engaged primarily in research and development. Our research and
      development team performs electronics hardware design and layout, mechanical
      design, prototype construction and testing, component specification, firmware
      and software development, VoIP service development, product testing, foreign
      and
      domestic regulatory approval efforts, end-user and internal documentation,
      and
      third-party software selection and testing.





During
      2004, 2005, and 2006 we expended $2.9 million, $2.7 million, and $2.2 million
      respectively on research and development activities.





**Manufacturing
      and Suppliers**





Our
      products are currently designed for high-volume automated assembly to help
      assure reduced costs, rapid market entry, short lead times, and reliability.
      High-volume assembly typically occurs in China, Taiwan, or Korea. Our contract
      manufacturers and original design manufacturers typically obtain some or all
      of
      the material required to assemble the products based upon a Zoom Technologies
      Approved Vendor List and Parts List. Our manufacturers typically insert parts
      onto the printed circuit board, with most parts automatically inserted by
      machine, solder the circuit board, and in-circuit test the completed assemblies.
      Functional test and packaging are sometimes performed by the contract
      manufacturer. For the United States and many other markets, functional test
      and
      packaging are more commonly performed at our manufacturing facilities in North
      America, allowing us to tailor the packaging and its contents for our customers
      immediately before shipping. We also perform circuit design, circuit board
      layout, and strategic component sourcing at our North American facility.
      Wherever the product is built, our quality systems are used to help assure
      that
      the product meets our specifications.





In
      late
      2006 we moved our North American manufacturing facility from Boston,
      Massachusetts to Tijuana, Mexico. This was a highly challenging move, since
      it
      dramatically changed our personnel, facilities, infrastructure, and logistics.
      The reason we made the move was to reduce our personnel cost, facilities cost,
      and the costs associated with shipping from Asia to North America. This move
      caused production delays during the latter part of 2006, and these delays forced
      us to incur high costs for air freight. While we continue to experience
      challenges associated with the Tijuana facility, it is running fairly smoothly
      now and we are cautiously optimistic that this facility will lower our future
      cost of goods.





We
      usually use one primary manufacturer for a given design. We sometimes maintain
      back-up production tooling at a second manufacturer for our highest-volume
      products. Our manufacturers are normally adequate to meet reasonable and
      properly planned production needs; but a fire, natural calamity, strike,
      financial problem, or other significant event at an assembler's facility could
      adversely affect our shipments and revenues. Currently a substantial percentage
      of our manufacturing is performed by SameTime Electronics ("SameTime"). The
      loss
      of these services or a material adverse change in SameTime’s business or in our
      relationship could materially and adversely harm our business.




8





Our
      products include a large number of parts, most of which are available from
      multiple sources with varying lead times. However, most of our products include
      a sole-sourced chipset as the most critical component of the product. We
      currently buy dial-up modem chipsets exclusively from two high-volume dial-up
      modem chipset manufacturers, Conexant Systems, Inc. and Agere Systems Inc.
      We
      also buy the majority of our DSL and cable modem chipsets from Conexant. We
      also
      purchase DSL chipsets from Ikanos, a company that purchased the DSL business
      of
      Analog Devices. We believe Conexant, Agere, and Ikanos have significant
      resources for semiconductor design and production, analog and digital signal
      processing, communications firmware development, and application sales and
      support. Integrated circuit product areas covered by these companies together
      include dial-up modems, DSL modems, cable modems, wireless networking, home
      phone line networking, routers, and gateways. Some of our chipset suppliers
      have
      provided us certain concessions and incentives, such as reduced prices or free
      chipsets, if we purchased or agreed to purchase a certain dollar amount of
      products from these suppliers.





We
      have
      experienced delays in receiving shipments of modem chipsets in the past, and
      we
      may experience such delays in the future. Moreover, we cannot assure that a
      chipset supplier will, in the future, sell chipsets to us in quantities
      sufficient to meet our needs or that we will purchase the specified dollar
      amount of products necessary to receive concessions and incentives from a
      chipset supplier. An interruption in a chipset supplier's ability to deliver
      chipsets, a failure of our suppliers to produce chipset enhancements or new
      chipsets on a timely basis and at competitive prices, a material increase in
      the
      price of the chipsets, our failure to purchase a specified dollar amount of
      products or any other adverse change in our relationship with modem component
      suppliers could have a material adverse effect on our results of
      operations.





We
      are
      also subject to price fluctuations in our cost of goods. Our costs may increase
      if component shortages develop or lead-times stretch out.





We
      are
      also subject to the RoHS and CEC rules discussed above, which affect component
      sourcing, product manufacturing, sales, and marketing.





**Competition**





The
      communications network access industry is intensely competitive and
      characterized by aggressive pricing practices, continually changing customer
      demand patterns and rapid technological advances and emerging industry
      standards. These characteristics result in frequent introductions of new
      products with added capabilities and features, and continuous improvements
      in
      the relative functionality and price of modems and other PC communications
      products. Our operating results and our ability to compete could be adversely
      affected if we are unable to:





·
            successfully
                and accurately anticipate customer
                demand;


·
            manage
                our product transitions, inventory levels, and manufacturing processes
                efficiently;


·
            distribute
                or introduce our products quickly in response to customer demand
                and
                technological advances;


·
            differentiate
                our products from those of our competitors;
                or


·
            otherwise
                compete successfully in the markets for our
                products.





Some
      of
      our primary competitors by product group include the following:





·
            **DSL
                modem competitors:**2Wire, 3Com, Actiontec, Airties, Asus, Aztech, Cisco Systems (Linksys
                division), D-Link, Netgear, Netopia, Sagem, Siemens (formerly Efficient
                Networks), Thomson, US Robotics, Westell, Xavi, and ZyXEL
                Communications.


·
            **Dial-up
                modem competitors:**Best Data, Creative Labs, Lite-On, Sitecom, and US
                Robotics.


·
            **Cable
                modem competitors:**Arris
                Systems, Cisco Systems (Linksys and Scientific Atlanta divisions),
                D-Link,
                Hon Hai Network Systems (formerly Ambit Microsystems), Motorola,
                Netgear,
                SMC Networks, Terrayon, and Thomson


·
            **VoIP
                hardware competitors:**Cisco Systems (Linksys division), Digium, D-Link, Draytek, Grandstream,
                Mediatrix, Snom, Zyxel, and 8x8.





Many
      of
      our competitors and potential competitors have more extensive financial,
      engineering, product development, manufacturing, and marketing resources than
      we
      do.





The
      principal competitive factors in our industry include the
      following:


·
              product
                  performance, features, reliability and quality of
                  service;




9


·
              price;
 ·
              brand
                  image;
 ·
              product
                  availability and lead times;
 ·
              size
                  and stability of operations;
 ·
              breadth
                  of product line and shelf space;
 ·
              sales
                  and distribution capability;
 ·
              technical
                  support and service;
 ·
              product
                  documentation and product warranties;
 ·
              relationships
                  with providers of broadband access services;
                  and
 ·
              compliance
                  with industry standards.


We
      believe we are able to provide a competitive mix of the above factors for
      dial-up modems, particularly when they are sold through retailers, computer
      product distributors, and small to medium sized Internet service providers
      and
      system integrators. We are less successful in selling directly to large
      telephone companies and other large providers of broadband access
      services.





DSL
      and
      cable modems transmit data at significantly faster speeds than dial-up modems,
      which still account for a significant portion of our revenues. DSL and cable,
      however, typically require a more expensive Internet access service. In
      addition, the use of DSL and cable modems is currently impeded by a number
      of
      technical and infrastructure limitations. We began shipping both cable and
      DSL
      modems in the year 2000. We have had some success in selling to smaller phone
      companies and to Internet service providers, but we have not sold significant
      quantities to large phone companies or to large cable service providers. We
      believe a small fraction of new US cable modem placements in 2006 were sold
      at
      retail, and an even lower percentage were sold through retailers in most other
      countries. DSL had even less success at retail in the U.S. Some European
      countries, however, sell significant volumes of DSL modems through retailers.
      In
      the U.K., for instance, this has resulted in Zoom placing DSL modem models
      into
      retailer Dixons Store Group.





Successfully
      penetrating the broadband modem market presents a number of challenges,
      including:





·
            The
                current limited retail market for broadband
                modems;


·
            The
                relatively small number of cable, telecommunications and Internet
                service
                providers that make up the majority of the market for broadband
                modems;


·
            The
                significant bargaining power of these large volume
                purchasers;


·
            The
                time-consuming, expensive and uncertain approval processes of the
                various
                cable and DSL service providers; and


·
            The
                strong relationships with service providers enjoyed by some incumbent
                equipment providers, including Motorola and Cisco Systems for cable
                modems.





The
      use
      of the Internet to provide voice communications services is a relatively recent
      market development. A substantial number of companies have emerged to provide
      VoIP products and services, and many of these companies have more extensive
      financial, engineering, product development, and marketing resources than we
      do.
      The principal competitive factors in the VoIP market include: price, brand
      recognition, service and support, features, distribution, and reliability.
      Competitors for our current VoIP hardware products are listed above. Competitors
      for our Skype VoIP products will include a large number of companies worldwide,
      including Actiontec, Cisco Systems (Linksys division), D-Link, Motorola,
      Sennheiser, TeleVoIP, and U.S. Robotics.





Competitors
      for our VoIP service include AT&T, iConnectHere, Net2Phone, Voicepulse,
      Vonage and 8x8, as well as incumbent telephone carriers and other providers
      of
      traditional telephone service. Many of our competitors have greater name
      recognition and resources than we have and may be better positioned to more
      aggressively develop, promote and sell their products, including by offering
      more attractive pricing policies and bundled service arrangements. In addition,
      if telecommunications rates continue to decrease, any competitive pricing
      advantage of our services may be diminished or eliminated. We cannot assure
      that
      we will be able to compete effectively.





**Intellectual
      Property Rights**





We
      rely
      primarily on a combination of copyrights, trademarks, trade secrets and patents
      to protect our proprietary rights. We have trademarks and copyrights for our
      firmware (software on a chip), printed circuit board artwork, instructions,
      packaging, and literature. We also have nine patents. The patents that have
      been
      issued expire between 2011 and 2015. We cannot assure that any patent
      application will be granted or that any patent obtained will provide protection
      or be of commercial benefit to us, or that the validity of a patent will not
      be
      challenged. Moreover, we cannot assure that our means of protecting our
      proprietary rights will be adequate or that our competitors will not
      independently develop comparable or superior technologies.




10





We
      license certain technologies used in our products, typically rights to bundled
      software, on a non-exclusive basis. In addition we purchase chipsets that
      incorporate sophisticated technology. We have received, and may receive in
      the
      future, infringement claims from third parties relating to our products and
      technologies. We investigate the validity of these claims and, if we believe
      the
      claims have merit, we respond through licensing or other appropriate actions.
      Certain of these past claims have related to technology included in modem
      chipsets. We forwarded these claims to the appropriate vendor. If we or our
      component manufacturers were unable to license necessary technology on a
      cost-effective basis, we 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. Where possible we attempt to receive patent indemnification from
      chipset suppliers and other appropriate suppliers, but the extent of this
      coverage varies and enforcement of this indemnification may be difficult and
      costly.





**Government
      Regulation**





*Regulatory
      Approvals, Certifications and Other Industry Standards*





Our
      modems and related products sold in the U.S are required to meet United States
      government regulations, including regulations of the United States Federal
      Communications Commission, known as the FCC, which regulates equipment, such
      as
      modems, that connects to the public telephone network. The FCC also regulates
      the electromagnetic radiation and susceptibility of communications equipment.
      In
      addition, in order for our broadband products to be qualified for use with
      a
      particular broadband Internet service, we are often required to obtain approvals
      and certifications from the actual cable, telephone or Internet service provider
      and from CableLabs® for cable modems. In addition to U.S. regulations, many of
      our products sold abroad require us to obtain specific regulatory approvals
      from
      foreign regulatory agencies for matters such as electrical safety,
      country-specific telecommunications equipment requirements, and electromagnetic
      radiation and susceptibility requirements. We submit products to accredited
      testing laboratories and, when required, to specific foreign regulatory
      agencies, to receive approvals for our products based on the test standards
      appropriate to the target markets for a given product. We expect to continue
      to
      seek and receive approvals for new products to allow us to reach a large number
      of countries throughout the world, including countries in the Americas, Europe,
      Asia, and Africa. The regulatory process can be time-consuming and can require
      the expenditure of substantial resources. We cannot assure that the FCC or
      foreign regulatory agencies will grant the requisite approvals for any of our
      products on a timely basis, if at all.





United
      States and foreign regulations regarding the manufacture and sale of electronics
      devices are subject to change. On July 1, 2006 changes were implemented by
      the
      European Union to reduce the use of hazardous materials, such as lead, in
      electronic equipment. As discussed above, the implementation of these
      requirements caused Zoom and other electronics companies to change or
      discontinue many of its European products. As discussed above, the California
      Energy Commission’s Appliance Efficiency Regulations will affect the power cube
      supplied with some of Zoom’s US products.





In
      addition to reliability, quality and content standards, the market acceptance
      of
      our products and services is dependent upon the adoption of industry standards
      so that products from multiple manufacturers are able to communicate with each
      other. Our products and services, particularly our VoIP products and services,
      rely heavily on a variety of communication, network and voice compression
      standards to interoperate with other vendors' equipment. There is currently
      a
      lack of agreement among industry leaders about which standard should be used
      for
      a particular VoIP application, and about the definition of the standards
      themselves. There is significant and growing consensus to use SIP for VoIP
      telephony, but there are important exceptions. One exception is Skype, which
      uses a proprietary protocol. Another exception is Packet Cable, which is popular
      with cable service providers. Another complication is that some VoIP services
      continue to evolve. The failure of our products and services to comply with
      various existing and evolving standards could delay or interrupt volume
      production of our VoIP telephony or other new products and services, expose
      us
      to fines or other imposed penalties, or adversely affect the perception and
      adoption rates of our products and services, any of which could harm our
      business.





*Internet
      Telephony Services*





The
      use
      of the Internet and private IP networks to provide VoIP services is a relatively
      recent development. Although providing such services is currently permitted
      and
      largely unregulated within the U.S., several foreign governments have adopted
      laws and regulations that could restrict or prohibit the providing of VoIP
      services. More aggressive domestic or international regulation of the Internet
      in general, and Internet telephony providers and services specifically, may
      adversely affect our ability to introduce and market our VoIP services and
      products successfully.




11





Our
      ability to provide VoIP communications services on the terms we currently
      provide arise in large part from the fact VoIP services are not currently
      subject to the same regulation as traditional telephony. Because these services
      are not currently regulated to the same extent as traditional telephony, VoIP
      providers can currently avoid paying charges that traditional telephone
      companies must pay. Local exchange carriers are lobbying the FCC and the states
      to regulate VoIP on the same basis as traditional telephone services. The FCC
      and several states are examining this issue. If the FCC or any state determines
      to regulate VoIP, they may impose surcharges, taxes or additional regulations
      upon providers of Internet telephony. These surcharges could include access
      charges payable to local exchange carriers to carry and terminate traffic,
      contributions to the Universal Service Fund (USF) or other charges. Regulations
      requiring compliance with the Communications Assistance for Law Enforcement
      Act
      (CALEA), or provision of the same type of 911 services as required for
      traditional telecommunications providers could also place a significant
      financial burden on us depending on the technical changes required to
      accommodate the requirements. The imposition of any such additional fees,
      charges, taxes and regulations on IP communications services could materially
      increase our costs, require us to modify our service, delay our products, or
      impair our ability to offer competitive pricing.





In
      many
      countries outside the U.S. in which we operate or our services are sold, the
      status of the laws that may relate to our VoIP services is unclear. We cannot
      be
      certain that we will be able to comply with existing or future requirements,
      or
      that we will be able to continue to be in compliance with any such requirements.
      Our failure to comply with these requirements could have a material adverse
      affect on our ability to continue to offer our VoIP service in these
      jurisdictions.





*Regulation
      of the Internet*





In
      addition to regulations addressing our modems and related products and our
      Internet telephony services, other regulatory issues relating to the Internet
      in
      general could affect our ability to provide our services. Congress has adopted
      legislation that regulates certain aspects of the Internet, including online
      content, user privacy, taxation, liability for third-party activities and
      jurisdiction. In addition, a number of initiatives pending in Congress and
      state
      legislatures would prohibit or restrict advertising or sale of certain products
      and services on the Internet, which may have the effect of raising the cost
      of
      doing business on the Internet generally.





Federal,
      state, local and foreign governmental organizations are considering other
      legislative and regulatory proposals that would regulate the Internet. We cannot
      predict whether new taxes will be imposed on our services, and depending on
      the
      type of taxes imposed, whether and how our services would be affected
      thereafter. Increased regulation of the Internet may decrease its growth and
      hinder technological development, which may negatively impact the cost of doing
      business via the Internet or otherwise harm our business.





**Backlog**





Our
      backlog as of March 7, 2007 was $0.7 million, and on March 8, 2006 was $0.7
      million. Many orders included in backlog may be canceled or rescheduled by
      customers without significant penalty. Backlog as of any particular date should
      not be relied upon as indicative of our net sales for any future
      period.





**Employees**





As
      of
      December 31, 2006 we had 69 full-time employees compared to 127 as of December
      31, 2005. Of the decline of 58 employees, 47 were related to the outsourcing
      of
      our final assembly manufacturing operation to Mexico. The manufacturing
      personnel in Mexico are employees of a third-party maquilidora and are not
      included in our 2006 headcount. Of the 2006 total, 14 were engaged in research
      and development, 19 were involved in purchasing, assembly, packaging, shipping
      and quality control, 24 were engaged in sales, marketing and technical support,
      and the remaining 12 performed accounting, administrative, management
      information systems, and executive functions. None of our employees is
      represented by a labor union.




12





**Our
      Executive Officers**





The
      names
      and biographical information of our current executive officers are set forth
      below:





**Name**
            
            **Age**
            
            **Position
                with Zoom**Frank
                B. Manning
            
            58
            
            Chief
                Executive Officer, President and Chairman of the BoardPeter
                R. Kramer
            
            55
            
            Executive
                Vice President and DirectorRobert
                A. Crist
            
            63
            
            Vice
                President of Finance and Chief Financial OfficerTerry
                J. Manning
            
            55
            
            Vice
                President of Sales and MarketingDean
                N. Panagopoulos
            
            49
            
            Vice
                President of Network ProductsDeena
                Randall
            
            53
            
            Vice
                President of Operations





***Frank
      B. Manning*** is a
      co-founder of our company. Mr. Manning has been our president, chief executive
      officer, and a director since May 1977. He has served as our 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. From 1998 through late 2006 Mr. Manning was also a director
      of the Massachusetts Technology Development Corporation, a public purpose
      venture capital firm that invests in seed and early-stage technology companies
      in Massachusetts. Mr. Manning is the brother of Terry Manning, our vice
      president of sales and marketing.





***Peter
      R. Kramer*** is a
      co-founder of our company. Mr. Kramer has been our executive vice president
      and
      a director 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
      us in July 1997 as vice president of finance and chief financial officer. From
      April 1992 until joining us, Mr. Crist served in various capacities at Wang
      Laboratories, Inc., (now Getronics), 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, including corporate
      controller, corporate director of business planning and analysis, corporate
      manufacturing and engineering controller, and CFO for several business units.
      Mr. Crist earned his BS degree from Pennsylvania State University and he earned
      his MBA from the University of Rochester in 1971.





***Terry
      J. Manning*** joined
      us in 1984 and served as corporate communications director from 1984 until
      1989,
      when he became the director of our 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
      us in February 1995 as director of information systems. In July 2000 Mr.
      Panagopoulos was promoted to the position of vice president of network products.
      From 1993 to 1995, Mr. Panagopoulos worked as an independent consultant. From
      1991 to 1993, Mr. Panagopoulos served as director of technical services for
      Ziff
      Information Services, a major outsourcer of computing services. He attended
      the
      Massachusetts Institute of Technology from 1975 to 1978 and earned his BS degree
      in Information Systems from Northeastern University in 1983.





***Deena
      Randall*** joined
      us
      in 1977 as our first employee. Ms. Randall has served in various senior
      positions within our organization and has directed our operations since 1989.
      Ms. Randall earned her BA degree from Eastern Nazarene College in
      1975.





**ITEM
      1A. - RISK FACTORS**





The
      disclosure under the heading “Risk Factors” contained in Item 7 of this Annual
      Report on Form 10-K is incorporated by reference in this Item 1A.





**ITEM
      1B. - UNRESOLVED STAFF COMMENTS**





None.





**ITEM
      2 - PROPERTIES**





Our
      corporate headquarters are located at 201 and 207 South Street, Boston,
      Massachusetts. In December 2006 we sold our headquarters buildings to a third
      party, with a two-year lease-back of approximately 25,000 square feet of the
      62,000 square foot facility. Our net sale proceeds were approximately $7.7
      million of which approximately $3.6 million was repaid to our mortgage holder,
      eliminating the mortgage debt on our balance sheet ended December 31, 2006.




13





In
      August
      1996 we entered into a five-year lease for a 77,428 square foot manufacturing
      and warehousing facility at 645 Summer Street, Boston, MA. On February 28,
      2001
      we exercised our option to extend this lease for an additional five years.
      The
      term of this lease expired in August 2006 and we began the planned move of
      our
      manufacturing and warehousing facility to Tijuana, Mexico. In August 2006 we
      signed a lease for a 35,575 square foot manufacturing and warehousing facility
      in Tijuana, Mexico with an initial lease term from October 2006 to May 2007,
      with five two-year options thereafter. In February, 2007 we renegotiated the
      first renewal term and signed a one-year extension starting in May 2007, with
      five two-year options thereafter. In the event this lease is not further
      extended, we believe we will be able to find alternative space that is suitable
      and adequate for our manufacturing and warehousing operations.





In
      September 2005 we entered into a two year office lease consisting of 2,400
      square feet at 2 Kings Road, Fleet, Hants, U.K for our U.K. sales
      office.





In
      September 2002 we entered into a five-year lease, as a tenant, for approximately
      3,500 square feet at 950 Broken Sound Parkway NW, Boca Raton, Florida. We
      primarily use this facility as a technical support facility.





**ITEM
      3 - LEGAL PROCEEDINGS**





No
      material litigation.





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





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





**PART
      II**





**ITEM
      5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY SECURITIES**





Our
      common stock trades on the Nasdaq Capital 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 Capital
      Market.





**Fiscal
                Year Ended December 31, 2006**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            1.75
            
            $
            1.28Second
                Quarter
            
            $
            1.51
            
            $
            1.05Third
                Quarter
            
            $
            1.14
            
            $
            0.91Fourth
                Quarter
            
            $
            2.80
            
            $
            1.00**Fiscal
                Year Ended December 31, 2005**
            
            
            **High**
            
            
            **Low**First
                Quarter
            
            $
            3.55
            
            $
            2.67Second
                Quarter
            
            $
            3.00
            
            $
            2.07Third
                Quarter
            
            $
            3.08
            
            $
            1.98Fourth
                Quarter
            
            $
            2.10
            
            $
            1.40





As
      of
      March 14, 2007, there were 9,346,966 shares of our common stock outstanding
      and
      314 holders of record of our common stock.





**Recent
      Sales of Unregistered Securities**





We
      did
      not sell any unregistered securities during the fourth quarter of
      2006.





**Dividend
      Policy**





We
      have
      never declared or paid cash dividends on our capital stock and do not plan
      to
      pay any cash dividends in the foreseeable future. Our current policy is to
      retain all of our earnings to finance future growth.




14





**Repurchases
      by the Company**





During
      2006 we did not repurchase any shares of our common stock on our own behalf
      or
      for any affiliated purchaser.





**Equity
      Compensation Plan Information**





The
      information required by this Item 5 regarding securities authorized for issuance
      under our equity compensation plans is set forth in Part III, Item 12 of this
      report.





**Performance
      Graph**





The
      following graph compares the annual change in Zoom’s cumulative stockholder
      return for the five (5) year period from December 31, 2001 through December
      31,
      2006 based on the market price of Zoom’s common stock with the cumulative total
      return on the Standard & Poor’s 500 Stock Index and the Standard &
Poor’s Information Technology Composite Index for that period.





performancegraph **





The
      Performance Graph assumes the investment of $100 on December 31, 2001 in Zoom’s
      Common Stock, the Standard & Poor’s 500 Stock Index, and the Standard &
Poor’s Information Technology Composite Index, and the reinvestment of any and
      all dividends




15





**ITEM
      6 - SELECTED FINANCIAL DATA**





The
      following data has been derived from our consolidated financial statements.
      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.


**Years
                  Ended December 31,****2002**
              
              **2003**
              
              **2004**
              
              **2005**
              
              **2006****(In
                  thousands except per share amounts)****Statement
                  of Operations Data:**Net
                  sales
              
              $
              37,274
              
              $
              33,335
              
              $
              31,412
              
              $
              25,551
              
              $
              18,322Cost
                  of goods sold
              
              
              27,937
              
              
              23,120
              
              
              23,346
              
              
              20,885
              
              
              15,720Gross
                  profit
              
              
              9,337
              
              
              10,215
              
              
              8,066
              
              
              4,666
              
              
              2,602Operating
                  expense:Selling
              
              
              5,848
              
              
              5,271
              
              
              4,800
              
              
              4,059
              
              
              3,631General
                  and administrative
              
              
              3,405
              
              
              3,118
              
              
              3,620
              
              
              3,553
              
              
              2,847Research
                  and development
              
              
              3,527
              
              
              2,767
              
              
              2,927
              
              
              2,699
              
              
              2,15812,780
              
              
              11,156
              
              
              11,347
              
              
              10,311
              
              
              8,636Operating
                  profit (loss) before gain on sale of real estate
              
              
              (
                  3,443
              )
              
              (
                  941
              )
              
              (
                  3,281
              )
              
              (
                  5,645
              )
              
              (
                  6,034
              )Gain
                  on sale of real estate
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,752Operating
                  profit (loss)
              
              
              (
                  3,443
              )
              
              (
                  941
              )
              
              (
                  3,281
              )
              
              (
                  5,645
              )
              
              (
                  1,282
              )Other
                  income (expense):Gain
                  on sale of investment in InterMute, Inc.
              
              
              -
              
              
              -
              
              
              -
              
              
              3,496
              
              
              2,105Other,
                  net
              
              
              67
              
              
              273
              
              
              209
              
              
              41
              
              
              153Total
                  other income (expense)
              
              
              67
              
              
              273
              
              
              209
              
              
              3,537
              
              
              2,258Income
                  (loss) before income taxes
              
              
              (
                  3,376
              )
              
              (
                  668
              )
              
              (
                  3,072
              )
              
              (
                  2,108
              )
              
              977Income
                  tax expense (benefit)
              
              
              2,015
              
              
              -
              
              
              -
              
              
              9
              
              
              (53
              )Income
                  (loss) before extraordinary item
              
              
              (
                  5,391
              )
              
              (
                  668
              )
              
              (
                  3,072
              )
              
              (
                  2,117
              )
              
              1,030Extraordinary
                  gain on elimination of Negative goodwill
              
              
              255
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss)
              
              
              ($
                  5,136
              )
              
              ($
                  668
              )
              
              ($
                  3,072
              )
              
              ($
                  2,117
              )
              $
              1,030Earnings
                  (loss) per common and common equivalent share:Loss
                  before extraordinary item:Basic
                  and diluted
              
              
              ($
                  0.68
              )
              
              ($
                  0.08
              )
              
              ($
                  0.36
              )
              
              ($
                  0.23
              )
              $
              0.11Extraordinary
                  gain on elimination of negative goodwill
              
              
              0.03
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss):Basic
              
              
              ($
                  0.65
              )
              
              ($
                  0.08
              )
              
              ($
                  0.36
              )
              
              ($
                  0.23
              )
              $
              0.11Diluted
              
              
              ($
                  0.65
              )
              
              ($
                  0.08
              )
              
              ($
                  0.36
              )
              
              ($
                  0.23
              )
              $
              0.11Weighted
                  average common and Common equivalent shares:Basic
              
              
              7,861
              
              
              7,883
              
              
              8,590
              
              
              9,206
              
              
              9,347Diluted
              
              
              7,861
              
              
              7,883
              
              
              8,590
              
              
              9,206
              
              
              9,349




**Years
                Ended December 31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006****(In
                thousands)****Balance
                Sheet Data:**Working
                capital
            
            $
            15,341
            
            $
            15,647
            
            $
            14,837
            
            $
            8,267
            
            $
            12,430Total
                assets
            
            
            22,633
            
            
            21,974
            
            
            21,052
            
            
            19,687
            
            
            16,249Long-term
                obligations excluding current portion
            
            
            5,342
            
            
            5,096
            
            
            4,872
            
            
            -
            
            
            -Total
                stockholders' equity
            
            $
            13,485
            
            $
            13,470
            
            $
            12,668
            
            $
            10,868
            
            $
            12,322





16





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





*The
      following discussion and analysis should be read in conjunction with the
      "Selected Financial Data" and the consolidated financial statements included
      elsewhere in this report and the information described under the caption "Risk
      Factors" below* *.
      Readers should also be cautioned that results of any reported period are often
      not indicative of results for any future period.*




**Overview**




We
      derive
      our net sales primarily from sales of Internet-related communication products,
      principally broadband and dial-up modems and other communication products,
      to
      retailers, distributors, Internet Service Providers and Original Equipment
      Manufacturers. We sell our products through a direct sales force and through
      independent sales agents. Our employees are primarily located at our
      headquarters in Boston, Massachusetts, our support office in Boca Raton,
      Florida, our sales office in the United Kingdom, and our new production facility
      in Tijuana, Mexico. We typically design our hardware products, though we do
      sometimes use another company’s design if it meets our requirements. Electronic
      assembly and testing of the Company’s products in accordance with our
      specifications is typically done in China or Taiwan.




For
      many
      years we performed most of the final assembly, test, packaging, warehousing
      and
      distribution at a production and warehouse facility on Summer Street in Boston,
      Massachusetts, which has also engaged in firmware programming for some products.
      On June 30, 2006 we announced our plans to move most of our Summer Street
      operations to a dedicated facility in Tijuana, Mexico commencing approximately
      September 1, 2006, and we have implemented that plan. Our lease for our Summer
      Street facility expired in August 2006, and we completely vacated the facility
      on September 30, 2006.





Since
      1983 our headquarters has been near South Station in downtown Boston. Zoom
      has
      owned two adjacent buildings which connect on most floors, and which house
      our
      entire Boston staff. In December 2006 we sold our headquarters buildings to
      a
      third party, with a two-year lease-back of approximately 25,000 square feet
      of
      the 62,000 square foot facility. Our net sale proceeds were approximately $7.7
      million of which approximately $3.6 million was repaid to our mortgage holder,
      eliminating the mortgage debt from our balance sheet.




For
      many
      years we derived a majority of our net sales from the retail after-market sale
      of dial-up modems to customers seeking to add or upgrade a modem for their
      personal computers. In recent years the size of this market and our sales to
      this market have declined, as personal computer manufacturers have incorporated
      a modem as a built-in component in most consumer personal computers and as
      increasing numbers of consumers world-wide have switched to broadband Internet
      access. The consensus of communications industry analysts is that after-market
      sales of dial-up modems will probably continue to decline. There is also
      consensus among industry analysts that the installed base for broadband Internet
      connection devices, such as cable modems and DSL modems, will grow rapidly
      during the decade. In response to increased and forecasted worldwide demand
      for
      faster connection speeds and increased modem functionality, we have invested
      and
      continue to invest resources to advance our product line of broadband modems,
      both DSL modems and cable modems.




We
      continually seek to improve our product designs and manufacturing approach
      in
      order to improve product performance and reduce our costs. We pursue a strategy
      of outsourcing rather than internally developing our modem chipsets, which
      are
      application-specific integrated circuits that form the technology base for
      our
      modems. By outsourcing the chipset technology, we are able to concentrate our
      research and development resources on modem system design, leverage the
      extensive research and development capabilities of our chipset suppliers, and
      reduce our development time and associated costs and risks. As a result of
      this
      approach, we are able to quickly develop new products while maintaining a
      relatively low level of research and development expense as a percentage of
      net
      sales. We also outsource aspects of our manufacturing to contract manufacturers
      as a means of reducing our costs of production, and to provide us with greater
      flexibility in our production capacity.




Over
      the
      past several years our net sales have declined. In response to declining sales
      volume, we have cut costs by reducing staffing and some overhead costs. Our
      total headcount of full-time employees, including temporary workers, went from
      127 on December 31, 2005 to 69 on December 31, 2006. Of the decline of 58
      employees, 47 were related to the outsourcing of our final assembly
      manufacturing operation to Mexico. The manufacturing personnel in Mexico are
      not
      included in our 2006 headcount. Of the 69 employees on December 31, 2006, 14
      were engaged in research and development, 19 were involved in purchasing,
      assembly, packaging, shipping and quality control, 24 were engaged in sales,
      marketing and technical support, and the remaining 12 performed accounting,
      administrative, management information systems, and executive functions.




17




Generally
      our gross margin for a given product depends on a number of factors including
      the type of customer to whom we are selling. The gross margin for retailers
      tends to be higher than for some of our other customers; but the sales, support,
      and overhead costs associated with retailers also tend to be higher. Zoom’s
      sales to certain countries, including Turkey, Vietnam, and Saudi Arabia, are
      currently handled by a single master distributor for each country who handles
      the support and marketing costs within the country. Gross margin for sales
      to
      these master distributors tends to be low, since lower pricing to these
      distributors helps them to cover the support and marketing costs for their
      country. Our gross margin for broadband modems tends to be lower than for
      dial-up modems for a number of reasons, including that retailers are currently
      a
      more significant channel for our dial-up modems than for our broadband modems,
      that a higher percentage of our DSL sales come from low-margin countries, and
      that there is stronger competition in the broadband market than in the dial-up
      market.




In
      2006
      our net sales were down 28.3% compared to 2005. The main reason for the sales
      decrease was the decline in DSL modem and dial-up modem sales. Until the second
      quarter of 2006 we had generally experienced growth in our DSL modem sales.
      Zoom
      has had a relatively high share of the small but growing DSL market in Turkey,
      but these sales have been declining. We attribute this decline to a number
      of
      factors including increased competition and actions by Turkish Telecom to
      dramatically increase their bundling of DSL modems with their service. We are
      seeing growth in some areas, including DSL sales to U.S. Internet Service
      Providers, and we are continuing our efforts to expand our DSL customer base
      and
      product line. Because of our significant customer concentration, however, our
      net sales and operating results have fluctuated and in the future could continue
      to fluctuate significantly due to changes in political or economic conditions
      or
      the loss, reduction of business, or less favorable terms for any of our
      significant customers.




Since
      1999 we had a minority interest in a privately held software company, InterMute,
      Inc. In June 2005 InterMute was acquired by Trend Micro Inc., a U.S. subsidiary
      of Trend Micro Japan. In connection with the acquisition, in June 2005 we
      received a payment of approximately $3.5 million which we recorded as a
      non-operating gain in our second quarter of 2005. We realized in cash an
      additional contingent gain of $869,750 during the quarter ended September 30,
      2006, representing our portion of an earnout payment paid by the buyer as a
      result of the achievement of a performance milestone. On November 11, 2006
      we
      received a second and final performance milestone payment, also of $869,750.
      In
      December 2006 we received a return of our escrow deposit of approximately
      $365,933. There will be no further payments from the sale of InterMute. Total
      net proceeds from the sale of our minority interest in InterMute were $5.6
      million, received over 2005 and 2006.





Our
      cash
      and cash equivalents balance at December 31, 2006 was $7.8 million, down from
      $9.1 million at December 31, 2005. This reduction was due primarily to our
      operating loss for the year, an increase in accounts receivable and a decrease
      in accounts payable, partially offset by net proceeds from the sale of our
      headquarters building, the receipt of proceeds from the sale of the Company's
      investment in InterMute, and the reduction of inventory.




**Critical
      Accounting Policies and Estimates**





Following
      is a discussion of what we view as our more significant accounting policies
      and
      estimates. As described below, management judgments and estimates must be made
      and used in connection with the preparation of our consolidated financial
      statements. We have identified areas where material differences could result
      in
      the amount and timing of our net sales, costs, and expenses for any period
      if we
      had made different judgments or used different estimates.




18




**Revenue
      (Net Sales) Recognition.** We
      primarily sell hardware products to our customers. The hardware products include
      dial-up modems, DSL modems, cable modems, voice over IP products, and wireless
      and wired networking equipment. We earn a small amount of royalty revenue that
      is included in our net sales, primarily from internet service providers. We
      generally do not sell software. We began selling services in 2004. We introduced
      our Global Village VoIP service in late 2004, but sales of those services to
      date have not been material.




We
      derive
      our net sales primarily from the sales of hardware products to four types of
      customers:





·
            computer
                peripherals retailers,




·
            computer
                product distributors,




·
            Internet
                service providers, and




·
            original
                equipment manufacturers (OEMs)




We
      recognize hardware net sales for our customers at the point when the customers
      take legal ownership of the delivered products. Legal ownership passes from
      Zoom
      to the customer based on the contractual FOB point specified in signed contracts
      and purchase orders, which are both used extensively. Many of our customer
      contracts or purchase orders specify FOB destination. We verify the delivery
      date on all significant FOB destination shipments made during the last 10
      business days of each quarter.




Our
      net
      sales of hardware include reductions resulting from certain events which are
      characteristic of the sales of hardware to retailers of computer peripherals.
      These events are product returns, certain sales and marketing incentives, price
      protection refunds, and consumer mail-in and in-store rebates. Each of these
      is
      accounted for as a reduction of net sales based on detailed management
      estimates, which are reconciled to actual customer or end-consumer credits
      on a
      monthly or quarterly basis.




Our
      2006
      VoIP service revenues were recorded as the end-user-customer consumed billable
      VoIP services. The end-user-customer became a service customer by electing
      to
      sign up for the Global Village billable service on the Internet. Zoom recorded
      revenue either when billable services were consumed or when a monthly flat-fee
      service was billed.




**Product
      Returns** .
      Products are returned by retail stores and distributors for inventory balancing,
      contractual stock rotation privileges, and warranty repair or replacements.
      We
      estimate the sales and cost value of expected future product returns of
      previously sold products. Our estimates for product returns are based on recent
      historical trends plus estimates for returns prompted by, among other things,
      announced stock rotations and announced customer store closings. Management
      reviews historical returns, current economic trends, and changes in customer
      demand and acceptance of our products when estimating sales return allowances.
      The estimate for future returns is recorded as a reserve against accounts
      receivable, a reduction in our net sales, and the corresponding change to
      inventory reserves and cost of sales. Product returns as a percentage of total
      shipments were 8.9% and 6.9%, respectively, for 2006 and 2005. The 2006 figure
      does not include the impact of the start of the consignment arrangement in
      2006
      at a major retailer customer.




**Price
      Protection Refunds.** We have
      a policy of offering price protection to certain of our retailer and distributor
      customers for some or all their inventory. Under the price protection policies,
      when we reduce our prices for a product, the customer receives a credit for
      the
      difference between the original purchase price and our reduced price for their
      unsold inventory of that product. Our estimates for price protection refunds
      are
      based on a detailed understanding and tracking by customer and by sales program.
      Estimated price protection refunds are recorded in the same period as the
      announcement of a pricing change. Information from customer inventory-on-hand
      reports or from direct communications with the customers is used to estimate
      the
      refund, which is recorded as a reduction of net sales and a reserve against
      accounts receivable. Reductions in our net sales due to price protection were
      $0.1 million in 2004, $0.2 million in 2005, and $0.1 million in 2006.




**Sales
      and Marketing Incentives** .
      Many of
      our retailer customers require sales and marketing support funding, usually
      set
      as a percentage of our sales in their stores. The incentives were reported
      as
      reductions in our net sales and were $1.3 million in 2004, $1.1 million in
      2005,
      and $0.8 million in 2006.




19




**Consumer
      Mail-In and In-Store Rebates** .
      Our
      estimates for consumer mail-in and in-store rebates are based on a detailed
      understanding and tracking by customer and sales program, supported by actual
      rebate claims processed by the rebate redemption centers plus an accrual for
      an
      estimated lag in processing at the redemption centers. The estimate for mail-in
      and in-store rebates is recorded as a reserve against accounts receivable and
      a
      reduction of net sales in the same period that the rebate obligation was
      triggered. Reductions in our net sales due to the consumer rebates were $1.4
      million in 2004, $0.8 million in 2005, and $0.7 million in 2006.




To
      ensure
      that the sales, discounts, and marketing incentives are recorded in the proper
      period, we perform extensive tracking and documenting by customer, by period,
      and by type of marketing event. This tracking includes reconciliation to the
      accounts receivable records for deductions taken by our customers for these
      discounts and incentives.





**Accounts
      Receivable Valuation** .
      We
      establish accounts receivable valuation allowances equal to the above-discussed
      net sales adjustments for estimates of product returns, price protection
      refunds, consumer rebates, and general bad debt reserves. These allowances
      are
      reduced as actual credits are issued to the customer's accounts. Our bad-debt
      write-offs were less than $0.1 million for 2006.




**Inventory
      Valuation and Cost of Goods Sold.** Inventory is valued on a standard cost basis where the material standards are
      periodically updated for current material pricing. Allowances for obsolete
      inventory are established by management based on usability reviews performed
      each quarter. Our allowances against the inventory of a particular product
      range
      from 0% to 100%, based on management's estimate of the probability that the
      material will not be consumed or that it will be sold below cost. In 2006 we
      recorded an additional $0.6 million charge for inventory reserves related to
      obsolete and slow-moving products.





**Valuation
      and Impairment of Deferred Tax Assets.** As part
      of the process of preparing our consolidated financial statements we estimate
      our income tax expense and deferred income tax position. This process involves
      the estimation of our actual current tax exposure together with assessing
      temporary differences resulting from differing treatment of items for tax and
      accounting purposes. These differences result in deferred tax assets and
      liabilities, which are included in our consolidated balance sheet. We then
      assess the likelihood that our deferred tax assets will be recovered from future
      taxable income. To the extent we believe that recovery is not likely, we
      establish a valuation allowance. Changes in the valuation allowance are relected
      in the statement of operations.





Significant
      management judgment is required in determining our provision for income taxes
      and any valuation allowances. We have recorded a 100% valuation allowance
      against our deferred income tax assets. It is management's estimate that, after
      considering all the available objective evidence, historical and prospective,
      with greater weight given to historical evidence, it is more likely than not
      that these assets will not be realized. If we establish a record of continuing
      profitability, at some point we will be required to reverse the valuation
      allowance and restore the deferred asset value to the balance sheet, recording
      an equal income tax benefit which will increase net income in that
      period(s).





On
      December 31, 2006 the Company had federal net operating loss carryforwards
      of
      approximately $32,570,000. These federal net operating losses are available
      to
      offset future taxable income, and are due to expire in years ranging from
      2018 to 2026. The Company had state net operating loss carryforwards of
      approximately $13,363,000. These state net operating losses are available to
      offset future taxable income, and are primarily due to expire in years ranging
      from 2007 to 2011.





**Valuation
      of Investment in Affiliates.** Since
      1999 the Company had a minority interest in a privately held software company,
      InterMute, Inc., which the Company had been accounting for under the equity
      method of accounting. The Company made its original investment in 1999, at
      the
      time of Intermute’s formation, and subsequently made additional investments.
      Under the equity method of accounting, the Company's investment was increased
      or
      decreased, not below zero, based upon the Company's proportionate share of
      the
      net earnings or losses of InterMute. As a result of the losses incurred by
      InterMute subsequent to the Company's investments, the Company's investment
      balance was reduced to zero during 2002. The Company discontinued applying
      the
      equity method when the investment was reduced to zero and did not provide for
      additional losses, as the Company did not guarantee obligations of the investee
      and was not committed to provide further financial support.




In
      June
      2005 InterMute was acquired by Trend Micro Inc., a U.S. subsidiary of Trend
      Micro Japan. In connection with the acquisition, in June 2005 the Company
      received a payment of approximately $3.5 million which was recorded as a
      non-operating gain in the Company’s second quarter of 2005. The Company realized
      in cash an additional contingent gain of $0.9 million during the quarter ended
      September 30, 2006, representing its portion of an earnout payment paid by
      the
      buyer as a result of the achievement of a performance milestone. On November
      11,
      2006 the Company received a second and final performance milestone payment,
      also
      of $0.9 million. In December 2006 the Company received a return of its escrow
      deposit of approximately $0.4 million. All of the payments were recorded as
      non-operating gains, a total of approximately $2.1 million in 2006. There will
      be no further payments from the sale of InterMute.  Total
      net
      proceeds from the sale of our minority interest in InterMute were $5.6 million,
      received over 2005 and 2006.




20





**Results
      of Operations**





The
      following table sets forth certain financial data as a percentage of net sales
      for the periods indicated:





**Years
                Ended December 31,****2004**
            
            **2005**
            
            **2006**Net
                sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of goods sold
            
            
            74.3
            
            
            81.7
            
            
            85.8Gross
                profit
            
            
            25.7
            
            
            18.3
            
            
            14.2Operating
                expense:Selling
            
            
            15.3
            
            
            15.9
            
            
            19.8General
                and administration
            
            
            11.5
            
            
            13.9
            
            
            15.5Research
                and development
            
            
            9.3
            
            
            10.6
            
            
            11.836.1
            
            
            40.4
            
            
            47.1Operating
                profit (loss) before sale of real estate
            
            
            (10.4
            )
            
            (22.1
            )
            
            (32.9
            )Gain
                on sale of real estate
            
            
            -
            
            
            -
            
            
            25.9Operating
                profit (loss)
            
            
            (10.4
            )
            
            (22.1
            )
            
            (
                7.0
            )Other
                income (expense):Gain
                on sale of investment in InterMute, Inc.
            
            
            -
            
            
            13.7
            
            
            11.5Other,
                net
            
            
            0.6
            
            
            0.1
            
            
            0.8Total
                other income (expense)
            
            
            0.6
            
            
            13.8
            
            
            12.3Loss
                before income taxes
            
            
            (9.8
            )
            
            (8.3
            )
            
            5.3Income
                tax expense (benefit)
            
            
            -
            
            
            -
            
            
            (
                0.3
            )Net
                income (loss)
            
            
            (9.8
            %)
            
            (8.3
            %)
            
            5.6
            %




**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**





The
      following is a discussion of the major categories of our consolidated statement
      of operations, comparing the financial results for the year ended December
      31,
      2006 with the year ended December 31, 2005.





**Net
      Sales.** Our
      total net sales declined year-over-year by $7.2 million or 28.3%, including
      a
      $1.2 million sales reduction resulting from our new consignment arrangement
      with
      a significant retailer customer. In 2006 we primarily generated our sales by
      selling dial-up and broadband modems via distributors, retailers, and Internet
      Service Providers. The dial-up modem market has continued to decline, and Zoom
      sales of dial-up modems declined $1.5 million due primarily to the new
      consignment arrangement as well as the decline of the dial-up modem market.
      Our
      DSL broadband modem category declined $5.5 million primarily as a result of:
      (i)
      a $4.2 million decrease of DSL sales to our Turkish distributor due to actions
      by Turkish Telecom which dramatically increased their bundling of DSL modems
      with their service offerings, (ii) the business failure in June 2005 of a major
      U.K. customer, Granville Technologies, Ltd., and (iii) reduced DSL sales to
      our
      distributor in Vietnam. Net sales in our other product sales categories, which
      included cable modems, cameras, ISDN modems, telephone dialers, and wireless
      networking equipment, declined 15.6% to $1.5 million in 2006 from $1.8 million
      in 2005. The following table illustrates this change in net sales.





**Year
                2005**
              **Sales
                $000**
            
            **Year
                2006**
              **Sales
                $000**
            
            **Change**
              **$000**
            
            **Change**
              **%**Dial-up
            
            $
            10,332
            
            $
            8,851
            
            
            ($
                1,481
            )
            
            (14.3
            %)DSL
            
            
            13,453
            
            
            7,981
            
            
            (5,472
            )
            
            (40.7
            %)Other
                Products
            
            
            1,766
            
            
            1,490
            
            
            (276
            )
            
            (15.6
            %)Total
                Net Sales
            
            $
            25,551
            
            $
            18,322
            
            
            ($7,229
            )
            
            (28.3
            %)





As
      shown
      in the table below our net sales in North America declined $1.3 million or
      11.2%, to $10.3 million in 2006 from $11.6 million in 2005, primarily the result
      of the $1.2 million sales reduction from our new consignment arrangement with
      a
      significant North American retailer customer. Our net sales in Turkey were
      $1.3
      million in 2006 compared to $5.6 million in 2005, a 75.8% decrease. The dramatic
      decline of our sales in Turkey resulted from decreased DSL sales to our Turkish
      distributor due to actions by Turkish Telecom which dramatically increased
      their
      bundling of DSL modems with their service offerings. This action significantly
      reduced the retail market for DSL modems in Turkey. Our net sales in the UK
      were
      $3.7 million in 2006 compared to $5.2 million in 2005, a 28.5% decline. The
      sales decline in North America and the UK primarily reflect our declining sales
      of dial-up modems. In addition, our UK sales were also reduced by the decision
      in the third quarter of 2005 of a large U.K retailer to discontinue carrying
      most of our DSL product line. Our net sales in all other countries were $3.0
      million in 2006 compared to $3.2 million in 2005, a 6.3% decline. The sales
      decline in all other countries was primarily due to declining sales of dial-up
      modems and DSL modems.




21





**Year
                2005**
              **Sales
                $000**
            
            **Year
                2006**
              **Sales
                $000**
            
            **Change**
              **$000**
            
            **Change**
              **%**North
                America
            
            $
            11,575
            
            $
            10,279
            
            
            ($1,296
            )
            
            (11.2
            %)Turkey
            
            
            5,608
            
            
            1,359
            
            
            (
                4,249
            )
            
            (75.8
            %)UK
            
            
            5,202
            
            
            3,717
            
            
            (1,485
            )
            
            (28.5
            %)All
                Other
            
            
            3,166
            
            
            2,967
            
            
            (199
            )
            
            (6.3
            %)Total
                Net Sales
            
            $
            25,551
            
            $
            18,322
            
            
            ($7,229
            )
            
            (28.3
            %)





In
      2006
      our only customer accounting for 10% or more of our total net sales was a large
      retailer in the United Kingdom. An electronics distributor and a large office
      retailer in the United States each accounted for 9% of total net sales. Because
      of our customer concentration, our net sales and operating income could
      fluctuate significantly due to changes in political or economic conditions
      or
      the loss, reduction of business, or less favorable terms for any of our
      significant customers.





**Gross
      Profit.** Our
      gross profit was $2.6 million in 2006 compared to $4.7 million in 2005. Our
      gross margin percentage of net sales decreased to 14.2% in 2006 from 18.3%
      in
      2005. The primary reason for this decline was lower total sales and the negative
      effect of fixed manufacturing costs spread over lower total sales.  Both
      our fixed and variable manufacturing costs were lower in the second half of 2006
      compared to the first half of 2006 as a result of the third quarter move of
      production to Mexico. This cost reduction served to partially offset the
      negative gross margin impact from the large sales decline.




**Operating
      Expense.** Total
      operating expense excluding the gain on sale of real estate decreased by $1.7
      million to $8.6 million in 2006 from $10.3 million in 2005. Note that total
      operating expense in 2006 included $0.3 million of expense for stock options
      under FAS 123(R) compared to no expense for stock options in 2005 under APB
      25.
      Total operating expense excluding the gain on sale of real estate as a
      percentage of net sales increased to 47.1% in 2006 from 40.4% in 2005. The
      table
      below illustrates the change in operating expense.




**Operating
                Expense**
            
            **Year
                2005**
              **Sales
                $000**
            
            **%
                Net**
              **Sales**
            
            **Year
                2006**
              **Sales
                $000**
            
            **%
                Net**
              **Sales**
            
            **Change**
              **$000**
            
            **%**
              **Change**Selling
                Expense
            
            $
            4,059
            
            
            15.9
            %
            $
            3,631
            
            
            19.8
            %
            
            ($428
            )
            
            (10.5
            %)General
                and Administrative Expense
            
            
            3,553
            
            
            13.9
            %
            
            2,847
            
            
            15.5
            %
            
            (706
            )
            
            (19.8
            %)Research
                and Development Expense
            
            
            2,699
            
            
            10.6
            %
            
            2,158
            
            
            11.8
            %
            
            (541
            )
            
            (20.0
            %)Total
                Operating Expense excluding the gain on sale of real
                estate
            
            $
            10,311
            
            
            40.4
            %
            $
            8,636
            
            
            47.1
            %
            
            ($1,675
            )
            
            (16.2
            %)




**Selling
      Expense.** Selling
      expense decreased to $3.6 million in 2006 from $4.1 million in 2005. Selling
      expense as a percentage of net sales was 19.8% in 2006 and 15.9% in 2005. The
      $0.4 million decrease in selling expense was primarily due to reductions in
      personnel costs due to reduced employee headcount ($0.3 million), lower
      commission expense due to lower sales ($0.1 million), lower sales promotion
      and
      travel expense ($0.1 million), and reduced facility expense ($0.1 million),
      partially offset by higher customer delivery costs ($0.1 million), advertising
      ($0.1 million) and stock option expense.





**General
      and Administrative Expense.** General
      and administrative expense was $2.8 million in 2006 and $3.6 million in 2005.
      General and administrative expense as a percentage of net sales was 15.5% in
      2006 and 13.9% in 2005. In 2006 compared to 2005, general and administrative
      expense decreased primarily due to a decline in bad debt expense ($0.7 million)
      and reductions in personnel costs ($0.2 million), partially offset by the
      increase in stock option expense ($0.1 million). In 2005, general and
      administrative expense included $0.7 million in bad debt expense, primarily
      for
      the business failure of a major U.K. customer, Granville Technologies,
      Ltd.




22




**Research
      and Development Expense.** Research
      and development expense decreased to $2.2 million in 2006 from $2.7 million
      in
      2005. Research and development expense as a percentage of net sales increased
      to
      11.8% in 2006 from 10.6% in 2005. The $0.5 million decrease in research and
      development expense was primarily due to reduced personnel costs ($0.4 million),
      consulting costs ($0.1 million), equipment depreciation ($0.1 million), and
      facilities expense and outside services, partially offset by the increase in
      stock option expense ($0.1 million).





**Gain
      on Sale of Real Estate.** In
      2006
      we recognized a gain in operations on the sale of real estate of $4.8 million.
      The gain as a percentage of net sales was 32.9% in 2006. In December 2006,
      we
      sold the real estate housing our corporate headquarters and concurrently entered
      into a leaseback arrangement for a portion of the property. The leaseback
      arrangement is for two years. A gain of $5.5 million was realized on the sale.
      However, a portion of the gain ($0.7 million) has been deferred and will be
      recognized in operations over the term of the lease ($0.37 million in 2007
      and
      $0.36 million in 2008). The gain deferred is the estimated present value of
      the
      minimum lease payments under the leaseback arrangement.




**Other
      Income (Expense).** Other
      income, net decreased to $2.3 million in 2006 from $3.5 million in 2005. The
      $3.5 million other income in 2005 and $2.1 million of the $2.3 million other
      income in 2006 were payments received from Trend Micro, Inc. to Zoom in exchange
      for our investment in an affiliate, InterMute. The income was spread over two
      years due to the earn-out provision in the 2005 agreement. There will be no
      further payments from the sale of InterMute.





**Income
      Tax Expense (Benefit).** We
      recorded a favorable $0.05 million net income tax benefit in 2006 resulting
      from
      changes in prior years’ estimates. The net deferred income tax asset balance at
      December 31, 2006 was zero. This accounting treatment is described in further
      detail under the caption "Critical Accounting Policies and Estimates" above
      and
      in note 10 to the consolidated financial statements.





**Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004**





The
      following is a discussion of the major categories of our consolidated statement
      of operations, comparing the financial results for the year ended December
      31,
      2005 with the year ended December 31, 2004.





**Net
      Sales.** Our
      total net sales declined year-over-year by 18.7%. In 2005, we primarily
      generated our sales by selling broadband modems to the electronics after-market
      via distributors and retailers and to Internet Service Providers. The dial-up
      modem market has continued to decline and Zoom sales of dial-up modems declined
      due to reductions of both unit sales volume and, to a lesser extent, average
      selling prices. Our broadband modem category did not grow sufficiently in 2005
      to offset the decline in our dial-up modem sales, and our total net sales
      decreased 18.7% to $25.6 million in 2005 from $31.4 million in
      2004.





As
      shown
      in the table below, our net sales for dial-up modems declined $6.1 million,
      or
      37.2%, to $10.3 million in 2005 from $16.5 million in 2004. This decline was
      primarily attributable to both lower unit sales and lower prices, reflecting
      the
      declining retail market for these modems. Our DSL net sales increased $1.7
      million, or 14.2%, to $13.4 million in 2005 from $11.8 million in 2004. This
      increase was primarily attributable to increased unit sales of DSL modems,
      particularly in Turkey and other countries. Net sales in our other product
      sales
      categories, which included cable modems, cameras, ISDN modems, telephone
      dialers, and wireless networking equipment, declined 44.4%, to $1.8 million
      in
      2005 from $3.1 million in 2004, primarily due to decreased emphasis on many
      of
      these products.





**Year
                2004**
              **Sales
                $000**
            
            **Year
                2005**
              **Sales
                $000**
            
            **Change**
              **$000**
            
            **Change**
              **%**Dial-up
            
            $
            16,456
            
            $
            10,332
            
            $
            (6,124
            )
            
            (37.2
            %)DSL
            
            
            11,777
            
            
            13,453
            
            
            1,676
            
            
            14.2
            %Other
                Products
            
            
            3,179
            
            
            1,766
            
            
            (1,413
            )
            
            (44.4
            %)Total
                Net Sales
            
            $
            31,412
            
            $
            25,551
            
            $
            (5,861
            )
            
            (18.7
            %)





As
      shown
      in the table below our net sales in North America declined $2.5 million, or
      17.5%, to $11.6 million in 2005 from $14.0 million in 2004. Our net sales in
      Turkey were $5.6 million in 2005 compared to $4.9 million in 2004, a 13.9%
      increase. The growth of our sales in Turkey primarily reflect increased sales
      of
      DSL modems to our Turkish Distributor. **** Our
      net
      sales in the UK were $5.2 million in 2005 compared to $8.2 million in 2004,
      a
      36.3% decline. The sales decline in North America and the UK primarily reflect
      our declining sales of dial-up modems. In addition, our UK sales were also
      significantly reduced by the result of the business failure of Granville
      Technologies, Ltd., a major customer. Our net sales in all other countries
      were
      $3.2 million in 2005 compared to $4.3 million in 2004, a 26.4% decline. The
      sales decline in all other countries was primarily in dial-up
      modems.




23





**Year
                2004**
              **Sales
                $000**
            
            **Year
                2005**
              **Sales
                $000**
            
            **Change**
              **$000**
            
            **Change**
              **%**North
                America
            
            $
            14,027
            
            $
            11,575
            
            $
            (2,452
            )
            
            (17.5
            %)Turkey
            
            
            4,922
            
            
            5,608
            
            
            686
            
            
            13.9
            %UK
            
            
            8,164
            
            
            5,202
            
            
            (2,962
            )
            
            (36.3
            %)All
                Other
            
            
            4,299
            
            
            3,166
            
            
            (1,133
            )
            
            (26.4
            %)Total
                Net Sales
            
            $
            31,412
            
            $
            25,551
            
            $
            (5,861
            )
            
            (18.7
            %)





In
      2005
      our two largest customers were our Turkish Distributor and a large North
      American retailer, accounting for 22% and 12% of total net sales, respectively.
      Because of our significant customer concentration, our net sales and operating
      income could fluctuate significantly due to changes in political or economic
      conditions or the loss, reduction of business, or less favorable terms for
      any
      of our significant customers. For example, we expect our ongoing net sales
      to be
      adversely affected by the business failure of Granville Technologies in 2005.
      Granville Technologies accounted for 5% and 4% of our total net sales in 2004
      and 2005, respectively.





**Gross
      Profit.** Our
      gross profit was $4.7 million in 2005 compared to $8.1 million in 2004. Our
      gross profit as a percentage of net sales decreased to 18.3% in 2005 from 25.7%
      in 2004. The primary reason for this decline was a shift in the sales mix from
      dial-up modems to broadband modems, lower total sales, and the negative effect
      of fixed manufacturing costs spread over lower total sales. Zoom’s sales of
      dial-up modems are predominantly to the retail market, which have higher gross
      profit margins and selling expenses than sales of our broadband modems, which
      are predominately sold to distributors, internet service provider, and OEM
      customers.





**Operating
      Expense.** Total
      operating expense decreased by $1.0 million to $10.3 million in 2005 from $11.3
      million in 2004. Total operating expense as a percentage of net sales increased
      to 40.4% in 2005 from 36.1% in 2004. The table below shows total operating
      expense and its three major categories: selling expense, general and
      administrative expense, and research and development expense.





**Operating
                Expense**
            
            **Year
                2004**
              **Sales
                $000**
            
            **%
                Net**
              **Sales**
            
            **Year
                2005**
              **Sales
                $000**
            
            **%
                Net**
              **Sales**
            
            **Change**
              **$000**
            
            **%**
              **Change**Selling
                Expense
            
            $
            4,800
            
            
            15.3
            %
            $
            4,059
            
            
            15.9
            %
            $
            (741
            )
            
            (15.4
            %)General
                and Administrative Expense
            
            
            3,620
            
            
            11.5
            %
            
            3,553
            
            
            13.9
            %
            
            (67
            )
            
            (1.9
            %)Research
                and Development Expense
            
            
            2,927
            
            
            9.3
            %
            
            2,699
            
            
            10.6
            %
            
            (228
            )
            
            (7.8%)Total
                Operating Expense
            
            $
            11,347
            
            
            36.1
            %
            $
            10,311
            
            
            40.4
            %
            $
            (1,036
            )
            
            (9.1
            %)





**Selling
      Expense.** Selling
      expense decreased to $4.1 million in 2005 from $4.8 million in 2004. Selling
      expense as a percentage of net sales was 15.9% in 2005 and 15.3% in 2004. The
      $0.7 million decrease in selling expense was primarily due to reductions in
      personnel costs due to reduced employee headcount ($0.3 million) estimated
      European Value Added Tax expense ($0.1 million), outbound freight ($0.1
      million), and other selling costs related to lower overall sales volume and
      lower sales in the retail channel.





**General
      and Administrative Expense.** General
      and administrative expense was $3.6 million in 2004 and 2005. General and
      administrative expense as a percentage of net sales was 13.9% in 2005 and 11.5%
      in 2004. In 2005, general and administrative expense decreased in most
      categories, but the expense reductions were offset by an increase of $ 0.7
      million in bad debt expense, primarily the result of the business failure of
      a
      major U.K. customer, Granville Technologies, Ltd. in 2005. The general and
      administrative expense reductions in 2005 included reductions in personnel
      costs
      ($0.3 million), medical and general insurance expense ($0.3 million), and legal,
      audit and bank fee expense ($0.2 million).





**Research
      and Development Expense.** Research
      and development expense decreased to $2.7 million in 2005 from $2.9 million
      in
      2004. Research and development expense as a percentage of net sales increased
      to
      10.6% in 2005 from 9.3% in 2004. The $0.2 million decrease in research and
      development expense was primarily due to reduced personnel costs ($0.2 million)
      and government approvals and licenses ($0.1 million).





**Other
      Income (Expense).** Other
      income, net increased to $3.5 million in 2005 from $0.2 million in 2004. The
      significant increase was the result of a non-operating gain recorded for the
      $3.5 million gain and payment in June, 2005 by Trend Micro, Inc. to Zoom in
      exchange for our investment in an affiliate, InterMute. Zoom may also receive
      up
      to $3.0 million in additional payments in 2006 if certain conditions and
      performance targets are met. The recording of gains from these additional
      payments will not be made until and unless they are fully earned.




24





**Income
      Tax Expense (Benefit).** We did
      not record any income tax expense in 2004. We recorded a $0.09 million net
      income tax expense in 2005 for a U.K. income tax on interest income, which
      was
      not subject to our net loss carryforwards. The net deferred tax asset balance
      at
      December 31, 2005 is zero.





**Liquidity
      and Capital Resources**





On
      December 31, 2006 we had working capital of $12.4 million including $7.8 million
      in cash and cash equivalents. On December 31, 2005 we had working capital of
      $8.3 million including $9.1 million in cash and cash equivalents. Our current
      ratio at December 31, 2006 was 4.5 compared to 1.9 at December 31, 2005. This
      significant improvement was primarily the result of the sale of our headquarters
      real estate and the payment of our related mortgage debt.





In
      2006
      operating activities used $6.2 million in cash. Our net income in 2006 was
      $1.0
      million which was comprised of an operating loss of $6.0 million before the
      sale
      of our headquarters building, a gain of $4.8 million from the building sale,
      and
      a non-operating gain from investing and financing activities of $2.3 million.
      Sources of cash from operations included a decrease in inventory of $0.6 million
      and non-cash depreciation and amortization expense of $0.1 million. Uses of
      cash
      from operations included an increase in accounts receivable of $0.6 million
      and
      a decrease of accounts payable and accrued expenses of $0.7 million.





In
      2006
      our net cash provided by investing activities was $9.8 million, which included
      the proceeds from the sale of our headquarters building of $7.7 million and
      $2.1
      million of final payments received from our sale of an affiliate, InterMute,
      to
      Trend Micro, Inc., a U. S. subsidiary of Trend Micro Japan. This was partially
      offset by our $0.04 million investment in property, plant and equipment.





In
      2006
      cash was used by financing activities of $4.6 million, comprised of $4.9 million
      for the 2006 principal payments including the full repayment of the mortgage
      on
      our headquarters building less $0.3 million proceeds from the exercise of
      employee stock options.





On
      March
      16, 2005 we entered into a one year Loan and Security Agreement with Silicon
      Valley Bank that provided for a revolving line of credit of up to $2 million.
      The revolving line of credit could be used to (i) borrow under revolving loans
      for working capital and general corporate purposes, (ii) issue letters of
      credit, (iii) enter into foreign exchange forward contracts, and (iv) support
      certain cash management services The revolving line of credit terminated as
      scheduled on March 15, 2006. There were no borrowings under the line for the
      entire one year contract. As a result of improved liquidity from the sale of
      our
      building and our efforts to minimize expenses, we are not currently pursuing
      a
      renewal of the credit line.





To
      conserve cash and manage our liquidity, we have implemented cost-cutting
      initiatives including the reduction of employee headcount and overhead costs.
      The employee headcount was 127 at December 31, 2005 and 69 at December 31,
      2006.
      Forty-seven of this total reduction of 58 resulted from the closing of our
      Boston manufacturing facilty in August 2006. Our production activity was
      outsourced to a lower-cost factory in Tijuana, Mexico. We plan to continue
      to
      assess our cost structure as it relates to our revenues and cash position,
      and
      we may make further reductions if the actions are deemed necessary.





Management
      believes we have sufficient resources to fund our normal operations over the
      next 12 months, through at least December 31, 2007. However, if we are unable
      to
      increase our revenues, reduce or otherwise adequately control our expenses,
      or
      raise capital, our longer-term ability to continue as a going concern and
      achieve our intended business objectives could be adversely affected. See “Risk
      Factors” below, for further information with respect to events and uncertainties
      that could harm our business, operating results, and financial
      condition .





**Contractual
      Obligations**





The
      following table summarizes our contractual obligations as of December 31,
      2006.





**Payments
                due by period**Contractual
                Obligations
            
            Total
            
            Less
                than
              1
                year
            
            1-3
                years
            
            3-5
                years
            
            More
                than
              5
                yearsPurchase
                Obligations (1)
            
            $
            4,618,939
            
            $
            4,618,939Operating
                Lease Obligations (2)
            
            $
            1,130,681
            
            $
            669,820
            
            $
            460,861Total
            
            $
            5,749,620
            
            $
            5,288,759
            
            $
            460,861





(1)
            Represents
                obligations primarily with subcontractors and suppliers of inventory,
                all
                in the ordinary course of business.






25





(2)
            Represents
                minimum lease payments, excluding executory costs to be made under
                leases
                for our headquarters offices in Boston, MA, our office facility in
                Fleet,
                Hants, U.K., our Mexico manufcaturing facility, and our technical
                support
                facility in Boca Raton, FL.





**ITEM
      1A.**  **RISK
      FACTORS**




*This
      report contains forward-looking statements that involve risks and uncertainties,
      such as statements of our objectives, expectations and intentions. The
      cautionary statements made in this report are applicable to all forward-looking
      statements wherever they appear in this report. Our actual results could differ
      materially from those discussed herein. Factors that could cause or contribute
      to such differences include those discussed below, as well as those discussed
      elsewhere in this report.*





**To
      stay in business we may require future additional funding which we may be unable
      to obtain on favorable terms, if at all.**





Over
      the
      next twelve months we may require additional financing for our operations either
      to fund losses beyond those we anticipate or to fund growth in our inventory
      and
      accounts receivable. Our revolving credit facility expired on March 15, 2006
      and
      we currently have no line of credit from which we can borrow. Additional
      financing may not be available to us on a timely basis if at all, or on terms
      acceptable to us. If we fail to obtain acceptable additional financing when
      needed, we may not have sufficient resources to fund our normal operations
      and
      we may be required to further reduce planned expenditures or forego business
      opportunities. These factors could reduce our net sales, increase our losses,
      and harm our business. Moreover, additional equity financing could dilute the
      per share value of our common stock held by current shareholders, while
      additional debt financing could restrict our ability to make capital
      expenditures or incur additional indebtedness, all of which would impede our
      ability to succeed.





**The
      market for high-speed communications products and services has many competing
      technologies and, as a result, the demand for certain of our products and
      services is declining.**





Industry
      analysts believe that the market for our dial-up modems will continue to
      decline. If we are unable to increase demand for and sales of our broadband
      modems, we may be unable to sustain or grow our business. The market for
      high-speed communications products and services has a number of competing
      technologies. For instance, Internet access can be achieved
      by:




·
            using
                a standard telephone line and appropriate service for dial-up modems;




·
            ISDN
                modems, or DSL modems, possibly in combination;




·
            using
                a cable modem with a cable TV line and cable modem service;




·
            using
                a router and some type of modem to service the computers connected
                to a
                local area network; or




·
            other
                approaches, including wireless links to the
                Internet.




Although
      we currently sell products that include these technologies, our most successful
      products have historically been our dial-up modems. The introduction of new
      products by competitors, market acceptance of products based on new or
      alternative technologies, or the emergence of new industry standards have in
      the
      past rendered and could continue to render our products less competitive or
      even
      obsolete. For example, these factors have caused the market for our dial-up
      modems to shrink dramatically. If we are unable to increase demand for our
      broadband modems, we may be unable to sustain or grow our
      business.




**Delays,
      unanticipated costs, interruptions in production or other problems in connection
      with the transfer of our manufacturing operations to Mexico or the continuing
      operation of that facility could harm our business.**




In
      September 2006 we transferred most of our manufacturing operations from Boston,
      Massachusetts to Tijuana, Mexico. As a result of moving our manufacturing
      options to Mexico, we experienced delays and interruptions in production and
      may
      experience additional delays and interruptions as well as unanticipated costs
      and other problems. We incurred approximately $280,000 in costs in connection
      with the move of our manufacturing operations to Mexico. Delays, interruptions
      in production or other problems related to the move could lead to increased
      or
      unexpected costs, reduced margins, delays in product deliveries, order
      cancellations, and lost revenue, all of which could harm our business, results
      of operation, and liquidity. Our conduct of business in Mexico is subject to
      the
      additional challenges and risks associated with international operations,
      including those related to integration of operations across different cultures
      and languages, currency risk, and economic, legal, political and regulatory
      risks.




26





**Capacity
      constraints in our Mexican operations could reduce our sales and revenues and
      hurt customer relationships.**





We
      now
      rely on our Mexican operations to finish and ship most of the products we sell.
      Since moving our manufacturing operations to our Mexican facility we have
      experienced and may continue to experience constraints on our manufacturing
      capacity as we address challenges related to operating our new facility, such
      as
      hiring and training workers, creating the facility’s infrastructure, developing
      new supplier relationships, complying with customs and border regulations,
      and
      resolving shipping and logistical issues. Our sales and revenues may be reduced
      and our customer relationships may be impaired if we continue to experience
      constraints on our manufacturing capacity. We are working to minimize capacity
      constraints in a cost-effective manner, but there can be no assurance that
      we
      will be able to adequately minimize capacity constraints.





**Our
      reliance on a business processing outsourcing partner to conduct our operations
      in Mexico could materially harm our business and
      prospects.**





In
      connection with the move of most of our manufacturing operations to Mexico,
      we
      rely on a business processing outsourcing partner to hire, subject to our
      oversight, the production team for our manufacturing operation, provide the
      selected facility described above, and coordinate some of the start-up and
      ongoing manufacturing logistics relating to our operations in Mexico. Our
      outsourcing partner’s related functions include acquiring the necessary Mexican
      permits, providing the appropriate Mexican operating entity, assisting in
      customs clearances, and providing other general assistance and administrative
      services in connection with the start-up and ongoing operation of the Mexican
      facility. Our outsourcing partner’s performance of these obligations efficiently
      and effectively will be critical to the success of our operations in Mexico.
      Failure of our outsourcing partner to perform its obligations efficiently and
      effectively could result in delays, unanticipated costs or interruptions in
      production, delays in deliveries to our customers or other harm to our business,
      results of operation, and liquidity. Moreover, if our outsourcing arrangement
      is
      not successful, we cannot assure our ability to find an alternative production
      facility or outsourcing partner to assist in our operations in Mexico or our
      ability to operate successfully in Mexico without outsourcing or similar
      assistance.




**Our
      reliance on a limited number of customers for a large portion of our revenues
      could materially harm our business and prospects.**





Relatively
      few customers have accounted for a substantial portion of our net sales. In
      2006, our net sales to three companies constituted 30% of our total net sales.
      Our customers generally do not enter into long-term agreements obligating them
      to purchase our products. We may not continue to receive significant revenues
      from any of these or from other large customers. Because of our significant
      customer concentration, our net sales and operating income could fluctuate
      significantly due to changes in political or economic conditions or the loss
      of,
      reduction of business with, or less favorable terms for any of our significant
      customers. For example, in 2006, DSL sales to our Turkish distributor, one
      of
      our large customers, declined significantly from $5.6 million in 2005 to $1.3
      million in 2006. We attribute this decline due to a number of factors including
      increased competition and plans by Turkish Telecom to dramatically increase
      their bundling of DSL modems with their service. We cannot guarantee that we
      will increase our sales to our Turkish distributor. A reduction or delay in
      orders from any of our significant customers, or a delay or default in payment
      by any significant customer could materially harm our business, results of
      operation and liquidity.




**Our
      net sales, operating results and liquidity have been and may in the future
      be
      adversely affected because of the decline in the retail market for dial-up
      modems.**





The
      dial-up modem industry has been characterized by declining average selling
      prices and a declining retail market. The decline in average selling prices
      is
      due to a number of factors, including technological change, lower component
      costs, and competition. The decline in the size of the retail market for dial-up
      modems is primarily due to the inclusion of dial-up modems as a standard feature
      contained in new PCs, and the advent of broadband products. Decreasing average
      selling prices and reduced demand for our dial-up modems have resulted and
      are
      likely to continue to result in decreased net sales for dial-up modems. If
      we
      fail to replace declining revenue from the sales of dial-up modems with the
      sales of our other products, including our broadband modems, our business,
      results of operation and liquidity will be harmed.




27





**Less
      advantageous terms of sale of our products could harm our
      business.**





The
      Company entered into a consignment arrangement with a significant retailer
      customer in October 2006. In connection with this arrangement ownership of
      all
      unsold products previously purchased from the Company reverted to the Company
      in
      November 2006. The new arrangement resulted in an accounting adjustment that
      reduced the Company’s net sales in 2006 by $1.1 million and reduced cost of
      sales and other directly related expenses by $0.5 million, which reduced the
      net
      profit for 2006 by $0.6 million. Under the consignment arrangement we are not
      able to recognize revenue from the sale of a product until the retailer actually
      sells such product to its customer. The consignment arrangement also results
      in
      a delay in the dating of invoices, the recognition of accounts receivable,
      and
      the due dates for payment by the retailer for goods sold. If additional
      significant customers adopt similar arrangements or otherwise change the terms
      of sale, our business, results of operation and liquidity will be
      harmed.





**We
      believe that our future success will depend in large part on our ability to
      more
      successfully penetrate the broadband modem markets, which have been challenging
      markets, with significant barriers to entry.**




With
      the
      shrinking of the dial-up modem market, we believe that our future success will
      depend in large part on our ability to more successfully penetrate the broadband
      modem markets, DSL and cable, and the VoIP market. These markets have
      significant barriers to entry that have adversely affected our sales to these
      markets. Although some cable and DSL modems are sold at retail, the high volume
      purchasers of these modems are concentrated in a relatively few large cable,
      telecommunications, and Internet service providers which offer broadband modem
      services to their customers. These customers, particularly cable services
      providers, also have extensive and varied approval processes for modems to
      be
      approved for use on their network. These approvals are expensive, time
      consuming, and continue to evolve. Successfully penetrating the broadband modem
      market therefore presents a number of challenges including:




·
            the
                current limited retail market for broadband modems;




·
            the
                relatively small number of cable, telecommunications and Internet
                service
                provider customers that make up a substantial part of the market
                for
                broadband modems;




·
            the
                significant bargaining power of these large volume purchasers;




·
            the
                time consuming, expensive, uncertain and varied approval process
                of the
                various cable service providers; and




·
            the
                strong relationships with cable service providers enjoyed by incumbent
                cable equipment providers like Motorola and Scientific
                Atlanta.





Our
      sales
      of broadband products have been adversely affected by all of these factors.
      Sales of our broadband products in European countries have fluctuated and may
      continue to fluctuate due to approvals and delays in the deployment by service
      providers of cable and DSL service in these countries. We cannot assure that
      we
      will be able to successfully penetrate these markets.





**Our
      failure to meet changing customer requirements and emerging industry standards
      would adversely impact our ability to sell our products and
      services.**




The
      market for PC communications products and high-speed broadband access products
      and services is characterized by aggressive pricing practices, continually
      changing customer demand patterns, rapid technological advances, emerging
      industry standards and short product life cycles. Some of our product and
      service developments and enhancements have taken longer than planned and have
      delayed the availability of our products and services, which adversely affected
      our sales and profitability in the past. Any significant delays in the future
      may adversely impact our ability to sell our products and services, and our
      results of operations and financial condition may be adversely affected. Our
      future success will depend in large part upon our ability to:




·
            identify
                and respond to emerging technological trends and industry standards
                in the
                market;




·
            develop
                and maintain competitive products that meet changing customer demands;




·
            enhance
                our products by adding innovative features that differentiate our
                products
                from those of our competitors;




·
            bring
                products to market on a timely basis;




·
            introduce
                products that have competitive prices;






28






·
            manage
                our product transitions, inventory levels and manufacturing processes
                efficiently;




·
            respond
                effectively to new technological changes or new product announcements
                by
                others; and




·
            meet
                changing industry standards.




Our
      product cycles tend to be short, and we may incur significant non-recoverable
      expenses or devote significant resources to sales that do not occur when
      anticipated. Therefore, the resources we devote to product development, sales
      and marketing may not generate material net sales for us. In addition, short
      product cycles have resulted in and may in the future result in excess and
      obsolete inventory, which has had and may in the future have an adverse affect
      on our results of operations. In an effort to develop innovative products and
      technology, we have incurred and may in the future incur substantial
      development, sales, marketing, and inventory costs. If we are unable to recover
      these costs, our financial condition and operating results could be adversely
      affected. In addition, if we sell our products at reduced prices in anticipation
      of cost reductions and we still have higher cost products in inventory, our
      business would be harmed and our results of operations and financial condition
      would be adversely affected.





**Our
      international operations are subject to a number of risks that could harm our
      business.**




Currently
      our business is significantly dependent on our operations outside the United
      States, particularly sales of our products and the production of most of our
      products. All of our manufacturing operations except our rework operations
      are
      now located outside of the United States. In 2005, sales outside of North
      America were 55% of our net sales. In 2006, sales outside North America were
      44%
      of our net sales. The inherent risks of international operations could harm
      our
      business, results of operation, and liquidity. The types of risks faced in
      connection with international operations and sales include, among
      others:




·
            regulatory
                and communications requirements and policy changes;




·
            favoritism
                toward local suppliers;




·
            delays
                in the rollout of broadband services by cable and DSL service providers
                outside of the United States;




·
            local
                language and technical support requirements;




·
            difficulties
                in inventory management, accounts receivable collection and the management
                of distributors or representatives;




·
            cultural
                differences;




·
            reduced
                control over staff and other difficulties in staffing and managing
                foreign
                operations;




·
            reduced
                protection for intellectual property rights in some
                countries;




·
            political
                and economic changes and disruptions;




·
            governmental
                currency controls;




·
            shipping
                costs;




·
            currency
                exchange rate fluctuations, including, as a result of the move of
                our
                manufacturing operations to Mexico, changes in value of the Mexican
                Peso
                relative to the US dollar; and import, export, and tariff
                regulations.




**We
      may be subject to product returns resulting from defects, or from overstocking
      of our products. Product returns could result in the failure to attain market
      acceptance of our products, which would harm our business.**




If
      our
      products contain undetected defects, errors, or failures, we could
      face:




·
            delays
                in the development of our products;




·
            numerous
                product returns; and




·
            other
                losses to us or to our customers or end
                users.






29




Any
      of
      these occurrences could also result in the loss of or delay in market acceptance
      of our products, either of which would reduce our sales and harm our business.
      We are also exposed to the risk of product returns from our customers as a
      result of contractual stock rotation privileges and our practice of assisting
      some of our customers in balancing their inventories. Overstocking has in the
      past led and may in the future lead to higher than normal returns.




**Our
      failure to effectively manage our inventory levels could materially and
      adversely affect our liquidity and harm our business.**




Due
      to
      rapid technological change and changing markets we are required to manage our
      inventory levels carefully to both meet customer expectations regarding delivery
      times and to limit our excess inventory exposure. In the event we fail to
      effectively manage our inventory our liquidity may be adversely affected and
      we
      may face increased risk of inventory obsolescence, a decline in market value
      of
      the inventory, or losses from theft, fire, or other casualty. We incurred a
      $0.3
      million inventory obsolescence charge in 2006 for inventory reserves related
      to
      some slow-moving VoIP products.





**We
      may be unable to produce sufficient quantities of our products because we depend
      on third party manufacturers. If these third party manufacturers fail to produce
      quality products in a timely manner, our ability to fulfill our customer orders
      would be adversely impacted.**




We
      use
      contract manufacturers to partially manufacture our products. We use these
      third
      party manufacturers to help ensure low costs, rapid market entry, and
      reliability. Any manufacturing disruption could impair our ability to fulfill
      orders, and failure to fulfill orders would adversely affect our sales. Although
      we currently use four contract manufacturers for the bulk of our purchases,
      in
      some cases a given product is only provided by one of these companies. The
      loss
      of the services of any of our significant third party manufacturers or a
      material adverse change in the business of or our relationships with any of
      these manufacturers could harm our business. Since third parties manufacture
      our
      products and we expect this to continue in the future, our success will depend,
      in part, on the ability of third parties to manufacture our products cost
      effectively and in sufficient quantities to meet our customer
      demand.




We
      are
      subject to the following risks because of our reliance on third party
      manufacturers:




·
            reduced
                management and control of component purchases;




·
            reduced
                control over delivery schedules, quality assurance and manufacturing
                yields;




·
            lack
                of adequate capacity during periods of excess demand;




·
            limited
                warranties on products supplied to us;




·
            potential
                increases in prices;




·
            interruption
                of supplies from assemblers as a result of a fire, natural calamity,
                strike or other significant event; and




·
            misappropriation
                of our intellectual property.





**We
      may be unable to produce sufficient quantities of our products because we obtain
      key components from, and depend on, sole or limited source
      suppliers.**




We
      obtain
      certain key parts, components, and equipment from sole or limited sources of
      supply. For example, we purchase most of our dial-up and broadband modem
      chipsets from Conexant Systems, Agere Systems, and Ikanos Communications.
      Integrated circuit product areas covered by at least one of these companies
      include dial-up modems, DSL modems, cable modems, networking, routers, and
      gateways. In the past we have experienced delays in receiving shipments of
      modem
      chipsets from our sole source suppliers. We may experience similar delays in
      the
      future. In addition, some products may have other components that are available
      from only one source. If we are unable to obtain a sufficient supply of
      components from our current sources, we would experience difficulties in
      obtaining alternative sources or in altering product designs to use alternative
      components. Resulting delays or reductions in product shipments could damage
      relationships with our customers, and our customers could decide to purchase
      products from our competitors. Inability to meet our customers’ demand or a
      decision by one or more of our customers to purchase products from our
      competitors could harm our operating results.




**We
      face significant competition, which could result in decreased demand for our
      products or services.**




30




We
      may be
      unable to compete successfully. A number of companies have developed, or are
      expected to develop, products that compete or will compete with our products.
      Furthermore, many of our current and potential competitors have significantly
      greater resources than we do. Intense competition, rapid technological change
      and evolving industry standards could result in less favorable selling terms
      to
      our customers, decrease demand for our products or make our products
      obsolete.





**Changes
      in existing regulations or adoption of new regulations affecting the Internet
      could increase the cost of our products or otherwise affect our ability to
      offer
      our products and services over the Internet.**




Congress
      has adopted legislation that regulates certain aspects of the Internet,
      including online content, user privacy, taxation, liability for third-party
      activities and jurisdiction. In addition, a number of initiatives pending in
      Congress and state legislatures would prohibit or restrict advertising or sale
      of certain products and services on the Internet, which may have the effect
      of
      raising the cost of doing business on the Internet generally. Federal, state,
      local and foreign governmental organizations are considering other legislative
      and regulatory proposals that would regulate the Internet. We cannot predict
      whether new taxes will be imposed on our services, and depending on the type
      of
      taxes imposed, whether and how our services would be affected thereafter.
      Increased regulation of the Internet may decrease its growth and hinder
      technological development, which may negatively impact the cost of doing
      business via the Internet or otherwise harm our business.




**New
      environmental regulations recently implemented or scheduled to be implemented
      in
      2007 may increase our manufacturing costs and harm our
      business.**





The
      Federal government has announced plans to reduce the use of hazardous materials,
      such as lead, in electronic equipment. The implementation of these new
      requirements, currently scheduled to begin in 2007, may require us and other
      electronics companies to change or discontinue many products. We believe
      compliance with these new requirements will be difficult, and will typically
      increase our product costs by up to $.50 per unit, depending on the product.
      In
      addition, we may incur additional costs involved with the disposal of inventory
      or with returned products that do not meet the new requirements, which could
      further harm our business. In addition the State of California has implemented
      regulations requiring the use of highly efficient power cubes. These new
      requirements will effect many of our products and may result in an increase
      in
      our product costs.




**Changes
      in current or future laws or governmental regulations and industry standards
      that negatively impact our products, services and technologies could harm our
      business.**




The
      jurisdiction of the Federal Communications Commission, or the FCC, extends
      to
      the entire United States communications industry including our customers and
      their products and services that incorporate our products. Our products are
      also
      required to meet the regulatory requirements of other countries throughout
      the
      world where our products and services are sold. Obtaining government regulatory
      approvals is time-consuming and very costly. In the past, we have encountered
      delays in the introduction of our products, such as our cable modems, as a
      result of government certifications. We may face further delays if we are unable
      to comply with governmental regulations. Delays caused by the time it takes
      to
      comply with regulatory requirements may result in cancellations or postponements
      of product orders or purchases by our customers, which would harm our
      business.




In
      addition to reliability and quality standards, the market acceptance of our
      VoIP
      products and services is dependent upon the adoption of industry standards
      so
      that products from multiple manufacturers are able to communicate with each
      other. Standards are continuously being modified and replaced. As standards
      evolve, we may be required to modify our existing products or develop and
      support new versions of our products. The failure of our products to comply,
      or
      delays in compliance, with various existing and evolving industry standards
      could delay or interrupt volume production of our products, which could harm
      our
      business.





**Regulation
      of VoIP services is developing and is therefore uncertain. Future regulation
      of
      VoIP services could increase our costs and restrict the grown of our VoIP
      business.**




VoIP
      services currently have different regulations from traditional telephony in
      most
      countries including the US. The US, various states and other countries may
      impose surcharges, taxes or new regulations upon providers of VoIP services.
      The
      imposition of any such surcharges, taxes and regulations on VoIP services could
      materially increase our costs, may limit or eliminate our competitive pricing
      and may require us to restructure the VoIP services we currently offer. For
      example, regulations requiring compliance with the Communications Assistance
      for
      Law Enforcement Act (CALEA) or provision of the same type of 911 services as
      required for traditional telecommunications providers could place a significant
      financial burden on us depending on the technical changes required to
      accommodate the requirements. In May 2005 the FCC issued an order requiring
      interconnected VoIP providers to deliver 911 calls to the customer’s local
      emergency operator as a standard feature of the service. We believe our VoIP
      products are capable of meeting the FCC requirements. In the event our VoIP
      products do not meet the FCC requirements, we may need to modify our products,
      which could increase our costs.




31




In
      many
      countries outside the US in which we operate or our services are sold, we cannot
      be certain that we will be able to comply with existing or future requirements,
      or that we will be able to continue to be in compliance with any such
      requirements. Our failure to comply with these requirements could materially
      adversely affect our ability to continue to offer our VoIP services in these
      jurisdictions.




**Fluctuations
      in the foreign currency exchange rates in relation to the U.S. Dollar could
      have
      a material adverse effect on our operating results.**




Changes
      in currency exchange rates that increase the relative value of the U.S. dollar
      may make it more difficult for us to compete with foreign manufacturers on
      price, may reduce our foreign currency denominated sales when expressed in
      dollars, or may otherwise have a material adverse effect on our sales and
      operating results. A significant increase in our foreign currency denominated
      sales would increase our risk associated with foreign currency fluctuations.
      A
      weakness in the U.S. dollar relative to the Mexican Peso and various Asian
      currencies including the Chinese renminbi could increase our product costs.




**Our
      future success will depend on the continued services of our executive officers
      and key product development personnel.**




The
      loss
      of any of our executive officers or key product development personnel, the
      inability to attract or retain qualified personnel in the future, or delays
      in
      hiring skilled personnel could harm our business. Competition for skilled
      personnel is significant. We may be unable to attract and retain all the
      personnel necessary for the development of our business. In addition, the loss
      of Frank B. Manning, our president and chief executive officer, or Peter Kramer,
      our executive vice president, some other member of the senior management team,
      a
      key engineer or salesperson, or other key contributors, could harm our relations
      with our customers, our ability to respond to technological change, and our
      business.




**We
      may have difficulty protecting our intellectual property.**




Our
      ability to compete is heavily affected by our ability to protect our
      intellectual property. We rely primarily on trade secret laws, confidentiality
      procedures, patents, copyrights, trademarks, and licensing arrangements to
      protect our intellectual property. The steps we take to protect our technology
      may be inadequate. Existing trade secret, trademark and copyright laws offer
      only limited protection. Our patents could be invalidated or circumvented.
      We
      have more intellectual property assets in some countries than we do in others.
      In addition, the laws of some foreign countries in which our products are or
      may
      be developed, manufactured or sold may not protect our products or intellectual
      property rights to the same extent as do the laws of the United States. This
      may
      make the possibility of piracy of our technology and products more likely.
      We
      cannot assure that the steps that we have taken to protect our intellectual
      property will be adequate to prevent misappropriation of our
      technology.





**We
      could infringe the intellectual property rights of others.**





Particular
      aspects of our technology could be found to infringe on the intellectual
      property rights or patents of others. Other companies may hold or obtain patents
      on inventions or may otherwise claim proprietary rights to technology necessary
      to our business. We cannot predict the extent to which we may be required to
      seek licenses. We cannot assure that the terms of any licenses we may be
      required to seek will be reasonable. We are often indemnified by our suppliers
      relative to certain intellectual property rights; but these indemnifications
      do
      not cover all possible suits, and there is no guarantee that a relevant
      indemnification will be honored by the indemnifying party.





**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





We
      own
      financial instruments that are sensitive to market risks as part of our
      investment portfolio. The investment portfolio is used to preserve our capital
      until it is required to fund operations, including our research and development
      activities. None of these market-risk sensitive instruments are held for trading
      purposes. We do not own derivative financial instruments in our investment
      portfolio. The investment portfolio contains instruments that are subject to
      the
      risk of a decline in interest rates. Investment Rate Risk - Our investment
      portfolio consists entirely of money market funds, which are subject to interest
      rate risk. Due to the short duration and conservative nature of these
      instruments, we do not believe that it has a material exposure to interest
      rate
      risk. Our market risks have not changed substantially since December 31,
      2005.




32


**ITEM
      8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





**ZOOM
      TECHNOLOGIES, INC.**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES**





PageIndex
                to Consolidated Financial Statements
            33Report
                of Independent Registered Public Accounting Firms
            40-41Consolidated
                Balance Sheets as of December 31, 2005 and 2006
            42Consolidated
                Statements of Operations for the years ended December 31, 2004, 2005,
                and
                2006
            43Consolidated
                Statements of Stockholders' Equity and Comprehensive Loss for the
                years
                ended December 31, 2004, 2005, and 2006
            44Consolidated
                Statements of Cash Flows for the years ended December 31, 2004, 2005,
                and
                2006
            45Notes
                to Consolidated Financial Statements
            46-57Schedule
                II: Valuation and Qualifying Accounts for the years ended December
                31,
                2004, 2005, and 2006
            58





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





We
      changed our independent registered public accounting firm in 2006 as previously
      disclosed. There were no changes in or disagreements with our independent
      accountants on accounting or financial disclosure matters during the period
      covered by this report.





**ITEM
      9A - CONTROLS AND PROCEDURES**





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our Securities Exchange Act of 1934
      reports is recorded, processed, summarized and reported within the time periods
      specified in the SEC's rules and forms, and that such information is accumulated
      and communicated to our management, including our Chief Executive Officer and
      Chief Financial Officer, as appropriate, to allow timely decisions regarding
      required disclosure. In designing and evaluating the disclosure controls and
      procedures, management recognizes that any controls and procedures, no matter
      how well designed and operated, can provide only reasonable assurance of
      achieving the desired control objectives, as ours are designed to do, and
      management necessarily was required to apply its judgment in evaluating the
      cost-benefit relationship of possible controls and procedures.





As
      of
      December 31, 2006 we carried out an evaluation, under the supervision and with
      the participation of our management, including our Chief Executive Officer
      and
      Chief Financial Officer, of the effectiveness of the design and operation of
      our
      disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
      under the Securities Exchange Act of 1934. Based upon that evaluation, our
      Chief
      Executive Officer and Chief Financial Officer concluded that our disclosure
      controls and procedures are effective in enabling us to record, process,
      summarize and report information required to be included in our periodic SEC
      filings within the required time period.





There
      have been no changes in our internal control over financial reporting during
      the
      most recent quarter that have materially affected, or are reasonably likely
      to
      materially affect, our internal control over financial reporting.





In
      December the SEC 2006 issued guidance for the previously announced
      Sarbanes-Oxley 404 compliance requirement for 2007. The SEC invited comments
      regarding their guidance and announced a comment period extending into February
      2007. The SEC stated that after the end of the comment period the SEC would
      issue final and more detailed guidance and that the SEC would consider a further
      compliance deadline extension if the detailed guidance was thought to be too
      late for proper compliance for 2007. Because of the potential changes in SOX
      404
      requirements and the cost of implementing SOX 404 requirements, Zoom has elected
      to minimize expenditures on SOX 404 compliance work until the SEC provides
      final
      guidance.





33





**PART
      III**





**ITEM
      10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE**





Information
      required by this item appears under the caption "Our Executive Officers" in
      Part
      1, Item 1 -- Business, and under the captions "Election of Directors", "Board
      of
      Directors”, "Code of Ethics" and " Section 16(a) Beneficial Ownership Compliance
      " in our definitive proxy statement for our 2007 annual meeting of stockholders
      which will be filed with the SEC within 120 days after the close of our fiscal
      year, and is incorporated herein by reference.





**ITEM
      11 - EXECUTIVE COMPENSATION**





Information
      required by this item appears under the captions "Executive Compensation,"
      and
      "Directors' Compensation", in our definitive proxy statement for our 2007 annual
      meeting of stockholders which will be filed with the SEC within 120 days after
      the close of our fiscal year, and is incorporated herein by
      reference.





**ITEM
      12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**





We
      maintain a number of equity compensation plans for employees, officers,
      directors and others whose efforts contribute to our success. The table below
      sets forth certain information as of our fiscal year ended December 31, 2006
      regarding the shares of our common stock available for grant or granted under
      stock option plans that (i) were approved by our stockholders, and (ii) were
      not
      approved by our stockholders.





**Equity
      Compensation Plan Information** .





**Plan
                Category**
            
            **Number
                Of Securities**
              **To
                Be Issued Upon**
              **Exercise
                Of**
              **Outstanding
                Options**
            
            **Weighted-Average
                Exercise**
              **Price
                Of Outstanding**
              **Options**
            
            **Number
                Of Securities**
              **Remaining
                Available For**
              **Future
                Issuance Under Equity**
              **Compensation
                Plans (excluding**
              **securities
                reflected in column (a))****(a)**
            
            **(****b)**
            
            **(c)****Equity
                compensation plans approved by security
                holders(1)**
            
            
            **802,000**
            
            **$**
            **1.77**
            
            
            **717,646****Equity
                compensation plans not approved by security
                holders(2)**
            
            
            **551,000**
            
            **$**
            **1.85**
            
            
            **132,800****Total:**
            
            
            **1,353,000**
            
            **$**
            **1.80**
            
            
            **850,446**





(1)
            Includes
                the following plans: 1990 Employee Stock Option Plan and 1991 Directors
                Stock Option Plan, each as amended. Please see note 10 to our consolidated
                financial statements for a description of these
                plans.





(2)
            Includes
                the 1998 Employee Equity Incentive Plan, as amended. The purposes
                of the
                1998 Employee Equity Incentive Plan (the "1998 Plan"), adopted by
                the
                Board of Directors in 1998, are to attract and retain employees and
                provide an incentive for them to assist us in achieving our long-range
                performance goals, and to enable such employees to participate in
                our
                long-term growth. In general, under the 1998 Plan, all employees
                who are
                not officers or directors are eligible to participate in the 1998
                Plan.
                The 1998 Plan is currently administered by the Compensation Committee
                of
                the Board of Directors. Participants in the 1998 Plan are eligible
                to
                receive non-qualified stock options at an option price determined
                by the
                Stock Option Committee. All stock options granted under the 1998
                Plan have
                been granted for at least the fair market value on the date of grant.
                A
                total of 1,200,000 shares of our common stock have been authorized
                for
                issuance under the 1998 Plan.





The
      additional information required by this item is incorporated by reference to
      the
      section entitled "Security Ownership of Certain Beneficial Owners and Management
      " in our definitive proxy statement for our 2007 annual meeting of stockholders
      to be filed with the SEC within 120 days after the close of our fiscal
      year.





34





**ITEM
      13 - CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE**





Any
      information required by this item may appear under the caption "Certain
      Relationships and Related Transactions" and “Board of Directors” in our
      Definitive Proxy Statement for our 2007 annual meeting of Stockholders to be
      filed with the SEC within 120 days after the close of our fiscal year and is
      incorporated herein by reference.





**ITEM
      14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES**





Information
      required by this item appears under the caption “Principal Accountant Fees and
      Services” in our Definitive Proxy Statement for our 2007 annual meeting of
      stockholders to be filed with the SEC within 120 days after the close of our
      fiscal year and is incorporated herein by reference.





**PART
      IV**





**ITEM
      15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ***





(a)
            
            Financial
                Statements, Schedules and Exhibits:(1),(2)
            The
                consolidated financial statements and required schedules are indexed
                on
                page F-1.(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
            Certificate
                of Incorporation, filed as Exhibit 3.1 to Zoom Technologies, Inc.
                Current
                Report on Form 8-K dated February 28, 2002, filed with the Commission
                on
                March 4, 2002 (the "March 2002 Form 8-K"). *3.2
            By-Laws
                of Zoom Technologies, Inc., filed as Exhibit 3.2 to the March 2002
                Form
                8-K. ***10.1
            1990
                Stock Option Plan, as amended, filed as Exhibit 99.1 to the Company's
                Registration Statement on Form S-8 (Reg. No. 333-126612) filed with the
                Commission on July 15, 2005. ***10.2
            1991
                Director Stock Option Plan, as amended, filed as Exhibit 99.1 to
                the
                Company's Registration Statement on Form S-8 (Reg. No. 333-107923),
                filed
                with the Commission on August 13, 2003. *10.3
            1998
                Employee Equity Incentive Plan, as amended, filed as Exhibit 99.1
                to the
                Company's Registration Statement on Form S-8 (Reg. No. 333-97573),
                filed
                with the Commission on August 2, 2002. *10.4
            Lease
                between Zoom Telephonics, Inc. and "E" Street Associates, filed as
                Exhibit
                10.5 to the Company's Quarterly Report on Form 10-Q for the fiscal
                quarter
                ended June 30, 1996 (the "June 1996 Form 10-Q"). *10.5
            Form
                of Indemnification Agreement, filed as Exhibit 10.6 to the June 1996
                Form
                10-Q. ***10.6
            Employment
                Agreement, filed as Exhibit 10.9 to the Company's Annual Report on
                Form
                10-K for the fiscal year ended December 31, 1997. *10.7
            Mortgage,
                Security Agreement and Assignment between Zoom and Wainwright Bank
&
                Trust Company, filed as Exhibit 10.1 to the Company's Quarterly Report
                on
                Form 10-Q for the fiscal quarter ended March 31, 2001 (the "March
                2001
                Form 10-Q"). *10.8
            Commercial
                Real Estate Promissory Note, between Zoom and Wainwright Bank & Trust
                Company, filed as Exhibit 10.2 to the March 2001 Form 10-Q.
                ***10.9
            Form
                of Non-Qualified Stock Option Agreement for Executive Officers, filed
                as
                Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal
                year ended December 31, 2004..***10.10
            Summary
                of Directors' Compensation, filed as Exhibit 10.10 to the Company’s Annual
                Report on Form 10-K for the fiscal year ended December 31,
                2004.*






35






10.11
            Loan
                and Security Agreement with Silicon Valley Bank, filed as Exhibit
                10.1 to
                the Company's Current Report on Form 8-K filed on March 22, 2005.
                *10.12
            Letter
                of Transmittal for Surrender of Capital Stock of InterMute, filed
                as
                Exhibit 99.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal
                quarter ended June 30, 2005.*10.13
            Loan
                Modification Agreement dated March 30, 2006, by and between Zoom
                Telephonics, Inc. and Wainright Bank and Trust Company, filed as
                Exhibit
                10.13 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
                March 31, 2006.*10.14
            Amendment
                to Security Documents dated March 30, 2006, by and between Zoom
                Telephonics, Inc. and Wainright Bank & Trust Company, filed as Exhibit
                10.14 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
                March 31, 2006.*10.15
            Letter
                agreement dated August 4, 2006, filed as Exhibit 10.1 to the Company’s
                Quarterly Report on Form 10-Q for the quarter ended June 30,
                2006.*10.16
            Purchase
                and Sale Agreement dated August 31, 2006, filed as Exhibit 10.1 to
                the
                Company’s Current Report on Form 8-K on September 20,
                2006.***10.17
            Form
                of Non-Qualified Stock Option Agreement for Named Executive Officers,
                filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on
                December 12, 2006.*10.18
            Standard
                lease by and between 201-207 South Street LLC and Zoom Technologies,
                Inc.
                on December 22, 2006 to lease space for 24 months for headquarters
                offices.21.
            Subsidiaries,
                filed as Exhibit 21 to the Company's Annual Report on Form 10-K for
                the
                fiscal year ended December 31, 2000. *23.1
            Consent
                of UHY LLP, independent registered public accounting
                firm.23.2
            Consent
                of KPMG LLP, independent registered public accounting
                firm.31.1
            CEO
                Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
                of
                2002.31.2
            CFO
                Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
                of
                2002.32.1
            CEO
                Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.






36




**ITEM
      15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**




**(Continued)**




32.2
            CFO
                Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.*
            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.(b)
            
            Exhibits
                - See Item 15 (a) (3) above for a list of Exhibits incorporated herein
                by
                reference or filed with this Report.(c)
            
            Schedules
                - Schedule II: Valuation and Qualifying Accounts. Schedules other
                than
                those listed above have been omitted since they are either inapplicable
                or
                not required.






37


**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
                TECHNOLOGIES, INC.**
              **(Registrant)****Date:
                March 30, 2007**
            **By:**
            **/s/
                Frank B. Manning****Frank
                B. Manning, President**




**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 and on the dates indicated.**





**Signature**
            
            **Title**
            
            **Date****/s/
                Frank B. Manning**
            
            **Principal
                Executive Officer and Chairman of**
            
            **March
                30, 2007****Frank
                B. Manning**
            
            **the
              Board****/s/
                Robert A. Crist**
            
            **Principal
                Financial and Accounting Officer**
            
            **March
                30, 2007****Robert
                A. Crist****/s/
                Peter R. Kramer**
            
            **Director**
            
            **March
                30, 2007****Peter
                R. Kramer****/s/
                Bernard Furman**
            
            **Director**
            
            **March
                30, 2007****Bernard
                Furman****/s/
                J. Ronald Woods**
            
            **Director**
            
            **March
                30, 2007****J.
                Ronald Woods****/s/
                Joseph Donovan**
            
            **Director**
            
            **March
                30, 2007****Joseph
                Donovan**






38




**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES**





PageReport
                of UHY LLP, Independent Registered Public Accounting Firm
            40Independent
                Registered Public Accounting Firm
            41Consolidated
                Balance Sheets as of December 31, 2006 and 2005
            42Consolidated
                Statements of Operations for the years ended December 31, 2004, 2005,
                and
                2006
            43Consolidated
                Statements of Stockholders' Equity and Comprehensive (Loss) Income
                for the
                years ended December 31, 2004, 2005, and 2006
            44Consolidated
                Statements of Cash Flows for the years ended December 31, 2004, 2005,
                and
                2006
            45Notes
                to Consolidated Financial Statements
            46-57Schedule
                II: Valuation and Qualifying Accounts for the years ended December
                31,
                2004, 2005, and 2006
            58






39




**REPORT
      OF UHY LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





The
      Board
      of Directors and Stockholders


Zoom
      Technologies, Inc.:








We
      have
      audited the accompanying consolidated balance sheet of Zoom Technologies, Inc.
      and subsidiary as of December 31, 2006 and the related consolidated statements
      of operations, stockholders' equity and comprehensive (loss) income, and cash
      flows for the year then ended. Our audit also included the financial statement
      schedule for 2006. These consolidated financial statements and schedule are
      the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these consolidated financial statements and schedule based on our
      audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). 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 audit provides 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 Technologies, Inc.
      and
      subsidiary as of December 31, 2006 and the results of their operations and
      their
      cash flows for the year then ended in conformity with accounting principles
      generally accepted in the United States of America. Also, in our opinion, the
      related financial statement schedule for 2006, when considered in relation
      to
      the basic financial statements taken as a whole, presents fairly, in all
      material respects, the information set forth therin.





As
      discussed in Note 2 to the consolidated financial statements, effective January
      1, 2006, the Company adopted Financial Accounting Standards Board Statement
      No.
      123 (Revised 2004) - “Share-Based Payment”.


/s/
                UHY LLPBoston,
                Massachusetts
              March
                27, 2007






40




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




The
      Board
      of Directors and Stockholders


Zoom
      Technologies, Inc.:




We
      have
      audited the accompanying consolidated balance sheet of Zoom Technologies, Inc.
      and subsidiary as of December 31, 2005, and the related consolidated statements
      of operations, stockholders' equity and comprehensive loss, and cash flows
      for
      each of the years in the two-year period ended December 31, 2005. 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 the standards of the Public Company
      Accounting Oversight Board (United States). 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 Technologies, Inc.
      and
      subsidiary as of December 31, 2005, and the results of their operations and
      their cash flows for each of the years in the two-year period ended December
      31,
      2005, in conformity with U.S. generally accepted accounting
      principles.




/s/
                KPMG LLPBoston,
                MassachusettsMarch
                31, 2006




41


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEETS**




**December
                31,****ASSETS**
            
            
            **2005**
            
            
            **2006***Current
                assets*Cash
                and cash equivalents
            
            $
            9,081,122
            
            $
            7,833,046Accounts
                receivable, net of allowances of $1,294,637 in 2005and
                $915,969 in 2006
            
            
            2,630,859
            
            
            3,385,280Inventories
            
            
            5,073,178
            
            
            4,511,814Prepaid
                expense and other current assets
            
            
            301,265
            
            
            269,301Total
                current assets
            
            
            17,086,424
            
            
            15,999,441Property,
                plant and equipment, net
            
            
            2,600,660
            
            
            249,221Total
                assets
            
            $
            19,687,084
            
            $
            16,248,662**LIABILITIES
                AND STOCKHOLDERS' EQUITY***Current
                liabilities*Accounts
                payable
            
            $
            3,140,593
            
            $
            2,639,935Accrued
                expense
            
            
            788,427
            
            
            562,349Deferred
                gain on sale of real estate
            
            
            -
            
            
            367,245Current
                portion of long term debt
            
            
            4,889,928
            
            
            -Total
                current liabilities
            
            
            8,818,948
            
            
            3,569,529Deferred
                gain on sale of real estate
            
            
            -
            
            
            357,373Total
                liabilities
            
            
            8,818,948
            
            
            3,926,902Commitments
                and Contingencies (note 7)*Stockholders'
                equity*
              Common
                stock, $0.01 par value:Authorized
                - 25,000,000 shares; issued - 9,355,366 shares, including shares
                held in
                treasury
            
            
            93,554
            
            
            93,554Additional
                paid-in capital
            
            
            31,015,977
            
            
            31,275,169Accumulated
                deficit
            
            
            (20,627,318
            )
            
            (19,597,296
            )Accumulated
                other comprehensive income -currency translation
                adjustment
            
            
            393,245
            
            
            557,655Treasury
                stock (8,400 shares), at cost
            
            
            (7,322
            )
            
            (7,322
            )Total
                stockholders' equity
            
            
            10,868,136
            
            
            12,321,760Total
                liabilities and stockholders' equity
            
            $
            19,687,084
            
            $
            16,248,662





See
      accompanying notes.




42


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**Years
      Ended December 31, 2004, 2005 and 2006**




**2004**
            
            **2005**
            
            **2006**Net
                sales
            
            $
            31,411,781
            
            $
            25,551,179
            
            $
            18,322,301Cost
                of goods sold
            
            
            23,345,918
            
            
            20,885,254
            
            
            15,720,574Gross
                profit
            
            
            8,065,863
            
            
            4,665,925
            
            
            2,601,727Operating
                expenses:Selling
            
            
            4,800,165
            
            
            4,059,318
            
            
            3,631,340General
                and administrative
            
            
            3,619,480
            
            
            3,552,985
            
            
            2,846,862Research
                and development
            
            
            2,927,225
            
            
            2,698,449
            
            
            2,157,52911,346,870
            
            
            10,310,752
            
            
            8,635,731Operating
                profit (loss) before gain on sale of real estate
            
            
            (3,281,007
            )
            
            (5,644,827
            )
            
            (6,034,004
            )Gain
                on sale of real estate
            
            
            -
            
            
            -
            
            
            4,752,625Operating
                profit (loss)
            
            
            (3,281,007
            )
            
            (5,644,827
            )
            
            (1,281,379
            )Other
                :Interest
                income
            
            
            149,381
            
            
            235,424
            
            
            226,015Interest
                expense
            
            
            (211,213
            )
            
            (253,797
            )
            
            (306,867
            )Gain
                on sale of investment in InterMute, Inc.
            
            
            -
            
            
            3,495,546
            
            
            2,105,433Other,
                net
            
            
            270,991
            
            
            59,651
            
            
            233,515Total
                other income, net
            
            
            209,159
            
            
            3,536,824
            
            
            2,258,096Income
                (loss) before income taxes
            
            
            (3,071,848
            )
            
            (2,108,003
            )
            
            976,717Income
                taxes (benefit)
            
            
            -
            
            
            9,134
            
            
            (
                53,405
            )Net
                income (loss)
            
            
            ($3,071,848
            )
            
            ($2,117,137
            )
            $
            1,030,122Basic
                and diluted net income (loss) per share
            
            
            ($0.36
            )
            
            ($0.23
            )
            $
            0.11Weighted
                average common and common equivalent shares:Basic
            
            
            8,590,092
            
            
            9,206,179
            
            
            9,346,966Diluted
            
            
            8,590,092
            
            
            9,206,179
            
            
            9,349,381





See
      accompanying notes.


43


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


**AND
      COMPREHENSIVE INCOME (LOSS)**


**Common
                      Stock**
                  
                  **Additional
                      Paid In**
                  
                  **Accumulated**
                  
                  **Accumulated
                      Other Comprehensive**
                  
                  **Treasury
                      Stock**
                  
                  **Total
                      Stockholders'****Shares**
                  
                  **Amount**
                  
                  **Capital**
                  
                  **Deficit**
                  
                  **Income
                      (A)**
                  
                  **Shares**
                  
                  **Amount**
                  
                  **Equity**Balance
                      at December 31,2003
                  
                  
                  8,084,616
                  
                  
                  80,846
                  
                  
                  28,500,421
                  
                  
                  (15,438,333
                  )
                  
                  334,609
                  
                  
                  8,400
                  
                  
                  (7,322
                  )
                  
                  13,470,221Net
                      income (loss)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (3,071,848
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (3,071,848
                  )Foreign
                      currency translation adjustment
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  189,104
                  
                  
                  -
                  
                  
                  -
                  
                  
                  189,104Comprehensive
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  *(*2,882,744
                  )Exercise
                      of stock options
                  
                  
                  850,900
                  
                  
                  8,509
                  
                  
                  2,072,306
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  2,080,815Balance
                      at December 31,2004
                  
                  
                  8,935,516
                  
                  
                  89,355
                  
                  
                  30,572,727
                  
                  
                  (18,510,181
                  )
                  
                  523,713
                  
                  
                  8,400
                  
                  
                  (7,322
                  )
                  
                  12,668,292Net
                      income (loss)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (2,117,137
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (2,117,137
                  )Foreign
                      currency translation adjustment
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (130,468
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (130,468
                  )Comprehensive
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (2,247,605
                  *)*Exercise
                      of stock options
                  
                  
                  419,850
                  
                  
                  4,199
                  
                  
                  443,250
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  447,449Balance
                      at December 31,2005
                  
                  
                  9,355,366
                  
                  
                  93,554
                  
                  
                  31,015,977
                  
                  
                  (20,627,318
                  )
                  
                  393,245
                  
                  
                  8,400
                  
                  
                  (7,322
                  )
                  
                  10,868,136Net
                      income (loss)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,030,022
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,030,022Foreign
                      currency translation adjustment
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  164,410
                  
                  
                  -
                  
                  
                  -
                  
                  
                  164,410Comprehensive
                      income (loss)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,194,432Stock
                      based compensation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  259,192
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  259,192Balance
                      at December 31,2006
                  
                  
                  9,355,366
                  
                  $
                  93,554
                  
                  $
                  31,275,169
                  
                  
                  ($19,597,296
                  )
                  $
                  557,655
                  
                  
                  8,400
                  
                  
                  ($7,322
                  )
                  $
                  12,321,760




(A)
      Consists exclusively of foreign currency translation adjustments.





See
      accompanying notes.




44




**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Years
      Ended December 31, 2004, 2005 and 2006**




**2004**
            
            **2005**
            
            **2006**Operating
                activities:Net
                income (loss)
            
            
            ($3,071,848
            )
            
            ($2,117,137
            )
            $
            1,030,023Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:Gain
                on sale of investment in InterMute, Inc.
            
            
            -
            
            
            (3,495,516
            )
            
            (2,105,433
            )Gain
                on sale of real estate
            
            
            
            
            
            
            
            
            (4,752,625
            )Depreciation
                and amortization
            
            
            405,158
            
            
            324,208
            
            
            140,540Stock
                based compensation
            
            
            -
            
            
            -
            
            
            259,192Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            771,767
            
            
            632,589
            
            
            (629,677
            )Inventories
            
            
            (259,262
            )
            
            (45,887
            )
            
            573,902Prepaid
                expense and other current assets
            
            
            (95,295
            )
            
            219,135
            
            
            37,084Accounts
                payable and accrued expense
            
            
            97,969
            
            
            626,798
            
            
            (
                702,546
            )Net
                cash provided by (used in) operating  activities
            
            
            (2,151,511
            )
            
            (3,855,810
            )
            
            (6,149,540
            )Investing
                activities:Proceeds
                from sale of Investment in InterMute, Inc.
            
            
            -
            
            
            3,495,517
            
            
            2,105,433Proceeds
                from sale of real estate
            
            
            
            
            
            
            
            
            7,733,970Purchases
                of property, plant and equipment
            
            
            (189,381
            )
            
            (223,976
            )
            
            (43,643
            )Net
                cash provided by (used in) investing activities
            
            
            (189,381
            )
            
            3,271,541
            
            
            9,795,760Financing
                activities:Repayment
                of long-term debt
            
            
            (217,966
            )
            
            (211,926
            )
            
            (4,889,929
            )Exercise
                of stock options
            
            
            2,080,815
            
            
            447,449Net
                cash provided by (used in) financing activities
            
            
            1,862,849
            
            
            235,523
            
            
            (4,889,929
            )Effect
                of exchange rate changes on cash
            
            
            12,255
            
            
            (8,728
            )
            
            (4,367
            )Net
                change in cash
            
            
            (465,788
            )
            
            (357,474
            )
            
            (1,248,076
            )Cash
                and cash equivalents at beginning of year
            
            
            9,904,384
            
            
            9,438,596
            
            
            9,081,122Cash
                and cash equivalents at end of year
            
            $
            9,438,596
            
            $
            9,081,122
            
            $
            7,833,046





See
      accompanying notes.




45




**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements**


**Years
      Ended December 31, 2004, 2005 and 2006**




**(1)**  **NATURE
      OF OPERATIONS**




Zoom
      Technologies,, Inc. and subsidiary (collectively, the "Company") design,
      produce, and market broadband and dial-up modems and other communication-related
      products





**(2)**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**




*(a)
      Basis of Presentation and Use of Estimates*




The
      consolidated financial statements are prepared in accordance with accounting
      principles generally accepted in the United States of America (US
      GAAP).





The
      preparation of financial statements in conformity with US GAAP 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
      expense during the reporting period. Actual results may differ from those
      estimates. Significant estimates made by the Company include: 1) asset valuation
      allowances for accounts receivable (collectibility and sales returns) and
      deferred income tax assets; 2) write-downs of inventory for slow-moving and
      obsolete items, and market valuations; 3) stock based compensation; 4) the
      useful lives of property, plant and equipment; and 5) the recoverability of
      long-lived assets .





*(b)
      Principles of Consolidation*




The
      consolidated financial statements include the accounts of Zoom Technologies,
      Inc. and its wholly owned subsidiary, Zoom Telephonics, Inc. All intercompany
      balances and transactions have been eliminated in consolidation.





*(c)
      Cash and Cash Equivalents*




All
      highly liquid investments with original maturities of less than 90 days from
      the
      date of purchase are classified as cash equivalents. Cash equivalents consist
      exclusively of money market funds. The Company has deposits at a limited number
      of financial institutions with federally insured limits. Balances of cash and
      cash equivalents at these institutions are normally in excess of the insured
      limits. However, the Company believes that the institutions are financial sound
      and there is only nominal risk of loss.





*(d)
      Inventories*




Inventories
      are stated at cost, determined using the first-in, first-out method, or
      market.





*(e)
      Property, plant and equipment*




Property,
      plant and equipment is stated and recorded at cost. Depreciation of property,
      plant and equipment is provided using the straight-line method, with
      amortization over the estimated useful lives of the assets.





*(f)
      Impairment of Long-Lived Assets*




Long-lived
      assets are reviewed for impairment annually or whenever events or changes in
      circumstances indicate that the carrying amount may not be
      recoverable.





Recoverability
      of assets to be held and used is measured by a comparison of the carrying amount
      of an asset or asset group to undiscounted future net cash flows expected to
      be
      generated by the asset or asset group. If such assets are considered to be
      impaired, the impairment to be recognized is measured by the amount by which
      the
      carrying amount of the assets exceeds the fair value of the assets. Assets
      to be
      disposed of are reported at the lower of the carrying amount or fair value
      less
      cost to sell.





*(g)
      Income Taxes*




Deferred
      income taxes are provided on the differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases and on net operating loss and tax credit carry forwards. Deferred income
      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.





46


**ZOOM
        TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Notes
        to Consolidated Financial
        Statements****(Continued)**




*(h)
      Earnings (Loss) Per Common Share*




Basic
      earnings (loss) per share is computed by dividing net income (loss) by the
      weighted average number of common shares outstanding during the period. Diluted
      loss per share is computed by dividing net income by the weighted average number
      of common shares and dilutive potential common shares outstanding during the
      period. Under the treasury stock method, the unexercised options are assumed
      to
      be exercised at the beginning of the period or at issuance, if later. The
      assumed proceeds are then used to purchase common shares at the average market
      price during the period. A summary of the denominators used to compute basic
      and
      diluted earnings (loss) per share follow:





**2004**
            
            **2005**
            
            **2006**Weighted
                average shares outstanding - used to compute basic earnings (loss)
                per
                share
            
            
            8,590,092
            
            
            9,206,179
            
            
            9,346,966Net
                effect of dilutive potential common sharesoutstanding,
                based on the treasury stock method
            
            
            -
            
            
            -
            
            
            2,415Weighted
                average shares outstanding - used to compute diluted earnings (loss)
                per
                share
            
            
            8,590,092
            
            
            9,206,179
            
            
            9,349,381





Potential
      common shares for which inclusion would have the effect of increasing diluted
      earnings per share (i.e., antidilutive) are excluded from the computation.
      The
      dilutive effect of options to purchase 769,790 and 187,438 shares of common
      stock at December 31, 2004 and 2005, respectively, were outstanding, but not
      included in the computation of diluted earnings per share as their effect would
      be antidilutive.





*(i)
      Revenue Recognition*




The
      Company primarily sells hardware products to its customers. The hardware
      products include dial-up modems, DSL modems, cable modems, embedded modems, ISDN
      modems, telephone dialers, and wireless and wired networking equipment. The
      Company generally does not sell software.





The
      Company derives its net sales primarily from the sales of hardware products
      to
      computer peripherals retailers, computer product distributors, and original
      equipment manufacturers (OEMs). The Company sells a very small amount of its
      hardware products to direct consumers or to any customers via the
      internet.





The
      Company recognizes hardware net sales for all four types of customers at the
      point when the customers take legal ownership of the delivered products. Legal
      ownership passes to the customer based on the contractual FOB point specified
      in
      signed contracts and purchase orders, which are both used extensively. Many
      customer contracts or purchase orders specify FOB destination. The Company
      verifies the delivery date on all significant FOB destination shipments made
      during the last 10 business days of each quarter.





The
      Company's net sales of hardware are reduced by certain events which are
      characteristic of the sales of hardware to retailers of computer peripherals.
      These events are product returns, certain sales and marketing incentives, price
      protection refunds, and consumer and in-store mail-in rebates. Each of these
      is
      accounted for as a reduction of net sales based on careful management estimates,
      which are reconciled to actual customer or end-consumer credits on a monthly
      or
      quarterly basis.





The
      estimates for product returns are based on recent historical trends plus
      estimates for returns prompted by announced stock rotations, announced customer
      store closings, etc. Management analyzes historical returns, current economic
      trends, and changes in customer demand and acceptance of the Company's products
      when evaluating the adequacy of sales return allowances. The Company's estimates
      for price protection refunds require a detailed understanding and tracking
      by
      customer, by sales program. Estimated price protection refunds are recorded
      in
      the same period as the announcement of a pricing change. Information from
      customer inventory-on-hand reports or from direct communications with the
      customers is used to estimate the refund, which is recorded as a reserve against
      accounts receivable and a reduction of current period revenue. The Company's
      estimates for consumer mail-in rebates are comprised of actual rebate claims
      processed by the rebate redemption centers plus an accrual for an estimated
      lag
      in processing. The Company's estimates for store rebates are comprised of actual
      credit requests from the eligible customers.





*(j)
      Financial Instruments*




Financial
      instruments consist of cash and cash equivalents, accounts receivable, accounts
      payable, accrued expense, and, until December 2006 when the Company paid off
      its
      mortgage, borrowings. Due to the short term nature of these instruments or
      the
      corresponding variable interest rate attached to the debt, the carrying amount
      of these financial instruments approximates fair value.





47


**ZOOM
        TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Notes
        to Consolidated Financial Statements****(Continued)**




*(k)
      Stock-Based Compensation*




Effective
      January 1, 2006, the Company adopted SFAS No. 123 (R), “Accounting for Stock
      Based Compensation” using the modified-prospective method. Under this method,
      compensation cost is recognized for all share-based payments granted, modified
      or settled after January 1, 2006, as well as for any unvested awards that were
      granted prior thereto. Compensation cost for unvested awards granted prior
      to
      January 1, 2006 is recognized using the same estimate of the grant-date fair
      value and the same attribution method used to determine the pro forma
      disclosures under SFAS No. 123, “Accounting for Stock-Based Compensation.”
Compensation cost for awards granted after January 1, 2006 is based on the
      estimated fair value of the awards on their grant date and is generally
      recognized over the required service period. Prior to January 1, 2006, the
      Company accounted for its stock option plans under the recognition and
      measurement principles of Accounting Principles Board (APB) Opinion No. 25,
      "Accounting for Stock Issued to Employees”, and related Interpretations. No
      stock-based compensation expense was recognized in operations for these plans,
      since all options granted under them had an exercise price equal to the market
      value of the underlying common stock on the date of grant. The effect of
      adopting SFAS No. 123(R) was to increase compensation cost and reduce reported
      net income for the year ended December 31, 2006 by $259.2 thousand, or $0.03
      per
      basic share and $0.03 per diluted share. Stock based compensation cost is
      generally deductible for income tax reporting purposes; there was no effect
      on
      cash flows.





The
      unrecognized stock-based compensation cost related to non-vested stock awards
      as
      of December 31, 2006 was $250.1 thousand. Such amount will be recognized in
      operations ratably over a remaining period of two years.





Pro
      forma
      information as if the Company had applied the fair value method to recognize
      stock based compensation cost follows:


Year
                  ended December 312004
              
              2005Net
                  loss, as reported
              
              
              ($3,071,848
              )
              
              ($2,117,137
              )Stock-based
                  employee compensation expense determined using fair value
              
              
              (591,459
              )
              
              (782,618
              )Pro
                  forma net loss
              
              
              ($3,663,307
              )
              
              ($2,899,755
              )Net
                  loss per share, as reported - Basic and diluted
              
              
              ($0.36
              )
              
              ($0.23
              )Net
                  loss per share, pro forma - Basic and diluted
              
              
              ($0.43
              )
              
              ($0.31
              )




Weighted-average
      assumptions: 2004-expected dividend yield 0.0%, risk-free interest rate of
      2.32%, volatility 110% and an expected life of 2.0 years; 2005-expected dividend
      yield 0.0%, risk-free interest rate of 3.6%, volatility 91% and an expected
      life
      of 2.47 years and 2006 -expected dividend yield 0.0%, risk-free interest rate
      of
      4.59%, volatility 58.6% and an expected life of 2.22 years.





*(l)
      Advertising Costs*




Advertising
      costs are expensed as incurred and reported in selling expense 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 deferred advertising costs
      in
      the accompanying consolidated balance sheets.





*(m)
      Foreign Currencies*




The
      Company generates a portion of its revenues in markets outside North America
      and
      principally in transactions that are denominated in foreign currencies, which
      exposes the Company to risks of foreign currency fluctuations. Foreign currency
      transaction gains and losses are reflected in operations and were not material
      for any period presented. The Company does not use derivative financial
      instruments.





The
      Company considers the local currency to be the functional currency for its
      U.K.
      branch. Assets and liabilities denominated in foreign currencies are translated
      using the exchange rates as of the balance sheet date. Revenues and expenses
      are
      translated at average exchange rates prevailing during the year. Translation
      adjustments resulting from this process are charged or credited to accumulated
      other comprehensive income.




48


**ZOOM
          TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Notes
          to Consolidated Financial Statements****(Continued)**




*(n)
      Warranty Costs*




The
      Company provides currently for the estimated costs that may be incurred under
      its standard warranty obligations.





*(o)
      Shipping and Freight Costs*




The
      Company records the expense associated with customer-delivery shipping and
      freight costs in selling expense.





**(3)** **LIQUIDITY**




On
      December 31, 2006 the Company had working capital of $12.4 million including
      $7.8 million in cash and cash equivalents. On December 31, 2005 the Company
      had
      working capital of $8.3 million including $9.1 million in cash and cash
      equivalents. The Company’s current ratio at December 31, 2006 was 4.5 compared
      to 1.9 at December 31, 2005. The significant improvement was primarily the
      result of the sale of the Company’s headquarters net of the payment of the
      related mortgage debt.





In
      2006
      operating activities used $6.2 million in cash. The Company’s net income in 2006
      was $1.0 million which included an operating loss of $6.0 million before the
      gain on the sale of the headquarters of $4.8 million and net non-operating
      income of $2.3 million, including a $2.1 million gain on the sale of the
      investment in InterMute, Inc. Sources of cash from operations included a
      decrease in inventory of $0.6 million and non-cash depreciation and amortization
      expense of $0.1 million. Uses of cash from operations included an increase
      in
      accounts receivable of $0.6 million and a decrease of accounts payable and
      accrued expenses of $0.7 million.





In
      2006
      the Company’s net cash provided by investing activities was $9.8 million, which
      included the proceeds from the sale of its headquarters building of $7.7 million
      and $2.1 million of final payments received from the sale of InterMute, Inc..
      This was partially offset by our $0.04 million investment in property, plant
      and
      equipment.





In
      2006
      $4.9 million cash was used by financing activities for the full repayment of
      the
      mortgage on the Company’s headquarters building.





On
      March
      16, 2005 the Company entered into a one year Loan and Security Agreement with
      Silicon Valley Bank that provided for a revolving line of credit of up to $2
      million. The revolving line of credit terminated, as scheduled, on March 15,
      2006. There were no borrowings under the line for the entire one year contract.
      As a result of the building sale and our efforts to minimize expenses, we are
      not currently pursuing a renewal of the credit line.





To
      conserve cash and manage our liquidity, the Company has implemented cost cutting
      initiatives including the reduction of employee headcount and overhead costs.
      The employee headcount was 127 at December 31, 2005 and 69 at December 31,
      2006.
      Forty-seven of this total reduction of 58 resulted from the closing of the
      Company’s Boston manufacturing facility in August 2006. The Company’s production
      activity was outsourced to a lower-cost maquiladora factory in Tijuana, Mexico.
      The Company plans to continue to assess its cost structure as it relates to
      revenues and cash position, and the Company may make further reductions if
      the
      actions are deemed necessary.





The
      Company's total current assets at December 31, 2006 were $16.0 million and
      current liabilities were $3.6 million. The Company did not have any long-term
      debt at December 31, 2006. Management believes it has sufficient resources
      to
      fund its planned operations through at least December 31, 2007. However, if
      the
      Company is unable to increase its revenues, reduce its expense, or raise capital
      the Company's longer-term ability to continue as a going concern and achieve
      its
      intended business objectives could be adversely affected.




**(4)** **NEW
      ACCOUNTING PRONOUNCEMENTS**





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
      interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the
      accounting for uncertainty in income taxes by prescribing a recognition
      threshold and measurement attribute for the financial statement recognition
      and
      measurement of a tax position taken or expected to be taken in a tax return.
      FIN
      48 also provides guidance on derecognition, classification, interest and
      penalties, accounting in interim periods, and disclosure. This pronouncement
      is
      effective for fiscal years beginning after December 15, 2006, and the Company
      will adopt FIN 48 effective the beginning of fiscal 2007. Differences between
      the amounts recognized in the adoption will be accounted for as a
      cumulative-effect adjustment. The Company is currently assessing the impact
      of
      FIN 48 on its financial statements. The Company does not believe that the
      adoption of FIN 48 will have a significant impact on its financial
      statements.




49


**ZOOM
          TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Notes
          to Consolidated Financial Statements****(Continued)**




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value,
      establishes a framework for measuring fair value, and expands disclosure
      requirements regarding fair value measurement. This statement simplifies and
      codifies fair value related guidance previously issued and is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The Company does not believe
      that
      SFAS 157 will significantly impact its financial statements.





In
      June
      2006, the FASB issued Emerging Issues Tax Force Issue No. 06-3, or EITF 06-3,
      How Sales Taxes Collected from Customers and Remitted to Governmental
      Authorities Should Be Presented in the Income Statement (That Is, Gross Versus
      Net Presentation). EITF 06-3 requires disclosure of accounting policy regarding
      the gross or net presentation of point-of-sales taxes such as sales tax and
      value-added tax. If taxes included in gross revenues are significant, the amount
      of such taxes for each period for which an income statement is presented should
      also be disclosed. EITF 06-3 will be effective for the first annual or interim
      reporting period after December 15, 2006. The Company will adopt this
      pronouncement beginning in the first quarter of 2007 and does not expect the
      adoption of EITF 06-3 to have a material impact on its financial statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 provides
      guidance on the consideration of the effects of prior year unadjusted errors
      in
      quantifying current year misstatements for the purpose of a materiality
      assessment. SAB 108 requires registrants to apply the new guidance the first
      time that it identifies material errors in existence at the beginning of the
      first fiscal year ending after November 15, 2006 by correcting those errors
      through a one-time cumulative effect adjustment to beginning-of-year retained
      earnings. The Company’s financial statements were not effected by SAB
      108.





**(5)** **INVENTORIES**




Inventories
      consist of the following at December 31:





**2005**
            
            **2006**Materials
            
            $
            2,333,949
            
            $
            2,969,375Work
                in process
            
            
            648,034
            
            
            522,307Finished
                goods (including $563,000 held by a customer at December 31, 2006)
            
            
            2,091,195
            
            
            1,020,132Total
            
            $
            5,073,178
            
            $
            4,511,814





**(6)**  **PROPERTY,
      PLANT AND EQUIPMENT**




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




**2005**
            
            **2006**
            
            **Estimateduseful
                lives**Land
            
            $
            309,637
            
            $
            -
            
            
            -Buildings
                and improvements
            
            
            2,842,766
            
            
            -
            
            
            31.5
                yearsLeasehold
                improvements
            
            
            492,617
            
            
            6,100
            
            
            5
                yearsComputer
                hardware and software
            
            
            3,677,616
            
            
            3,706,110
            
            
            3
                yearsMachinery
                and equipment
            
            
            1,836,453
            
            
            1,905,434
            
            
            5
                yearsMolds,
                tools and dies
            
            
            1,605,119
            
            
            1,607,669
            
            
            5
                yearsOffice
                furniture and fixtures
            
            $
            275,516
            
            $
            277,337
            
            
            5
                years$
            11,039,724
            
            $
            7,502,650Accumulated
                depreciation and amortization
            
            
            (8,439,064
            )
            
            (7,253,429
            )Total
                Property, plant and equipment, net
            
            $
            2,600,660
            
            $
            249,221




50


**ZOOM
          TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Notes
          to Consolidated Financial Statements****(Continued)**




**(7)** **COMMITMENTS
      AND CONTINGENCIES**




*(a)
      Lease Obligations*




The
      Company leases its headquarters’ offices in Boston, Massachusetts, a
      manufacturing facility in Tijuana, Mexico, a sales office facility in Fleet,
      United Kingdom, and a technical support facility in Boca Raton, Florida. In
      December, 2006, the Company sold its owned headquarters buildings in Boston,
      Massachusetts and leased back 25,000 square feet for two years expiring December
      2008 (see Note 8). In September 2006 the Company moved out of its leased
      manufacturing facility in Boston, Massachusetts and moved into a leased
      manufacturing facility in Tijuana, Mexico. The Mexico lease expires on April
      30,
      2008 with five two year option renewals thereafter. In September 2005 the
      Company entered into a two year office lease at 2 Kings Road, Fleet, Hants,
      U.K.
      In September 2002 we entered into a five year lease, as a tenant, for
      approximately 3,500 square feet at 951 Broken Sound Parkway, Boca Raton,
      Florida, which expires in August 2007. Total rent expense, under non-cancelable
      operating leases, was $795,102, $733,760, and $576,477 for the years ended
      December 31, 2004, 2005 and 2006, respectively.





The
      Company's estimated future minimum rental payments, excluding executory costs,
      under these operating leases are set forth in the table below.




**Year**
            
            **Total**2007
            
            $
            669,8202008
            
            $
            460,861





*(b)
      Contingencies*




The
      Company is party to various lawsuits and administrative proceedings arising
      in
      the ordinary course of business. The Company evaluates such lawsuits and
      proceedings on a case-by-case basis, and its policy is to vigorously contest
      any
      such claims which it believes are without merit. The Company's management
      believes that the ultimate resolution of such pending matters will not
      materially and adversely affect the Company's business, financial position,
      results of operations or cash flows.





*(c)
      Concentrations*




The
      Company participates in the PC peripherals industry, which is characterized
      by
      aggressive pricing practices, continually changing customer demand patterns
      and
      rapid technological developments. The Company's operating results could be
      adversely affected should the Company be unable to successfully anticipate
      customer demand accurately; manage its product transitions, inventory levels
      and
      manufacturing process efficiently; distribute its product quickly in response
      to
      customer demand; differentiate its products from those of its competitors or
      compete successfully in the markets for its new products.





The
      Company depends on many third-party suppliers for key components contained
      in
      its product offerings. For some of these components, the Company may only use
      a
      single source supplier, in part due to the lack of alternative sources of
      supply. If the supply of a key material component is delayed or curtailed,
      the
      Company's ability to ship the related product or solution in desired quantities
      and in a timely manner could be adversely affected, possibly resulting in
      reductions in net sales. In cases where alternative sources of supply are
      available, qualification of the sources and establishment of reliable supplies
      could result in delays and possible reduction in net sales.





In
      the
      event that the financial condition of the Company's third-party suppliers for
      key components was to erode, the delay or curtailment of deliveries of key
      material components could occur. Additionally, the Company's reliance on
      third-party suppliers of key material components exposes the Company to
      potential product quality issues that could affect the reliability and
      performance of its products and solutions. Any lesser ability to ship its
      products in desired quantities and in a timely manner due to a delay or
      curtailment of the supply of material components, or product quality issues
      arising from faulty components manufactured by third-party suppliers, could
      adversely affect the market for the Company's products and lead to a reduction
      in the Company's net sales.





**(8)**  **SALE/LEASEBACK
      AND MORTGAGE DEBT**





In
      December 2006, the Company sold real estate housing its corporate headquarters
      and concurrently entered into a leaseback arrangement for a portion of the
      property. The leaseback arrangement is for two years. Net proceeds from the
      sale
      were $7,733,970 of which a portion was used to retire related outstanding
      mortgage debt. A gain of $5,477,243 was realized on the sale. However, a portion
      of the gain ($724,618) has been deferred and will be recognized in operations
      over the term of the lease (2007 - $367,245 and 2008 - $357,373). The gain
      deferred is the estimated present value of the minimum lease payments under
      the
      leaseback arrangement. The gain recognized in operations in 2006 was
      $4,752,625.




51


**ZOOM
          TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Notes
          to Consolidated Financial Statements****(Continued)**




**(9)** **STOCK
      OPTION PLANS**




At
      December 31, 2006 the Company had three stock option plans as described
      below.





*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 3,300,000 shares of common stock for
      issuance upon the exercise of stock options granted under the plan. Shares
      of
      common stock were registered for issuance under this plan in accordance with
      the
      Securities Act of 1933. Under this plan, stock options are granted at the
      discretion of the Compensation Committee of the Board of Directors at an option
      price not less than the fair market value of the stock on the date of grant.
      The
      options are exercisable in accordance with terms specified by the Compensation
      Committee not to exceed ten years from the date of grant. Option activity under
      this plan follows:




**Number
                of shares**
            
            **Weighted
                average****exercise
                price**Balance
                at December 31, 2003
            
            
            1,199,000
            
            $
            2.13Granted
            
            
            -
            
            
            -Exercised
            
            
            (631,000
            )
            $
            2.67Expired
            
            
            -
            
            
            -Balance
                at December 31, 2004
            
            
            568,000
            
            $
            1.52Granted
            
            
            335,000
            
            $
            2.45Exercised
            
            
            (267,000
            )
            $
            1.03Expired
            
            
            -
            
            
            -Balance
                at December 31, 2005
            
            
            636,000
            
            $
            2.21Granted
            
            
            335,000
            
            $
            1.03Exercised
            
            
            -
            
            
            -Expired
            
            
            (301,000
            )
            $
            1.95Balance
                at December 31, 2006
            
            
            670,000
            
            $
            1.74





The
      weighted average grant date fair value of options granted was $2.45 in 2005
      and
      $1.03 in 2006.





The
      following table summarizes information about fixed stock options under the
      Employee Stock Option Plan outstanding on December 31, 2006:





**Options
                Outstanding**
            
            **Options
                Exercisable****Exercise
                Prices**
            
            **Number****Outstanding**
            
            **Weighted
                Average Remaining****Contractual
                Life**
            
            **Weighted
                Average****Exercise
                Price**
            
            **Number****Exercisable**
            
            **Weighted
                Average****Exercise
                Price**$1.03
            
            
            335,000
            
            
            2.9
            
            $
            1.03
            
            
            0
            
            $
            0$2.45
            
            
            335,000
            
            
            1.3
            
            $
            2.45
            
            
            167,500
            
            $
            2.45**$1.03
                to $2.45**
            
            
            **670,000**
            
            
            **2.1**
            
            **$**
            **1.74**
            
            
            **167,500**
            
            **$**
            **2.45**




In
      1991
      the Company established the Director Stock Option Plan (the "Directors Plan").
      Shares of common stock were registered for issuance under this plan in
      accordance with the Securities Act of 1933. The Directors Plan was established
      for all directors of the Company except for any director who is a full-time
      employee or full-time officer of the Company. In 2003, the Directors Plan was
      amended to provide that, each eligible director is automatically granted an
      option to purchase 12,000 shares of common stock on July 10 and January 10
      of
      each year, beginning July 10, 2003. The option price is the fair market value
      of
      the common stock on the date the option is granted. There are 450,000 shares
      authorized for issuance under the Directors Plan. Each option expires two years
      from the grant date. Option activity under this plan follows:




**Number
                of shares**
            
            **Weighted
                average**
                **exercise
                  price**Balance
                at December 31, 2003
            
            
            54,000
            
            $
            0.94Granted
            
            
            72,000
            
            $
            3.81Exercised
            
            
            (30,000
            )
            $
            0.85Expired
            
            
            -
            
            
            -Balance
                at December 31, 2004
            
            
            96,000
            
            $
            3.12Granted
            
            
            72,000
            
            $
            2.82Exercised
            
            
            (24,000
            )
            $
            1.05Expired
            
            
            (36,000
            )
            $
            3.64Balance
                at December 31, 2005
            
            
            108,000
            
            $
            3.20Granted
            
            
            72,000
            
            $
            1.275Exercised
            
            
            -
            
            
            -Expired
            
            
            (48,000
            )
            $
            3.81Balance
                at December 31, 2006
            
            
            132,000
            
            $
            1.93




52


**ZOOM
        TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Notes
        to Consolidated Financial Statements****(Continued)**




The
      weighted average grant date fair value of options granted was $3.81 in 2004,
      $2.82 in 2005 and $1.275 in 2006.





The
      following table summarizes information about fixed stock options under the
      Directors Plan on December 31, 2006:





**Options
                Outstanding**
            
            **Options
                Exercisable****Exercise
                Prices**
            
            **Number****Outstanding**
            
            **Weighted
                Average Remaining****Contractual
                Life**
            
            **Weighted
                Average****Exercise
                Price**
            
            **Number****Exercisable**
            
            **Weighted
                Average****Exercise
                Price**$0.00-$1.75
            
            
            72,000
            
            
            1.3
            
            $
            1.275
            
            
            36,000
            
            $
            1.47$1.75-$3.50
            
            
            60,000
            
            
            0.3
            
            $
            2.71
            
            
            60,000
            
            $
            2.71$1.08-$3.31
            
            
            132,000
            
            
            0.8
            
            $
            1.93
            
            
            96,000
            
            $
            2.24




1998
      Employee Equity Incentive Stock Option Plan




The
      1998
      Employee Equity Incentive Stock Option Plan (the "1998 Plan") was adopted by
      the
      Board of Directors to attract and retain employees and provide an incentive
      for
      them to assist the Company to achieve long-range performance goals, and to
      enable them to participate in the long-term growth of the Company. Non-employee
      directors of the Company and certain officers of the Company are not entitled
      to
      participate under this plan. The authorized number of shares available for
      issuance under the 1998 Plan is 1,200,000 shares of common stock. Under this
      plan, stock options may be granted at the discretion of the Compensation
      Committee of the Board of Directors at an option price determined by the
      Compensation Committee. All options under this plan have been issued at fair
      market value on the date of the grant. The options are exercisable in accordance
      with terms specified by the Compensation Committee. Option activity under this
      plan follows:




**Number
                of shares**
            
            **Weighted
                average**
                **exercise
                  price**Balance
                at December 31, 2003
            
            
            582,050
            
            $
            1.76Granted
            
            
            68,500
            
            $
            3.64Exercised
            
            
            (189,900
            )
            $
            1.95Expired
            
            
            (70,075
            )
            $
            2.19Balance
                at December 31, 2004
            
            
            390,575
            
            $
            1.91Granted
            
            
            300,000
            
            $
            2.42Exercised
            
            
            (128,850
            )
            $
            1.14Expired
            
            
            (68,025
            )
            $
            2.34Balance
                at December 31, 2005
            
            
            493,700
            
            $
            2.36Granted
            
            
            273,000
            
            $
            1.03Exercised
            
            
            -
            
            
            -Expired
            
            
            (
                215,700
            )
            $
            1.97Balance
                at December 31, 2006
            
            
            551,000
            
            $
            1.85





The
      weighted average grant date fair value of options granted was $3.64 in 2004,
      $2.42 in 2005 and $1.03 in 2006.




53


**ZOOM
          TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Notes
          to Consolidated Financial Statements****(Continued)**




The
      following table summarizes information about fixed stock options under the
      1998
      Plan outstanding on December 31, 2006:





**Options
                Outstanding**
            
            **Options
                Exercisable****Exercise
                Prices**
            
            **Number****Outstanding**
            
            **Weighted
                Average Remaining****Contractual
                Life**
            
            **Weighted
                Average****Exercise
                Price**
            
            **Number****Exercisable**
            
            **Weighted
                Average****Exercise
                Price**$0.00-$1.75
            
            
            273,000
            
            
            2.9
            
            $
            1.03
            
            
            0
            
            $
            0$1.75-$3.50
            
            
            226,000
            
            
            1.2
            
            $
            2.42
            
            
            123,000
            
            $
            2.43$3.50-$5.25
            
            
            52,000
            
            
            0.7
            
            $
            3.70
            
            
            52,000
            
            $
            3.70$1.03-$4.83
            
            
            551,000
            
            
            2.0
            
            $
            1.85
            
            
            175,000
            
            $
            2.81





On
      October 26, 2005, the Company accelerated the vesting of all stock options
      previously awarded to employees and officers that were scheduled to vest on
      or
      before May 6, 2006. These stock options had exercise prices in excess of $1.76,
      the closing price of our Common Stock on October 26, 2005, the effective date
      of
      the acceleration. As a result of the acceleration, stock options to purchase
      317,500 shares became exercisable immediately. These accelerated stock options
      represented 33% of the total outstanding unvested stock options and
      approximately 25% of the total outstanding stock options as of October 26,
      2005.
      The weighted average exercise price of the accelerated stock options is $2.44
      per share.





The
      primary purpose of the acceleration of the vesting of these stock options was
      to
      reduce our future reported compensation expense upon the planned adoption of
      Statement of Financial Accounting Standards (SFAS) No. 123R, “Share Based
      Payment” effective January 1, 2006. As a result of the acceleration, there was
      no impact to our reported financial results through December 31, 2005 and the
      action reduced the stock option expense we otherwise would have recorded by
      approximately $130,000 for 2006.





In
      2006
      there were no options exercised for the above referenced plans. The aggregate
      intrinsic value of all options outstanding as of December 31, 2006 was $54,720.





On
      December 31, 2006 there were 850,446 additional shares available for issuance
      under all three stock option plans. The per share weighted-average fair value
      of
      stock options granted during, 2004, 2005 and 2006 was $2.18, $1.35 and $0.3928
      respectively, determined as of the date of grant using the Black Scholes
      option-pricing model.





**(10)**  **INCOME
      TAXES**




Income
      tax expense (benefit) consists of:




**Current**
            
            **Deferred**
            
            **Total**Year
                Ended December 31, 2005:US
                federal
            
            $
            -
            
            $
            -
            
            $
            -State
                and local
            
            
            -
            
            
            -
            
            
            -Foreign
            
            $
            9,134
            
            $
            -
            
            $
            9,134$
            9,134
            
            $
            -
            
            $
            9,134Year
                Ended December 31, 2006:US
                federal
            
            $
            47,483
            
            $
            -
            
            $
            47,483State
                and local
            
            
            (100,006
            )
            
            -
            
            
            (100,006
            )Foreign
            
            $
            (882
            )
            $
            -
            
            $
            (882
            )$
            (53,405
            )
            $
            -
            
            $
            (53,405
            )







54


**ZOOM
          TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Notes
          to Consolidated Financial Statements****(Continued)**




A
      reconciliation of the expected income tax expense or benefit to actual
      follows:





**2004**
            
            **2005**
            
            **2006**Computed
                "expected" US tax (benefit)
            
            
            ($1,044,428
            )
            
            ($716,721
            )
            $
            333,455Change
                resulting from:State
                and local income taxes, net of federal income tax benefit
            
            
            -
            
            
            -
            
            
            (66,004
            )Federal
                valuation allowance
            
            
            1,023,535
            
            
            730,525
            
            
            406,594Non-deductible
                items
            
            
            
            
            
            
            
            
            38,251Change
                in estimate for prior years’ provisions
            
            
            
            
            
            
            
            
            46,601Other,
                net
            
            
            20,893
            
            
            (4,670
            )
            
            887Income
                tax expense (benefit)
            
            $
            -
            
            $
            9,134
            
            $
            (53,405
            )




Temporary
      differences at December 31 follow:





**2004**
            
            **2005**
            
            **2006**Deferred
                income tax assets:Inventories
            
            $
            1,861,978
            
            $
            1,654,471
            
            $
            1,511,389Accounts
                receivable
            
            
            270,041
            
            
            303,392
            
            
            253,501Accrued
                expenses
            
            
            166,487
            
            
            152,852
            
            
            97,565Net
                operating loss and tax credit carry forwards
            
            
            11,325,988
            
            
            11,770,977
            
            
            12,410,482Plant
                and equipment
            
            
            1,616,459
            
            
            988,263
            
            
            656,327Other
            
            
            118,526
            
            
            115,624
            
            
            2,056Total
                deferred income tax assets
            
            
            15,359,479
            
            
            14,985,579
            
            
            14,920,466Valuation
                allowance
            
            
            (15,359,479
            )
            
            (14,985,579
            )
            
            (14,920,466
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -
            
            $
            -




On
      December 31, 2006 the Company had federal net operating loss carry forwards
      of
      approximately $32,570,000 which are available to offset future taxable income.
      They are due to expire in varying amounts from 2018 to 2026. The
      Company had state net operating loss carry forwards of approximately $13,363,000
      which are available to offset future taxable income. They are due to expire
      in
      varying amounts from 2007 through 2011. The Company recorded a deferred income
      tax asset valuation allowance for the portion of the deferred income tax assets
      that management believes may expire unused. The valuation allowance reduces
      deferred income tax assets to reflect the estimated amount of deferred tax
      assets, which will more likely not be realized after considering all the
      available objective evidence, historical and prospective, with greater weight
      given to historical evidence.





Subsequently
      recognized tax benefits relating to valuation allowances for deferred income
      tax
      assets, if any, will be allocated as follows: $14,155,000 to continuing
      operations and $765,000 to additional paid-in capital which is attributable
      to
      the exercise of employee stock options.





**(11)**  **SIGNIFICANT
      CUSTOMERS**




The
      Company sells its products primarily through high-volume distributors and
      retailers, Internet service providers, telephone service providers, value-added
      resellers, PC system integrators, and original equipment manufacturers ("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 attractive products.





Relatively
      few customers have accounted for a substantial portion of the Company’s net
      sales. During 2006 the Company’s top customer which accounted for 10% or more of
      its total net sales was Dixon’s Store Group, a major retailer in the U.K. Two
      other customers each accounted for 9% of total net sales. Together these three
      customers accounted for 30% of the Company’s total net sales and 56% of net
      accounts receivable. Two customers each comprised approximately 10% or more
      of
      net sales for the year ended December 31, 2005. Three customers each accounted
      for approximately 10% or more of net sales for the years ended December 31,
      2004. In the year 2005 two customers comprised approximately 33% of net sales
      and, on December 31, 2005, 19% of net accounts receivable. In the year 2004,
      three customers comprised approximately 38% of net sales and, on December 31,
      2004, 38% of net accounts receivable.





The
      Company’s customers generally do not enter into long-term agreements obligating
      them to purchase products. The Company may not continue to receive significant
      revenues from any of these or from other large customers. A reduction or delay
      in orders from any of the Company’s significant customers, or a delay or default
      in payment by any significant customer could materially harm the Company’s
      business and prospects. Because of the Company’s significant customer
      concentration, its net sales and operating income could fluctuate significantly
      due to changes in political or economic conditions, or the loss, reduction
      of
      business, or less favorable terms for any of the Company's significant
      customers.





55


**ZOOM
        TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Notes
        to Consolidated Financial Statements****(Continued)**


**(12)**  **GAIN
      ON SALE OF INVESTMENT IN INTERMUTE**




Since
      1999 the Company had a minority interest in a privately held software company,
      InterMute, Inc., which the Company had been accounting for under the equity
      method of accounting. The Company made its original investment in 1999, at
      the
      time of the company’s formation, and subsequently made additional investments.
      Under the equity method of accounting, the Company's investment was increased
      or
      decreased, not below zero, based upon the Company's proportionate share of
      the
      net earnings or losses of InterMute. As a result of the losses incurred by
      InterMute subsequent to the Company's investments, the Company's investment
      balance was reduced to zero during 2002. The Company discontinued applying
      the
      equity method when the investment was reduced to zero and did not provide for
      additional losses, as the Company did not guarantee obligations of the investee
      and was not committed to provide further financial support.





In
      June
      2005 InterMute was acquired by Trend Micro Inc., a U.S. subsidiary of Trend
      Micro Japan. In connection with the acquisition of InterMute in June 2005,
      the
      Company received a payment in exchange for its investment of approximately
      $3.5
      million, also in June 2005. The Company realized in cash an additional gain
      of
      $2.1 million during 2006, representing its portion of an earnout paid by the
      buyer as a result of the achievement of a performance milestone. Total net
      proceeds from the sale of the Company’s minority interest in InterMute were $5.6
      million, received over 2005 and 2006. There will be no further payments from
      the
      sale of InterMute.





**(13)**  **SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION**





**2004**
            
            **2005**
            
            **2006**Cash
                paid during year for interest
            
            $
            210,941
            
            $
            252,797
            
            $
            306,867Cash
                paid during year for income taxes
            
            $
            -
            
            $
            4,253
            
            $
            -




**(14)**  **DEPENDENCE
      ON KEY SUPPLIERS AND CONTRACT MANUFACTURERS**




The
      Company produces its products using components or subassemblies purchased from
      third-party suppliers.





Currently
      a substantial percentage of our manufacturing is performed by SameTime
      Electronics ("SameTime”). The loss of their services or a material adverse
      change in their business or in our relationship could materially and adversely
      harm our business. To lessen the risk associated with this company being the
      primary manufacturer of a substantial portion of our products and for a number
      of other reasons including cost and availability, we are also using six other
      vendors to manufacture various products.





**(15)**  **SEGMENT
      AND GEOGRAPHIC INFORMATION**




The
      Company's operations are classified as one reportable segment. Substantially
      all
      of the Company's operations and long-lived assets reside primarily in the United
      States. Net sales information follows:





**2004**
            
            **Percent**
            
            **2005**
            
            **Percent**
            
            **2006**
            
            **Percent**North
                America
            
            $
            14,026,601
            
            
            45%
            
            $
            11,575,212
            
            
            45%
            
            $
            10,278,545
            
            
            56%Outside
                North America
            
            
            17,385,180
            
            
            55%
            
            
            13,975,967
            
            
            55%
            
            
            8,043,756
            
            
            44%Total
            
            $
            31,411,781
            
            
            100%
            
            $
            25,551,179
            
            
            100%
            
            $
            18,322,301
            
            
            100%




( **16)**  **RETIREMENT
      PLAN**




The
      Company has a 401(k) retirement savings plan for employees. Under the plan,
      the
      Company matches 25% of an employee's contribution, up to a maximum of $350
      per
      employee per year. Company matching contributions charged to expense in 2004,
      2005, and 2006 were $23,654, $20,953, and $16,750 respectively.




56


**ZOOM
        TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Notes
        to Consolidated Financial Statements****(Continued)**


**(17)**
            **SELECTED
                QUARTERLY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA,
                UNAUDITED)**




The
      following table depicts selected quarterly financial information. Operating
      results for any given quarter are not necessarily indicative of results for
      any
      future period.





**2005
                Quarter Ended**
            
            **2006
                Quarter Ended (1)****Mar.
                31**
            
            **Jun.
                30**
            
            **Sept.
                30**
            
            **Dec.
                31**
            
            ******Mar.
                31**
            
            **Jun.
                30**
            
            **Sept.
                30**
            
            **Dec.
                31**Net
                sales
            
            $
            6,436
            
            $
            6,524
            
            $
            5,309
            
            $
            7,282
            
            $
            5,281
            
            $
            4,518
            
            $
            3,579
            
            $
            4,944Costs
                of goods sold
            
            
            4,904
            
            
            5,143
            
            
            4,790
            
            
            6,048
            
            
            4,315
            
            
            4,295
            
            
            3,338
            
            
            3,772Gross
                profit
            
            
            1,532
            
            
            1,381
            
            
            519
            
            
            1,234
            
            
            966
            
            
            223
            
            
            241
            
            
            1,172Operating
                expenses:Selling
            
            
            1,120
            
            
            1,074
            
            
            978
            
            
            887
            
            
            904
            
            
            878
            
            
            782
            
            
            1,067General
                and administrative
            
            
            823
            
            
            1,731
            
            
            314
            
            
            686
            
            
            849
            
            
            698
            
            
            689
            
            
            610Research
                and development
            
            
            749
            
            
            696
            
            
            664
            
            
            589
            
            
            632
            
            
            557
            
            
            521
            
            
            4482,692
            
            
            3,501
            
            
            1,956
            
            
            2,162
            
            
            2,385
            
            
            2,133
            
            
            1,992
            
            
            2,125Operating
                loss before gain of saleof
                real estate
            
            
            (1,160
            )
            
            (2,120
            )
            
            (1,437
            )
            
            (928
            )
            
            (1,419
            )
            
            (1,910
            )
            
            (1,751
            )
            
            (953
            )Gain
                on sale of real estate
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,752Operating
                profit (loss)
            
            
            (1,160
            )
            
            (2,120
            )
            
            (1,437
            )
            
            (928
            )
            
            (1,419
            )
            
            (1,910
            )
            
            (1,751
            )
            
            3,799Other
                income (expense), net (2)
            
            
            (145
            )
            
            3,541
            
            
            62
            
            
            78
            
            
            44
            
            
            53
            
            
            919
            
            
            1,243Income
                (loss) before income taxes
            
            
            (1,305
            )
            
            1,421
            
            
            (1,375
            )
            
            (850
            )
            
            (1,375
            )
            
            (
                1,857
            )
            
            (832
            )
            
            5,042Income
                tax expense (benefit)
            
            
            -
            
            
            -
            
            
            -
            
            
            9
            
            
            -
            
            
            -
            
            
            -
            
            
            (
                53
            )Net
                income (loss)
            
            
            ($1,305
            )
            $
            1,421
            
            
            ($1,375
            )
            
            ($859
            )
            
            ($1,375
            )
            
            ($1,857
            )
            
            ($832
            )
            $
            5,095Net
                loss per common share:Basic
            
            
            ($0.15
            )
            $
            0.16
            
            
            ($0.15
            )
            
            ($0.09
            )
            
            ($0.15
            )
            
            ($0.20
            )
            
            ($0.09
            )
            $
            0.55Diluted
            
            
            ($0.15
            )
            $
            0.15
            
            
            ($0.15
            )
            
            ($0.09
            )
            
            ($0.15
            )
            
            ($0.20
            )
            
            ($0.09
            )
            $
            0.54Weighted
                average common and common equivalent Shares:Basic
            
            
            8,967
            
            
            9,164
            
            
            9,341
            
            
            9,347
            
            
            9,347
            
            
            9,347
            
            
            9,347
            
            
            9,347Diluted
            
            
            8,967
            
            
            9,397
            
            
            9,341
            
            
            9,347
            
            
            9,347
            
            
            9,347
            
            
            9,347
            
            
            9,357





(1)
      Effective January 1, 2006, the Company adopted Financial Accounting Standards
      Board Statement No. 123 (Revised) - “Share-Based Payment”. Stock based
      compensation expense charged to operations was approximately $65 thousand for
      each quarter of 2006.





(2)
      Includes gain on sale of investment in InterMute, Inc. of $3,496 thousand during
      the quarter ended June, 2005 and $870 thousand and $1,236 thousand during the
      quarters ended September 30, 2006 and December 31, 2006,
      respectively.




57


**Schedule
      II**





**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**VALUATION
      AND QUALIFYING ACCOUNTS**


**Years
      Ended December 31, 2004, 2005 and 2006**





**Description**
            
            **Balance
                at Beginning**
              **of
                year**
            
            **Charged**
              **to**
              **Expense**
            
            **Deductions
                charged**
              **Against**
              **Accounts**
              **Receivable**
            
            **Balance**
              **at
                end**
              **of
                year**Allowance
                for doubtful accounts
            
            $
            121,914
            
            $
            37,184
            
            $
            40,906
            
            $
            118,192Allowance
                for price protection
            
            
            109,561
            
            
            145,697
            
            
            236,529
            
            
            18,729Allowance
                for sales returns
            
            
            770,562
            
            
            2,658,411
            
            
            2,822,674
            
            
            606,299COOP
                advertising and other allowances
            
            
            788,168
            
            
            2,989,145
            
            
            3,161,078
            
            
            616,235Year
                ended December 31, 2004
            
            $
            1,790,205
            
            $
            5,830,437
            
            $
            6,261,187
            
            $
            1,359,455Allowance
                or doubtful accounts
            
            $
            118,192
            
            $
            761,703
            
            $
            650,041
            
            $
            229,854Allowance
                for price protection
            
            
            18,729
            
            
            213,913
            
            
            209,566
            
            
            23,076Allowance
                for sales returns
            
            
            606,299
            
            
            1,887,899
            
            
            1,887,015
            
            
            607,183COOP
                advertising and other allowances
            
            
            616,235
            
            
            2,258,906
            
            
            2,440,617
            
            
            434,524Year
                ended December 31, 2005
            
            $
            1,359,455
            
            $
            5,122,421
            
            $
            5,187,239
            
            $
            1,294,637Allowance
                for doubtful accounts
            
            $
            229,854
            
            $
            (49,828
            )
            $
            (2,794
            )
            $
            182,819Allowance
                for price protection
            
            
            23,076
            
            
            63,909
            
            
            83,571
            
            
            3,415Allowance
                for sales returns
            
            
            607,183
            
            
            2,871,120
            
            
            3,090,989
            
            
            387,314COOP
                advertising and other allowances
            
            
            434,524
            
            
            1,826,128
            
            
            1,918,231
            
            
            342,421Year
                ended December 31, 2006
            
            $
            1,294,637
            
            $
            4,711,329
            
            $
            5,089,996
            
            $
            915,969







58


**EXHIBIT
      INDEX**





(a)
            
            Financial
                Statements, Schedules and Exhibits:(1),(2)
            The
                consolidated financial statements and required schedules are indexed
                on
                page F-1.(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
            Certificate
                of Incorporation, filed as Exhibit 3.1 to Zoom Technologies, Inc.
                Current
                Report on Form 8-K dated February 28, 2002, filed with the Commission
                on
                March 4, 2002 (the "March 2002 Form 8-K"). *3.2
            By-Laws
                of Zoom Technologies, Inc., filed as Exhibit 3.2 to the March 2002
                Form
                8-K. ***10.1
            1990
                Stock Option Plan, as amended, filed as Exhibit 99.1 to the Company's
                Registration Statement on Form S-8 (Reg. No. 333-126612) filed with
                the
                Commission on July 15, 2005. ***10.2
            1991
                Director Stock Option Plan, as amended, filed as Exhibit 99.1 to
                the
                Company's Registration Statement on Form S-8 (Reg. No. 333-107923),
                filed
                with the Commission on August 13, 2003. *10.3
            1998
                Employee Equity Incentive Plan, as amended, filed as Exhibit 99.1
                to the
                Company's Registration Statement on Form S-8 (Reg. No. 333-97573),
                filed
                with the Commission on August 2, 2002. *10.4
            Lease
                between Zoom Telephonics, Inc. and "E" Street Associates, filed as
                Exhibit
                10.5 to the Company's Quarterly Report on Form 10-Q for the fiscal
                quarter
                ended June 30, 1996 (the "June 1996 Form 10-Q"). *10.5
            Form
                of Indemnification Agreement, filed as Exhibit 10.6 to the June 1996
                Form
                10-Q. ***10.6
            Employment
                Agreement, filed as Exhibit 10.9 to the Company's Annual Report on
                Form
                10-K for the fiscal year ended December 31, 1997. *10.7
            Mortgage,
                Security Agreement and Assignment between Zoom and Wainwright Bank
&
                Trust Company, filed as Exhibit 10.1 to the Company's Quarterly Report
                on
                Form 10-Q for the fiscal quarter ended March 31, 2001 (the "March
                2001
                Form 10-Q"). *10.8
            Commercial
                Real Estate Promissory Note, between Zoom and Wainwright Bank & Trust
                Company, filed as Exhibit 10.2 to the March 2001 Form 10-Q.
                ***10.9
            Form
                of Non-Qualified Stock Option Agreement for Executive Officers, filed
                as
                Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal
                year ended December 31, 2004..***10.10
            Summary
                of Directors' Compensation, filed as Exhibit 10.10 to the Company’s Annual
                Report on Form 10-K for the fiscal year ended December 31,
                2004.*10.11
            Loan
                and Security Agreement with Silicon Valley Bank, filed as Exhibit
                10.1 to
                the Company's Current Report on Form 8-K filed on March 22, 2005.
                *10.12
            Letter
                of Transmittal for Surrender of Capital Stock of InterMute, filed
                as
                Exhibit 99.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal
                quarter ended June 30, 2005.*10.13
            Loan
                Modification Agreement dated March 30, 2006, by and between Zoom
                Telephonics, Inc. and Wainright Bank and Trust Company, filed as
                Exhibit
                10.13 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
                March 31, 2006.*10.14
            Amendment
                to Security Documents dated March 30, 2006, by and between Zoom
                Telephonics, Inc. and Wainright Bank & Trust Company, filed as Exhibit
                10.14 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
                March 31, 2006.*10.15
            Letter
                agreement dated August 4, 2006, filed as Exhibit 10.1 to the Company’s
                Quarterly Report on Form 10-Q for the quarter ended June 30,
                2006.*10.16
            Purchase
                and Sale Agreement dated August 31, 2006, filed as Exhibit 10.1 to
                the
                Company’s Current Report on Form 8-K on September 20,
                2006.*






59






10.18
            Standard
                lease by and between 201-207 South Street LLC and Zoom Technologies,
                Inc.
                on December 22, 2006 to lease space for 24 months for headquarters
                offices.**10.17
            Form
                of Non-Qualified Stock Option Agreement for Named Executive Officers,
                filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on
                December 12, 2006.*21.
            Subsidiaries,
                filed as Exhibit 21 to the Company's Annual Report on Form 10-K for
                the
                fiscal year ended December 31, 2000. *23.1
            Consent
                of UHY LLP, independent registered public accounting
                firm.23.2
            Consent
                of KPMG LLP, independent registered public accounting
                firm.31.1
            CEO
                Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
                of
                2002.31.2
            CFO
                Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
                of
                2002.32.1
            CEO
                Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.






60