**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, 2005**




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 oNox




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 xNo 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
xNoo





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 Filer o  Accelerated
      Filer o  Non-Accelerated
      Filer x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).  Yes oNox




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, 2005 (computed by
        reference to the closing price of such stock on The Nasdaq Capital Market
        on
        such date) was approximately $17,950,023.








The
      number of shares outstanding of the registrant's common stock, $0.01 par value,
      as of March 17, 2006 was 9,346,966 shares.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the registrant's proxy statement for the registrant's 2006 annual meeting
      of
      shareholders to be filed with the SEC in April 2006 are incorporated by
      reference into Part III, Items 10-14 of this Form 10-K.





2
 **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
                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;**


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


**·**
            **business
                strategies;**


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


**·**
            **general
                economic conditions;**


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


**·**
            **our
                ability to service our debt obligations;
                and**


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





***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.***








3
 **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, but generally our
      sales of dial-up modems have been declining and our sales of broadband modems
      have been rising. 2005 was the first full year in which our DSL modem revenues
      were higher than our dial-up modem revenues.





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. We also have a line of integrated services digital
      network ("ISDN") products, which can transmit and receive data simultaneously
      at
      up to 128,000 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 Voice over IP 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. Our VoIP products
      can be purchased with or without 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.





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.





4
 **Products**





*General*




The
      vast
      majority of our products facilitate communication of data through the Internet.
      Our dial-up modems and ISDN 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 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 or ISA 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 ISDN or 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
      2003,
      2004 and 2005, our dial-up modems and related products accounted for
      approximately 73%, 52% and 40% 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. Zoom expects to continue to add
      DSL
      modems to its product line during 2006. One new model is planned to include
      VoIP, wireless networking, a 4-port hub, router, and firewall.





The
      maximum speed for the ADSL standard has been 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 believes that
      it
      has completed the ADSL 2/2+ hardware design for Ethernet, Ethernet/USB, 4-port
      switch, and wireless models, and that Zoom should be able to ship these models
      to appropriate customers when the firmware is ready for these
      models.





In
      2003,
      2004 and 2005, our DSL modems and related products accounted for approximately
      14%, 38%, and 53% of our net sales.




5
 *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 the first quarter of 2005
      Zoom added a new Bluetooth USB adapter to its line, a low-cost class 2 adapter
      to accompany the class 1 adapter we had been shipping. Zoom also continues
      to
      add features, and Zoom recently added enhanced support for transmission of
      audio
      and video to some of its Bluetooth products.





*ISDN
      Products*





We
      have a
      family of modems for ISDN communications. Basic ISDN is a telephone service
      that
      uses existing phone lines to provide two 64,000 bps channels and one 16,000
      bps
      channel. ISDN has higher data rates than dial-up modems, and this can be
      particularly attractive for data-intensive applications such as the transmission
      of graphics and video images, Internet browsing, or video telephony. ISDN also
      provides much faster response times to a source of data than those associated
      with dial-up modems. However, generally our ISDN sales are declining due to
      competition from DSL and cable modem products and services, which provide higher
      speeds than ISDN.





*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
      2005
      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. So far sales through the retail channel have been
      handicapped by a number of factors, including the approval process described
      above, 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.





*Voice
      over Internet Protocol*





In
      2004
      we introduced a line of products that support VoIP or "Voice over Internet
      Protocol". Our first VoIP products use 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 Zoom’s new 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 Ethenet 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.





Zoom
      devoted significant resources to the VoIP product area in 2004 in 2005, and
      we
      continue to devote considerable resources to VoIP hardware, firmware, and test,
      and to Zoom's Global Village phone service.





6


In
      2006
      Zoom expects to extend its VoIP product line by adding new hardware products
      and
      by enhancing the functionality of Global Village. Zoom expects that some of
      its
      products will be targeted toward businesses that want to add VoIP to their
      existing phone system to save money on long distance calls.





*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.





*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 need to change their manufacturing processes and component choices
      to conform to RoHS. Zoom has completed most of 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. Zoom is already shipping a small number of
      products that conform to RoHS, and Zoom will be shipping many products that
      conform to RoHS prior to July 1, 2006. Generally conformance to RoHS is slightly
      increasing Zoom’s cost of goods, and in some cases this will slightly reduce
      Zoom’s gross margin. Zoom believes that RoHS will moderately reduce the number
      of products available for purchase in Europe from Zoom’s competitors, especially
      for dial-up modems, and that this may help Zoom to increase its market share.
      A
      number of states in the U.S. plan to adopt laws similar to RoHS during 2007,
      and
      we believe that Zoom is well-prepared for this transition. However, careful
      management is required to minimize inventory risk for products that do not
      conform to RoHS, since those products will have reduced
      marketability .







**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
      2005 our customers who accounted for approximately 10% or more of our total
      net
      sales were Olusum (Turkey) and Staples. Together these two customers accounted
      for 33% 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 distributors outside North America
      include Altec, CPCDI, Enta Technologies, Micro Peripherals, Olusum, Tan Thanh,
      and UMD. Our major European high-volume retailers include Business Logic,
      Centromail, Dixons Group (Dixons, Currys, PC World, and PC City), El Corte
      Ingles and MediaMark. Our net sales outside of North America as a percentage
      of
      total net sales have grown from 40% in 2002 to 55% in 2005. Our revenues from
      sales outside North America were $15.1 million in 2003, $17.4 million in 2004,
      and $14.0 million in 2005. Approximately 69%, 47%, and 37% of our net sales
      outside North America in 2003, 2004 and 2005, respectively, were customers
      in
      the United Kingdom. Sales to Turkey accounted for 3%, 28%, and 40% of our net
      sales outside North America in 2003, 2004 and 2005, respectively. We believe
      sales growth outside North America will continue to require substantial
      additional investments of resources for product design and testing, regulatory
      approvals, and native-language instruction manuals, 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.





7


*North
      American High-volume Retailers and Distributors*





In
      North
      America we reach the PC retail market primarily through high-volume retailers.
      Our North American retailers include CDW, CompUSA, Fry's, Micro Electronics,
      PC
      Connection, Staples, and many others. Although we offer a number of our products
      through high-volume retailers in North America, including DSL modems and cable
      modems, 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.





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 Border State Electric
      Supply, D&H Distributing, Ingram Micro, and Tech Data.





*Internet
      Service Providers and Voice 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 expect 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.





**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 offices 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, 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 modem 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, 2005 we had 18 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.





8


During
      2003, 2004, and 2005 we expended $2.8 million, $2.9 million and $2.7 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 Boston,
      Massachusetts 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 Boston facility. Wherever
      the product is built, our quality systems are used to help assure that the
      product meets our specifications.





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.





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 recently 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 new RoHS rules discussed above, which may have a major
      impact on 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:




9




**·**
              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, D-Link, Linksys,
                      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, D-Link, Hon Hai Network Systems (formerly Ambit Microsystems),
                      Linksys, Motorola, Netgear, Scientific Atlanta, SMC Networks,
                      Terrayon,
                      and Thomson
 
 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;**·**
                    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 or
            computer
            product distributors. We are less successful in selling directly to providers
            of
            broadband access services and to PC Manufacturers.
 
 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 cable service providers. A
            small
            fraction of new US cable modem placements in 2004 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 five DSL modem models into
            retailer
            Dixons Group. Similarly Zoom, through its distributor Olusum in Turkey,
            has been
            successful in placing most of its DSL modem models into Turkey for sale
            by a
            large number of retailers.
 
 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 Scientific Atlanta
                  for cable
                  modems.





10


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 VoIP products include Cisco (Linksys & Sipura brands),
      D-Link, Grandstream, Mediatrix, Zyxel, and 8x8.





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
      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.





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
      telecommunications devices are subject to change. Recent changes have been
      announced by the European Union and the U.S. to reduce the use of hazardous
      materials, such as lead, in electronic equipment. The implementation of these
      new requirements, currently scheduled for July 1, 2006 for the European Union,
      would require Zoom and other electronics companies to change or discontinue
      many
      products. We believe that the transition process to comply with these new
      requirements is difficult, and in some cases has a slight negative impact on
      our
      product costs. In addition, we may incur additional costs involved with the
      disposal of inventory or returned products that do not meet the new
      requirements. We cannot predict what impact, if any, any other regulatory
      changes may have upon our business.





11


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. Moreover, these standards continue to evolve. The failure of our
      products and services to comply, or delays in compliance, 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 service, 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.





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 and
      may
      limit or eliminate our 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 8, 2006 was $0.7 million, and on March 9, 2005 was $1.5
      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.





12


**Employees**





As
      of
      December 31, 2005 we had 127 full-time employees compared to 154 as of December
      31, 2004. Of the 2005 total, 18 were engaged in research and development, 66
      were involved in purchasing, assembly, packaging, shipping and quality control,
      29 were engaged in sales, marketing and technical support, and the remaining
      14
      performed accounting, administrative, management information systems, and
      executive functions. None of our employees is represented by a labor
      union.





**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
            
            57
            
            Chief
                Executive Officer, President and Chairman of the BoardPeter
                R. Kramer
            
            54
            
            Executive
                Vice President and DirectorRobert
                A. Crist
            
            62
            
            Vice
                President of Finance and Chief Financial OfficerTerry
                J. Manning
            
            54
            
            Vice
                President of Sales and MarketingDean
                N. Panagopoulos
            
            48
            
            Vice
                President of Network ProductsDeena
                Randall
            
            52
            
            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. Since 1998 Mr. Frank Manning has also been 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.





13
 **ITEM
        1B. - UNRESOLVED STAFF COMMENTS**





None.




**ITEM
      2 - PROPERTIES**





Our
      corporate headquarters are located at 201 and 207 South Street, Boston,
      Massachusetts. Approximately 11,000 square feet of this 62,000 square foot
      facility is leased to third parties. We purchased these buildings in April
      1993.
      In January 2001 we received $6.0 million in financing by securing a mortgage
      on
      this property. On March 30, 2006 we paid the lender $1.166 million to pay down
      the remaining balance of $4.841 million, and refinanced the balance of $3.675
      million with a new mortgage with a 15 year amortization for one year and a
      Maturity Date of April 10, 2007. At Zoom’s option, the mortgage may be extended
      for an additional year to April 10, 2008.





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.
      We
      believe that this space provides us with more manufacturing space than we
      require for our current operations. The term of this lease is due to expire
      in
      August 2006. 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, 2005**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            3.55
            
            $
            2.67Second
                Quarter
            
            
            3.00
            
            
            2.07Third
                Quarter
            
            
            3.08
            
            
            1.98Fourth
                Quarter
            
            
            2.10
            
            
            1.40**Fiscal
                Year Ended December 31, 2004**
            
            
            **High**
            
            
            **Low**First
                Quarter
            
            $
            6.40
            
            $
            3.62Second
                Quarter
            
            
            5.68
            
            
            3.51Third
                Quarter
            
            
            5.01
            
            
            2.02Fourth
                Quarter
            
            
            4.45
            
            
            3.19





As
      of
      March 17, 2006, there were 9,346,966 shares of our common stock outstanding
      and
      approximately 234 holders of record of our common stock.





**Recent
      Sales of Unregistered Securities**





We
      did
      not sell any unregistered securities during the fourth quarter of
      2005.





14
 **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.





**Repurchases
      by the Company**





During
      2005 we did not repurchase any shares of our common stock on our own behalf
      or
      for any affiliated purchaser.





15
 **ITEM
        6 - SELECTED FINANCIAL DATA**





The
      following table contains our selected consolidated financial data and is
      qualified in its entirety by the more detailed consolidated financial statements
      and notes thereto included elsewhere in this report. Our statement of operations
      data for the years ended December 31, 2003, 2004, and 2005 and our balance
      sheet
      data as of December 31, 2004 and 2005 have been derived from our consolidated
      financial statements, which have been audited by KPMG LLP, an independent
      registered public accounting firm, and are included elsewhere in this report.
      Our statement of operations data for the years ended December 31, 2001 and
      2002
      and our balance sheet data as of December 31, 2001, 2002, and 2003 have been
      derived from our consolidated financial statements, which have been audited
      by
      KPMG LLP and are not included in this report. This data should be read in
      conjunction with the consolidated financial statements and related notes thereto
      and "Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations" appearing elsewhere herein.





**Years
                Ended December 31,****2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2005****(In
                thousands except per share amounts)****Statement
                of Operations Data:**Net
                sales
            
            $
            41,570
            
            $
            37,274
            
            $
            33,335
            
            $
            31,412
            
            $
            25,551Cost
                of goods sold
            
            
            35,193
            
            
            27,937
            
            
            23,120
            
            
            23,346
            
            
            20,885Gross
                profit
            
            
            6,377
            
            
            9,337
            
            
            10,215
            
            
            8,066
            
            
            4,666Operating
                expense:Selling
            
            
            7,481
            
            
            5,848
            
            
            5,271
            
            
            4,800
            
            
            4,059General
                and administrative
            
            
            7,938
            
            
            3,405
            
            
            3,118
            
            
            3,620
            
            
            3,553Research
                and development
            
            
            5,328
            
            
            3,527
            
            
            2,767
            
            
            2,927
            
            
            2,699Total
                operating expense
            
            
            20,747
            
            
            12,780
            
            
            11,156
            
            
            11,347
            
            
            10,311Operating
                income (loss)
            
            
            (14,370
            )
            
            (3,443
            )
            
            (941
            )
            
            (3,281
            )
            
            (5,645
            )Other
                income (expense), net
            
            
            (159
            )
            
            67
            
            
            273
            
            
            209
            
            
            3,537Income
                (loss) before income taxes
            
            
            (14,529
            )
            
            (3,376
            )
            
            (668
            )
            
            (3,072
            )
            
            (2,108
            )Income
                tax expense (benefit)
            
            
            3,800
            
            
            2,015
            
            
            -
            
            
            -
            
            
            9Income
                  (loss) before extraordinaryitem
            
            
            (18,329
            )
            
            (5,391
            )
            
            (668
            )
            
            (3,072
            )
            
            (2,117
            )Extraordinary
                  gain on elimination ofNegative
                  goodwill
            
            
            -
            
            
            255
            
            
            -
            
            
            -
            
            
            -Net
                income (loss)
            
            $
            (18,329
            )
            $
            (5,136
            )
            $
            (668
            )
            $
            (3,072
            )
            $
            (2,117
            )Earnings
                (loss) per common and common
                equivalent share:Loss
                before extraordinary item:Basic
                and diluted
            
            $
            (2.33
            )
            $
            (0.68
            )
            $
            (0.08
            )
            $
            (0.36
            )
            $
            (0.23
            )Extraordinary
                gain on elimination of negative
                goodwill
            
            
            -
            
            
            0.03
            
            
            -
            
            
            -
            
            
            -Net
                loss:Basic
                and diluted
            
            $
            (2.33
            )
            $
            (0.65
            )
            $
            (0.08
            )
            $
            (0.36
            )
            $
            (0.23
            )Weighted
                average common andCommon
                equivalent shares:Basic
                and diluted
            
            
            7,861
            
            
            7,861
            
            
            7,883
            
            
            8,590
            
            
            9,206




**Years
                Ended December 31,****2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2005****(In
                thousands)****Balance
                Sheet Data:**Working
                capital............
            
            $
            18,218
            
            $
            15,341
            
            $
            15,647
            
            $
            14,837
            
            $
            8,267Total
                assets...............
            
            
            29,185
            
            
            22,633
            
            
            21,974
            
            
            21,052
            
            
            19,687Long-term
                obligations excluding current portion.........
            
            
            6,001
            
            
            5,342
            
            
            5,096
            
            
            4,872
            
            
            -Total
                stockholders' equity...................
            
            $
            18,416
            
            $
            13,485
            
            $
            13,470
            
            $
            12,668
            
            $
            10,868




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*





**Overview**




We
      derive
      our net sales primarily from sales of Internet related hardware products,
      principally broadband and dial-up modems and related 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, and our sales office
      in the United Kingdom. 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 our products in accordance with our specifications
      is
      typically done in China. We perform most of the packaging and distribution
      effort at our production and warehouse facility in Boston, Massachusetts, which
      also engages in firmware programming and in testing.





Historically
      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 general
      consensus of communications industry analysts is that after-market sales of
      dial-up modems will 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 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, especially DSL modems, and we
      have
      experienced increased sales of these modems that have partially offset our
      declining sales of dial-up modems.





We
      continually seek to improve our product designs and manufacturing approach
      in
      order to 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 and innovative 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 the declining
      sales volume, we have cut costs by reducing staffing and some overhead costs.
      On
      December 31, 2002, our total headcount of full-time employees, including
      temporary workers, was 185, which was reduced to 127 at year-end
      2005.





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. All of
      Zoom’s sales to certain countries, including Turkey, Vietnam, and Saudi Arabia,
      are currently handled by a single distributor who handles the support and
      marketing costs within the country. Gross margin for sales to these distributors
      tends to be low, since lower pricing to these distributors helps them to cover
      the support and marketing costs that they cover. Our gross margin for broadband
      modems tends to be lower than for dial-up modems for a number of reasons,
      including the fact that retailers are currently a more significant channel
      for
      our dial-up modems than for our broadband modems; the fact that a higher
      percentage of our DSL sales come from low-margin countries; and the fact that
      there is stronger competition in the DSL market than in the dial-up
      market.





In
      2005
      our net sales were down 18.7% compared to 2004. The main reason for the decrease
      was the decline in dial-up modem sales, more than offsetting a growth in DSL
      modem sales. While we have generally experienced growth in our DSL modem sales,
      these sales are currently concentrated with a small number of customers, and
      this reduces the predictability of our results. In Turkey Zoom has had a
      relatively high share of the small DSL market that is one of the fastest growing
      in the world in percentage terms; and in the future we will compete to try
      to
      maintain or grow our share in what is expected to be a high-growth market.
      We
      are also continuing our efforts to expand our DSL customer base and product
      line, and to enter new markets. Because of our significant customer
      concentration, however, our net sales and operating results 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.





17


Zoom’s
      fourth largest customer in the second quarter of 2005 and sixth largest customer
      in the first nine months of 2005 was Granville Technologies, Ltd., which was
      reported in late July 2005 to have gone into “administration,” a U.K. form of
      receivership. No sales to Granville were recorded in the third or fourth quarter
      of 2005. The administrators decided to discontinue the company as a going
      concern and sell the business assets to help satisfy creditors. As a result,
      Zoom recorded a bad debt expense in 2005 of $0.6 million for its uncollected
      accounts receivable balance with Granville.





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 in exchange for our investment.
      We recorded a non-operating gain of $3.5 million in our second quarter of 2005
      in connection with this sale. We may also receive up to $3.0 million in
      additional payments in 2006 if certain conditions and performance targets are
      met. We will not record gains from these additional payments, if any, until
      and
      unless they are fully earned.





Our
      cash
      and cash equivalents balance at December 31, 2005 was $9.1 million, down from
      $9.4 million at December 31, 2004. This was due primarily to our operating
      loss
      for the year, partially offset by the receipt of $3.5 million from the sale
      of
      the Company's investment in InterMute, the reduction of accounts receivable
      and
      prepaid expense, and the increase of accounts payable and accrued
      expense.





**Critical
      Accounting Policies and Estimates**





The
      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. Where noted, material differences could result in the
      amount and timing of our net sales, costs, and expenses for any period if we
      made different judgments or used different estimates.





**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, embedded
      modems, ISDN modems, telephone dialers, 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 were not
      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 and in-store mail-in 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
      2005
      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 as billable services were consumed or as a monthly flat-fee
      service was billed.





18


*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,
      new product introductions, announced stock rotations and announced customer
      store closings, etc. 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 of net sales, and the
      corresponding change to inventory and cost of sales. The relationship of
      quarterly physical product returns to quarterly product sales remained
      relatively stable for many years, but has been declining from a high of 10.6%
      to
      a low of 5.4% in the past two years as retail sales as a percent of total sales
      have declined. Product returns as a percentage of total net sales were 5.5%
      and
      6.9% in the fourth quarter and full year of 2005, respectively.





*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
      $0.2 million in 2003, $0.1 million in 2004, and $0.2 million in
      2005.





*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 $1.5 million in 2003, $1.3 million in
      2004,
      and $1.1 million in 2005. The decline in 2005 was primarily due to lower
      retailer sales.





*Consumer
      Mail-In and In-Store Rebates and Store Rebates* .
      Our
      estimates for consumer mail-in 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. Our estimates for store rebates are
      comprised of actual credit requests from the eligible customers. The estimate
      for mail-in and 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 $2.1 million in 2003, $1.4 million in 2004, and $0.8 million in
      2005. The decline in 2005 was primarily due to lower retailer
      sales.





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 reserves equal to the above-discussed net sales
      adjustments for estimates of product returns, price protection refunds, and
      consumer and store rebates. These reserves are drawn down as actual credits
      are
      issued to the customer's accounts.





Our
      bad-debt write-offs were not significant in 2003 and 2004. A major customer
      in
      the United Kingdom,  Granville
      Technologies, Ltd. went into “administration,” a U.K. form of receivership, in
      June, 2005, and its charter has subsequently been terminated with no repayments
      to unsecured creditors. In connection with Granville’s administration, we wrote
      off $0.6 million of uncollectible Granville Technologies’ accounts receivable in
      2005. The Granville accounts receivable charge was recorded to general and
      administrative expense.





**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. Reserves for obsolete
      inventory are established by management based on usability reviews performed
      each quarter. Our reserves 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. Our valuation
      process is to compare our cost to the selling prices each quarter, and if the
      selling price of a product is less than the "if completed" cost of our
      inventory, we write-down the inventory on a "lower of cost or market" basis.
      In
      2003, 2004 and 2005 we recorded charges against inventory of $0.3 million,
      $0.0
      million and $0.0 million, respectively, as a result of lower of cost or market
      valuation issues.





**Valuation
      and Impairment of Deferred Tax Assets.** As part
      of the process of preparing our consolidated financial statements we are
      required to 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 must
      then assess the likelihood that our deferred tax assets will be recovered from
      future taxable income and to the extent we believe that recovery is not likely,
      we must establish a valuation allowance. To the extent we establish a valuation
      allowance or increase this allowance in a period, we must include an expense
      within the tax provision in the statement of operations.





19


Significant
      management judgment is required in determining our provision for income taxes
      and any valuation allowance recorded against our net deferred tax assets. We
      have recorded a 100% valuation allowance against our deferred 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, 2005 the Company had federal net operating loss carryforwards
      of
      approximately $31,854,000. These federal net operating losses are available
      to
      offset future taxable income, and are due to expire in years ranging from
      2018 to 2025. The Company had state net operating loss carryforwards of
      approximately $22,253,000. These state net operating losses are available to
      offset future taxable income, and are primarily due to expire in years ranging
      from 2006 to 2010.




**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 of InterMute in June 2005,
      the
      Company received a payment of approximately $3.5 million, also in June 2005,
      in
      exchange for its investment. The Company recorded a non-operating, after-tax
      gain of $3.5 million in its second quarter ended June 30, 2005. The Company
      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.





**Results
      of Operations**





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





**Years
                Ended****December
                31,****2003**
            
            **2004**
            
            **2005**Net
                sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of goods sold
            
            
            69.4
            
            
            74.3
            
            
            81.7Gross
                profit
            
            
            30.6
            
            
            25.7
            
            
            18.3Operating
                expense:Selling
            
            
            15.8
            
            
            15.3
            
            
            15.9General
                and administration
            
            
            9.3
            
            
            11.5
            
            
            13.9Research
                and development
            
            
            8.3
            
            
            9.3
            
            
            10.6Total
                operating expense
            
            
            33.4
            
            
            36.1
            
            
            40.4Operating
                profit (loss)
            
            
            (2.8
            )
            
            (10.4
            )
            
            (22.1
            )Other
                income (expense), net
            
            
            0.8
            
            
            0.6
            
            
            13.8Loss
                before income taxes
            
            
            (2.0
            )
            
            (9.8
            )
            
            (8.3
            )Income
                tax expense (benefit)
            
            
            -
            
            
            -
            
            
            -Net
                income (loss)
            
            
            (2.0)
            %
            
            (9.8)
            %
            
            (8.3)
            %





20
 **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**
            
            **Year
                2005**
            
            **Change**
            
            **Change****Sales
                $000**
            
            **Sales
                $000**
            
            **$000**
            ****
            **%**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 primariy in dial-up
      modems.








**Year
                2004**
            
            **Year
                2005**
            
            **Change**
            
            **Change****Sales
                $000**
            
            **Sales
                $000**
            
            **$000**
            ****
            **%**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.





21


**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.





**Year
                2004**
            
            **%
                Net**
            
            **Year
                2005**
            
            **%
                Net**
            
            **Change**
            
            **%****Operating
                Expense**
            
            **Sales
                $000**
            
            **Sales**
            
            **Sales
                $000**
            
            **Sales**
            
            **$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.





**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. This accounting treatment is described in further
      detail under the caption "Critical Accounting Policies and Estimates" above
      and
      in note  11
      to the
      consolidated financial statements .





**Year
      Ended December 31, 2004 Compared to Year Ended December 31,
      2003**





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,
      2004 with the year ended December 31, 2003.




22


**Net
      Sales.** Our
      total net sales declined year-over-year by 5.8%. In 2004, we primarily generated
      our sales by selling dial-up modems to the electronics after-market via
      distributors and retailers. The market and Zoom’s sales of dial-up modems
      continued to decline in 2004. Our broadband modem category did not grow
      sufficiently in 2004 to offset the decline in our dial-up modem sales, and
      our
      total net sales decreased 5.8% to $31.4 million in 2004 from $33.3 million
      in
      2003.





As
      shown
      in the table below our net sales for dial-up modems declined $7.7 million,
      or
      32.0%, from $24.2 million in 2003 to $16.5 million in 2004, primarily
      attributable to both lower unit sales and lower prices. Our broadband net sales
      increased $6.1 million, or 91.7%, from $6.6 million in 2003 to $12.7 million
      in
      2004. This increase was primarily attributable to increased unit sales of DSL
      modems, particularly in markets outside North America. Our DSL sales increased
      161% from $4.5 million in 2003 to $11.8 million in 2004. Net sales in our other
      product sales categories, which included wireless networking equipment, ISDN
      modems, cameras, and telephone dialers declined 10.3%, from $2.5 million to
      $2.3
      million.


**Year
                  2003**
                **Sales
                  $000**
              
              **Year
                  2004**
                **Sales
                  $000**
              
              **Change**
                **$000**
              
              **Change**
                **%**Dial-up
              
              $
              24,198
              
              $
              16,456
              
              $
              (7,742
              )
              
              (32.0
              )%Broadband
              
              
              6,629
              
              
              12,706
              
              
              6,077
              
              
              91.7
              %Other
                  Products
              
              
              2,508
              
              
              2,250
              
              
              (258
              )
              
              (10.3
              )%Total
                  Net Sales
              
              $
              33,335
              
              $
              31,412
              
              $
              (1,923
              )
              
              (
                  5.8
              )%
 
 As
        shown
        in the table below our net sales in North America decreased by 23.0% to $14.0
        million in 2004, compared to our net sales in 2003. Our 2004 net sales outside
        North America increased by 15% to $17.4 million, compared to our net sales
        in
        2003. These changes reflect our declining sales of dial-up modems worldwide,
        our
        stronger broadband sales in the markets outside North America, and the positive
        currency translation impact, for converting British Pounds and Euros to dollars
        (a $0.9 million benefit), of a significant portion of our sales outside North
        America. Our sales outside North America benefited from strong growth in
        Turkey,
        primarily relating to DSL modem sales, accounting for 28% of our total 2004
        sales outside North America.
 
 **Year
                  2003**
                **Sales
                  $000**
              
              **Year
                  2004**
                **Sales
                  $000**
              
              **Change**
                **$000**
              
              **Change**
                **%**North
                  America
              
              $
              18,212
              
              $
              14,027
              
              $
              (4,185
              )
              
              (23.0
              )%Outside
                  North America
              
              
              15,123
              
              
              17,385
              
              
              2,262
              
              
              15.0
              %Total
                  Net Sales
              
              $
              33,335
              
              $
              31,412
              
              $
              (1,923
              )
              
              (5.8
              )%
 
 **Gross
        Profit.** Our
        gross profit was $8.1 million in 2004 compared to $10.2 million in 2003.
        Our
        gross profit as a percentage of net sales decreased to 25.7% in 2004 from
        30.6%
        in 2003. The primary reason for this decline was a shift in the sales mix
        from
        dial-up modems, our highest margin product category, to broadband modems,
        which
        have lower margins.
 
 **Operating
        Expense.** Total
        operating expense increased by $0.2 million to $11.3 million in 2004 from
        $11.2
        million in 2003. Total operating expense as a percentage of net sales increased
        to 36.1% in 2004 from 33.5% in 2003. 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
                  2003**
                **Sales
                  $000**
              
              **%
                  Net**
                **Sales**
              
              
              **Year
                  2004**
                **Sales
                  $000**
              
              **Net**
                **Sales**
              
              
              **Change**
                **$000**
              
              **%**
                **Change**Selling
                  Expense
              
              $
              5,270
              
              
              15.8
              %
              
              $
              4,800
              
              
              15.3
              %
              
              $
              (470
              )
              
              (
                  8.9
              )%General
                  and Administrative Expense
              
              
              3,118
              
              
              9.4
              %
              
              
              3,620
              
              
              11.5
              %
              
              
              502
              
              
              16.1
              %Research
                  and Development Expense
              
              
              2,767
              
              
              8.3
              %
              
              
              2,927
              
              
              9.3
              %
              
              
              160
              
              
              5.8
              %Total
                  Operating Expense
              
              $
              11,155
              
              
              33.5
              %
              
              $
              11,347
              
              
              36.1
              %
              
              $
              192
              
              
              1.7
              %


**Selling
      Expense.** Selling
      expense decreased to $4.8 million in 2004 from $5.3 million in 2003. Selling
      expense as a percentage of net sales was 15.3% in 2004 and 15.8% in 2003. The
      $0.5 million decrease in selling expense was primarily due to reduced outbound
      freight ($0.2 million), marketing costs ($0.1 million), personnel costs ($0.1
      million), and sales commissions ($0.1 million) as a result of lower overall
      sales volume and lower sales in the retail channel. These decreases were
      partially offset by an adjustment to our estimated European Value Added Tax
      expense ($0.1 million).





23


**General
      and Administrative Expense.** General
      and administrative expense increased to $3.6 million in 2004 from $3.1 million
      in 2003. General and administrative expense as a percentage of net sales were
      11.5% in 2004 and 9.4% in 2003. The $0.5 million increase in general and
      administrative expense was primarily due to acquisition-related expense for
      a
      non-consummated transaction ($0.3 million) and salaries and benefits for
      increased personnel costs for Information Systems and Sarbanes-Oxley compliance
      ($0.1 million).





**Research
      and Development Expense.** Research
      and development expense increased to $2.9 million in 2004 from $2.8 million
      in
      2003. Research and development expense as a percentage of net sales increased
      to
      9.3% in 2004 from 8.3% in 2003. The $0.16 million increase in research and
      development expense was primarily due to increased personnel costs ($0.1
      million) and related expense.





**Other
      Income (Expense).** Other
      income, net declined to $0.21 million in 2004 from $0.27 million in 2003. The
      decline was primarily the result of an increased foreign exchange loss and
      the
      sale in 2003 of a web domain name, partially offset by increased interest income
      on our cash investments.





**Income
      Tax Expense (Benefit).** We did
      not record any net tax expense or benefit in 2004 or 2003.





**Liquidity
      and Capital Resources**





On
      December 31, 2005, we had working capital of $8.3 million including $9.1 million
      in cash and cash equivalents.





In
      2005
      operating activities used $3.9 million in cash. Our net loss in 2005 was $2.1
      million which was comprised of an operating loss of $5.6 million and a
      non-operating gain from investing activities of $3.5 million. Sources of cash
      from operations included a reduction of accounts receivable of $0.6 million,
      an
      increase of accounts payable and accrued expense of $0.6 million, non-cash
      depreciation and amortization expense of $0.3 million, and a decrease of prepaid
      expense of $0.2 million. Our decrease in accounts receivable reflected our
      lower
      sales, a $0.6 million bad debt write - off
      for a
      major customer, Granville Technologies, Ltd., and a higher mix of sales with
      shorter payment terms. Our increase in accounts payable was primarily related
      to
      the timing of inventory receipts.





In
      2005
      our net cash provided by investing activities was $3.3 million, which included
      the $3.5 million 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 $0.2 million investment in property, plant and equipment. Zoom may also
      receive additional payments of up to approximately $3 million in 2006 in
      connection with the InterMute sale if certain conditions and performance targets
      are met.





In
      2005
      cash was provided by financing activities of $0.2 million consisting of proceeds
      from the exercise of employee stock options of $0.4 million, partially offset
      by
      $0.2 million for monthly principal payments on our $6.0 million mortgage on
      our
      headquarters facility. Our mortgage is a 5-year balloon mortgage that is
      amortized on a 20-year basis. The interest rate is adjusted annually in January
      of each year based on the Federal Home Loan Bank rate plus 2.5% per annum.
      In
      2004 the interest rate was 3.99%. As of January 10, 2005 the rate of interest
      changed to 5.80%. We renegotiated the rate to 5.0% effective February 10, 2005.
      As of December 31, 2005 $4.872 million was outstanding on this loan. The loan
      was scheduled to be paid in full on January 10, 2006 and the final payment
      was
      deferred during negotiations for a new mortgage. On March 30, 2006 we paid
      the
      lender $1.166 million to pay down the then balance of $4.841 million, and
      refinanced the balance of $3.675 million with a new mortgage with a 15 year
      amortization for one year and a Maturity Date of April 10, 2007. The new
      mortgage rate is equal to the federal prime rate, which is 7.75% as of March
      30,
      2006, and the rate will adjust along with the federal prime rate. At Zoom’s
      option, the mortgage may be extended for an additional year to April 10, 2008.
      The lender has retained a payment reserve account equal to six months of
      principal and interest in a Certificate of Deposit. The mortgage contains
      certain financial and non-financial covenants. We also believe that we should
      be
      able to sell our owned buildings on favorable terms if we require additional
      liquidity. If we were to sell the portion of our owned buildings that includes
      our principal headquarters, we believe we would be able to lease back a portion
      of the sold property or otherwise find suitable space for our principal
      headquarters on satisfactory terms.





On
      March
      16, 2005 we entered into a one year Loan and Security Agreement with Silicon
      Valley Bank that provides for a revolving line of credit of up to $2 million.
      The revolving line of credit can 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. Revolving loans bear interest at a floating rate
      of
      interest equal to Silicon Valley Bank’s prime rate plus 0.5%. This interest rate
      will be increased to Silicon Valley Bank’s prime rate plus 1.0% if we record two
      consecutive quarters of combined losses. The rate at December 31, 2005 was
      8.25%, based on the prime rate plus 1.0%. 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. We are currently negotiating a new one
      year line with Silicon Valley Bank. There can be no assurance as to the outcome
      of these negotiations.




24


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 154 at December 31, 2004 and has been reduced to
      127
      at December 31, 2005. 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 December 31, 2006. 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. Moreover, our
      liquidity could be significantly impaired if we are not able to refinance all
      or
      a significant portion of the mortgage and we are not otherwise able to sell
      our
      owned buildings for adequate consideration. 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,
      2005.





**TOTAL**
            
            **LESS
                THAN 1 YEAR**
            
            **1-3
                YEARS**
            
            **3-5
                YEARS**
            
            **AFTER
                5 YEARS**Purchase
                Obligations(1)
            
            $
            2,634,217
            
            $
            2,634,217
            
            $
            -
            
            $
            -
            
            $
            -Long
                Term Debt(2)
            
            
            4,889,927
            
            
            4,889,927
            
            
            -
            
            
            -
            
            
            -Operating
                Leases(3)
            
            
            584,696
            
            
            510,050
            
            
            74,646
            
            
            -
            
            
            -Total
            
            $
            8,108,840
            
            $
            8,034,194
            
            $
            74,646
            
            $
            -
            
            $
            -





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


(2)
            Represents
                the mortgage on our corporate headquarters, including estimated interest
                payments at 5%. On March 30, 2006 we paid the lender $1.166 million
                to pay
                down the then balance of $4.841 million, and refinanced the balance
                of
                $3.675 million with a new mortgage with a 15 year amortization for
                one
                year and a Maturity Date of April 10, 2007. At Zoom’s option, the mortgage
                may be extended for an additional year to April 10, 2008.


(3)
            Represents
                minimum lease payments, excluding executory costs to be made under
                leases
                for our manufacturing facility in Boston, MA, our office facility
                in
                Fleet, Hants, U.K., and our technical support facility in Boca Raton,
                FL.








**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 should be read as 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.*




**We
      may continue to incur net losses if we are unable to increase sales of our
      broadband modems.**





Our
      net
      sales have been declining primarily due to the decline in the dial-up modem
      market, continuing decreases in the average selling prices of dial-up modems,
      and the trend toward faster connection speeds and broadband access products.
      Despite numerous cost reductions over the last few years, we have continued
      to
      incur significant net losses primarily due to our continuous decline in net
      sales from dial-up modems. We believe that the future of our business is largely
      dependent on the success of our broadband modems and other products. Although
      we
      believe that we have sufficient resources to fund our planned operations over
      the next year, if we fail to increase our net sales of our broadband modems
      and
      other products, our longer-term ability to stay in business and to achieve
      our
      intended business objectives could be adversely effected. Our continuing losses
      could also adversely affect our ability to fund the growth of our business
      should our strategies prove successful.





25


**Our
      liquidity may be significantly impaired if we repay our mortgage prior to the
      maturity of our mortgage with our current sources of cash and are not able
      to
      refinance all or a significant portion of our mortgage or otherwise sell our
      owned buildings for adequate consideration.**




On
      March
      30, 2006 we paid our mortgage lender $1.166 million to pay down the then balance
      of $4.841 million of our previous mortgage, and refinanced the balance of $3.675
      million with a new mortgage with a 15 year amortization for one year and a
      Maturity Date of April 10, 2007. The new mortgage rate is equal to the federal
      prime rate, which is 7.75% as of March 30, 2006, and the rate will adjust along
      with the federal prime rate. At Zoom’s option, the mortgage may be extended for
      an additional year to April 10, 2008. The lender has retained a payment reserve
      account equal to six months of principal and interest in a Certificate of
      Deposit. The
      mortgage contains certain financial and non-financial covenants.





We
      also
      believe that we should be able to sell our owned buildings on favorable terms
      if
      we require additional liquidity. If we were to sell the portion of our owned
      buildings that includes our principal headquarters, we believe we would be
      able
      to lease back a portion of the sold property or otherwise find suitable space
      for our principal headquarters on satisfactory terms.





Our
      liquidity could be significantly impaired if we are not otherwise able to sell
      our owned buildings for adequate consideration.





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





In
      addition to obtaining funds to refinance or repay our mortgage, 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 credit facility expired on March 15, 2006. We are
      currently in negotiations for a new one-year line of credit. 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 be required to further reduce planned expenditures or forego
      business opportunities, which 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.








**Our
      net sales and operating results have been adversely affected because of a
      decline in average selling prices for our dial-up modems and 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. Due to these factors
      and others, one of our significant retail customers has notified us that they
      want to purchase on a consignment basis for their dial-up modem category. That
      customer has also indicated that they plan to reduce the number of brands of
      dial-up modems they sell, and that they cannot assure that they will continue
      to
      sell our products. Less advantageous terms of sales, decreasing average selling
      prices and reduced demand for our dial-up modems have resulted and may in the
      future 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 and results of operation
      will be harmed.





**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
      2005, our net sales to two companies each constituted over 10% of our net sales
      and together these two customers accounted for 33% 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, reduction of
      business, or less favorable terms for any of our significant customers. 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 and prospects.





26


**Our
      operations outside North America are subject to a number of risks inherent
      in
      activities outside North America.**




Our
      sales
      outside of North America continue to represent an increasingly significant
      portion of our sales. Sales outside of North America have increased from 40%
      of
      net sales in 2002 to approximately 55% of our net sales in 2005, including
      20%
      in the UK and 22% in Turkey. Currently our operations are significantly
      dependent on our operations outside North America, particularly sales of our
      DSL
      modems, and may be materially and adversely affected by many factors
      including:




·
                regulatory
                    and communications requirements and policy changes outside North
                    America;·
                favoritism
                    toward local suppliers;·
                delays
                    in the rollout of broadband services by cable and DSL service
                    providers;·
                local
                    language and technical support requirements;·
                difficulties
                    in inventory management, accounts receivable collection and the
                    management
                    of distributors or representatives;·
                difficulties
                    in staffing and managing foreign operations;·
                political
                    and economic changes and disruptions;·
                governmental
                    currency controls;·
                shipping
                    costs;·
                currency
                    exchange rate fluctuations; and·
                tariff
                    regulations




We
      anticipate that our sales outside North America will continue to account for
      a
      significant percentage of our net sales. If foreign markets for our current
      and
      future products develop more slowly than currently expected, our sales and
      our
      future results of operations may 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 been
      challenging markets, with 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
  27
 ·
              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;·
              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.




**We
      have been selling our VoIP service for a limited period and there is no
      guarantee that this service will gain broad market
      acceptance.**




We
      have
      only recently introduced our VoIP service. Given our limited history with
      offering this service, there are many difficulties that we may encounter,
      including technical hurdles, multiple and changing regulations and industry
      standards, and other problems that we may not anticipate. To date, we have
      not
      generated significant revenue from the sale of our VoIP products and services,
      and there is no guarantee that we will be successful in generating significant
      revenues.





28


**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.




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
      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.





29


**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 Analog Devices. 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. We believe the market for chipsets is currently experiencing
      shortages and there are increased lead times for some chipsets. 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.




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




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, the market for
      high-speed communication products and services is fragmented and evolving.
      The
      introduction of new products by competitors, market acceptance of products
      based
      on new or alternative technologies, or the emergence of new industry standards
      could render and have in the past rendered our products less competitive or
      obsolete. If any of these events occur, we may be unable to sustain or grow
      our
      business. 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.




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




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 the accounting treatment of stock options may adversely affect our results
      of
      operations.**




In
      December 2004 the Financial Accounting Standard Board (FASB) issued Statement
      of
      Financial Accounting Standards (SFAS) No. 123R, “Share Based
      Payment”,which
      is a revision of SFAS 123. SFAS 123R requires all share-based
      payments to employees, including grants of employee stock options, to be
      recognized in the financial statements based on their fair values and does
      not
      permit pro forma disclosure as an alternative to financial statement
      recognition. SFAS 123R will be effective for us beginning in the first quarter
      of 2006. The adoption of the SFAS 123R fair value method may have a significant
      adverse impact on our reported results of operations because the stock-based
      compensation expense will be charged directly against our reported earnings.





On
      October 26, 2005, we 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 represent
      33% of the total outstanding unvested stock options and approximately 25% of
      the
      total outstanding stock options. The weighted average exercise price of the
      accelerated stock options is $2.44 per share.





30


The
      primary purpose of the acceleration of the vesting of these stock options is
      to
      reduce our future reported compensation expense upon the planned adoption of
      SFAS 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 we expect to reduce the stock option expense we otherwise
      would be required to record by approximately $130,000 total for the first two
      quarters of 2006.  We expect to incur stock compensation expense, a
      non-cash charge, in the range of $220,000 to $650,000 during fiscal year
      2006.




**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
      regulations to reduce the use of hazardous materials in products scheduled
      to be
      implemented in 2006 could increase our manufacturing costs and harm our
      business.**




The
      European Union and the US have 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 Europe in 2006 and the US
      in
      2007, would require us and other electronics companies to change or discontinue
      many products. We believe that our transition process to comply with these
      new
      requirements is difficult, and will typically increase our product costs by
      from
      zero 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.




**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.





31
 **Future
        legislation or regulation of Internet telephony could restrict our VoIP
        business, prevent us from offering service, or increase our cost of doing
        business.**




VoIP
      services currently have different regulations from traditional telephony in
      most
      countries including the US. Regulatory bodies including the FCC and regulators
      in various states and countries may impose surcharges, taxes or new 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. The
      imposition of any such additional fees, charges, taxes and regulations on IP
      communications services could materially increase our costs and may limit or
      eliminate our competitive pricing. 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. 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.




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 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.





32


**ITEM
      7A.**





We
      invest
      our cash in short-term money market instruments and certificates of deposit.
      These investments are generally denominated in U.S. dollars and U.K. pounds.
      Due
      to the conservative nature of these instruments, we do not believe that we
      have
      a material exposure to interest rate or market risk. The investment portfolio
      is
      used to preserve our capital until it is required to fund operations or
      acquisitions. None of these instruments are held for trading purposes. We do
      not
      own derivative financial instruments.





We
      are
      exposed to interest rate risk in the ordinary course of business. Our new
      mortgage, effective March 30, 2006, has an interest rate equal to the federal
      prime rate, which is 7.75% as of March 30, 2006, and the rate will adjust along
      with the federal prime rate.





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





**ZOOM
      TECHNOLOGIES, INC.**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES**




PageIndex
                  to Consolidated Financial Statements
              39Report
                  of Independent Registered Public Accounting Firm
              40Consolidated
                  Balance Sheets as of December 31, 2004 and 2005
              41Consolidated
                  Statements of Operations for the years ended December 31, 2003,
                  2004, and
                  2005
              42Consolidated
                  Statements of Stockholders' Equity and Comprehensive Loss for the
                  years
                  ended December 31, 2003, 2004, and 2005
              43Consolidated
                  Statements of Cash Flows for the years ended December 31, 2003,
                  2004, and
                  2005
              44Notes
                  to Consolidated Financial Statements
              45-60Schedule
                  II: Valuation and Qualifying Accounts for the years ended December
                  31,
                  2003, 2004, and 2005
              61


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





There
      were no changes in or disagreements with our accountants on accounting or
      financial disclosure 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, 2005 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.





33


There
      have been no changes in our internal control over financial reporting that
      occurred during the period covered by this report that have materially affected,
      or are reasonably likely to materially affect, our internal control over
      financial reporting.





**ITEM
      9B - OTHER INFORMATION**





Our
      corporate headquarters are located at 201 and 207 South Street, Boston,
      Massachusetts. Approximately 11,000 square feet of this 62,000 square foot
      facility is leased to third parties. We purchased these buildings in April
      1993.
      In January 2001 we received $6.0 million in financing by securing a mortgage
      on
      this property. On March 30, 2006 we paid the lender $1.166 million to pay down
      the remaining balance of $4.841 million, and refinanced the balance of $3.675
      million with a 15 year amortization for one year and a Maturity Date of April
      10, 2007. At Zoom’s option,
      the
      mortgage may be extended for an additional year to April 10, 2008.





**PART
      III**





**ITEM
      10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**





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" Meetings and Committees; Audit Committee", "Code of Ethics" and
      "
      Section 16(a) Beneficial Ownership Compliance " in our definitive proxy
      statement for our 2006 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 2006 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, 2005
      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.





**Number
                Of Securities**
            
            
            
            **Number
                Of Securities****To
                Be Issued Upon**
            
            **Weighted-Average
                Exercise**
            
            **Remaining
                Available For****Exercise
                Of**
            
            **Price
                Of Outstanding**
            
            **Future
                Issuance Under Equity****Outstanding
                Options,**
            
            **Options,**
            
            **Compensation
                Plans (excluding****Plan
                Category**
            
            **Warrants
                And Rights**
            
            **Warrants
                And Rights**
            
            **securities
                reflected in column [a])****(a)**
            
            **(b)**
            
            **(c)****Equity
                  compensation plans****approved by security
                  holders(1)**
            
            
            **744,000**
            
            **$**
            **2.3569**
            
            
            **775,646****Equity
                  compensation plans not approved by security holders(2)**
            
            
            **493,700**
            
            
            **2.3646**
            
            
            **190,100****Total....**
            
            
            **1,237,700**
            
            **$**
            **2.3599**
            
            
            **965,746**





(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.





34


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 2006 annual meeting of stockholders
      to be filed with the SEC within 120 days after the close of our fiscal
      year.





**ITEM
      13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





Any
      information required by this item may appear under the caption "Certain
      Relationships and Related Transactions" in our Definitive Proxy Statement for
      our 2006 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 2006 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.





35


**PART
      IV**





**ITEM
      15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ***  **[EXHIBITS
      TO BE UPDATED. INCLUDE ANY AMENDMENTS TO MORTGAGE OR CREDIT
      FACILITY]***




(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.*10.10
              
              Summary
                  of Directors' Compensation.*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.*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.
              
              Consent
                  of KPMG LLP, independent registered public accounting
                  firm.


36


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


**(Continued)**




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
                2002.32.2
            
            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 31, 2006**
            **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 indicated.**




**Signature**
              
              **Title**
              **Date****/s/
                  Frank B. Manning******
              
              **Principal
                  Executive Officer and Chairman of the Board**
              **March
                  31, 2006****Frank
                  B. Manning****/s/
                  Robert A. Crist******
              
              **Principal
                  Financial and Accounting Officer**
              **March
                  31, 2006****Robert
                  A. Crist****/s/
                  Peter R. Kramer******
              
              **Director**
              **March
                  31, 2006****Peter
                  R. Kramer****/s/
                  Bernard Furman******
              
              **Director**
              **March
                  31, 2006****Bernard
                  Furman****/s/
                  J. Ronald Woods**
              
              **Director**
              **March
                  31, 2006****J.
                  Ronald Woods****/s/
                  Joseph Donovan**
              
              **Director**
              **March
                  31, 2006****Joseph
                  Donovan**








38
 **ZOOM
        TECHNOLOGIES, INC. AND SUBSIDIARY**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES**




PageReport
                  of Independent Registered Public Accounting Firm
              40Consolidated
                  Balance Sheets as of December 31, 2004 and 2005
              41Consolidated
                  Statements of Operations for the years ended December 31, 2003,
                  2004, and
                  2005
              42Consolidated
                  Statements of Stockholders' Equity and Comprehensive Loss for the
                  years
                  ended December 31, 2003, 2004, and 2005
              43Consolidated
                  Statements of Cash Flows for the years ended December 31, 2003,
                  2004, and
                  2005
              44Notes
                  to Consolidated Financial Statements
              45-60Schedule
                  II: Valuation and Qualifying Accounts for the years ended December
                  31,
                  2003, 2004, and 2005
              61





39


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIR** M





The
      Board
      of Directors and Stockholders


Zoom
      Technologies, Inc.:








We
      have
      audited the accompanying consolidated balance sheets of Zoom Technologies,
      Inc.
      and subsidiary as of December 31, 2004 and 2005, and the related consolidated
      statements of operations, stockholders' equity and comprehensive loss, and
      cash
      flows for each of the years in the three-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, 2004 and 2005, and the results of their operations
      and their cash flows for each of the years in the three-year period ended
      December 31, 2005 in conformity with U.S. generally accepted accounting
      principles.





/s/
                  KPMG LLPBoston,
                  Massachusetts
                March
                  31,
                  2006





40


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEETS**











**December
                31,****ASSETS**
            
            **2004**
            
            **2005***Current
                assets:*Cash
                and cash equivalents
            
            $
            9,438,596
            
            $
            9,081,122Accounts
                receivable, net of reserves for doubtfulaccounts,
                returns, and allowances of $1,359,455 in2004
                and $1,294,637 in 2005 (note 12)
            
            
            3,349,781
            
            
            2,630,859Inventories
                (note 5)
            
            
            5,030,478
            
            
            5,073,178Prepaid
                expense and other current assets
            
            
            529,989
            
            
            301,265Total
                current assets
            
            
            18,348,844
            
            
            17,086,424Property,
                plant and equipment, net (note 6)
            
            
            2,703,208
            
            
            2,600,660Total
                assets
            
            $
            21,052,052
            
            $
            19,687,084**LIABILITIES
                AND STOCKHOLDERS' EQUITY***Current
                liabilities:*Accounts
                payable
            
            $
            2,006,819
            
            $
            3,140,593Accrued
                expense
            
            
            1,275,088
            
            
            788,427Current
                portion of long term debt (note 9)
            
            
            229,555
            
            
            4,889,928Total
                current liabilities
            
            
            3,511,462
            
            
            8,818,948Long-term
                debt, less current portion (note 9)
            
            
            4,872,298
            
            
            -Total
                liabilities
            
            
            8,383,760
            
            
            8,818,948Commitments
                (note 7)*Stockholders'
                equity (note 10):*
              Common
                stock, $0.01 par value.Authorized
                25,000,000 shares; issued 8,935,516 shares;outstanding
                8,927,116 and issued 9,355,366; outstanding9,346,966
                shares at December 31, 2004 and December 31, 2005,
                respectively
            
            
            89,355
            
            
            93,554Additional
                paid-in capital
            
            
            30,572,727
            
            
            31,015,977Retained
                earnings (accumulated deficit)
            
            
            (18,510,181
            )
            
            (20,627,318
            )Accumulated
                other comprehensive income (loss)
            
            
            523,713
            
            
            393,245Treasury
                stock, at cost
            
            
            (7,322
            )
            
            (7,322
            )Total
                stockholders' equity
            
            
            12,668,292
            
            
            10,868,136Total
                liabilities and stockholders' equity
            
            $
            21,052,052
            
            $
            19,687,084




See
      accompanying notes to consolidated financial statements.


41


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**Years
      Ended December 31, 2003, 2004 and 2005**





**2003**
            
            **2004**
            
            **2005**Net
                sales (notes 12 and 16)
            
            $
            33,335,209
            
            $
            31,411,781
            
            $
            25,551,179Cost
                of goods sold
            
            
            23,120,573
            
            
            23,345,918
            
            
            20,885,254Gross
                profit
            
            
            10,214,636
            
            
            8,065,863
            
            
            4,665,925Operating
                expense:Selling
            
            
            5,270,585
            
            
            4,800,165
            
            
            4,059,318General
                and administrative
            
            
            3,117,764
            
            
            3,619,480
            
            
            3,552,985Research
                and development
            
            
            2,766,967
            
            
            2,927,225
            
            
            2,698,449Total
                operating expense
            
            
            11,155,316
            
            
            11,346,870
            
            
            10,310,752Operating
                loss
            
            
            (940,680
            )
            
            (3,281,007
            )
            
            (5,644,827
            )Other
                income (expense):Interest
                income
            
            
            87,427
            
            
            149,381
            
            
            235,424Interest
                expense
            
            
            (211,165
            )
            
            (211,213
            )
            
            (253,797
            )Other,
                net
            
            
            396,363
            
            
            270,991
            
            
            3,555,197Total
                other income (expense), net
            
            
            272,625
            
            
            209,159
            
            
            3,536,824Income
                (loss) before income taxes
            
            
            (668,055
            )
            
            (3,071,848
            )
            
            (2,108,003
            )Income
                tax expense (benefit)(note 11)
            
            
            -
            
            
            -
            
            
            9,134Net
                income (loss)
            
            $
            (668,055
            )
            $
            (3,071,848
            )
            $
            (2,117,137
            )Basic
                and diluted earnings (loss) per share (note 2):Net
                loss:Basic
                and diluted
            
            $
            (0.08
            )
            $
            (0.36
            )
            $
            (0.23
            )Weighted
                average common and common equivalent shares:Basic
                and diluted
            
            
            7,883,400
            
            
            8,590,092
            
            
            9,206,179




See
      accompanying notes to consolidated financial statements.





42


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


**AND
      COMPREHENSIVE LOSS**




**Retained**
            
            **Accumulated****Additional**
            
            **Earnings**
            
            **Other**
            
            
            
            
            
            **Total****Common
                Stock**
            
            **Paid
                In**
            
            **(Accumulated**
            
            **Comprehensive**
            
            **Treasury
                Stock**
            
            **Stockholders'****Shares**
            
            **Amount**
            
            **Capital**
            
            **Deficit)**
            
            **Income
                (Loss)**
            
            **Shares**
            
            **Amount**
            
            **Equity**Balance
                at December 31, 2002
            
            
            7,860,866
            
            $
            78,608
            
            $
            28,166,607
            
            $
            (14,770,278
            )
            $
            11,755
            
            
            2,600
            
            $
            (2,196
            )
            $
            13,484,496Net
                income (loss)
            
            
            -
            
            
            -
            
            
            -
            
            
            (668,055
            )
            
            -
            
            
            -
            
            
            -
            
            
            (668,055
            )Foreign
                  currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            322,854
            
            
            -
            
            
            -
            
            
            322,854Comprehensive
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            *(345,201*
            *)*Exercise
                of stock options (note 10)
            
            
            223,750
            
            
            2,238
            
            
            333,814
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            336,052Purchase
                of treasury stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,800
            
            
            (5,126
            )
            
            (5,126
            )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 translationadjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            189,104
            
            
            -
            
            
            -
            
            
            189,104Comprehensive
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            *(2,882,744*
            *)*Exercise
                of stock options (note 10)
            
            
            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 translationadjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (130,468
            )
            
            -
            
            
            -
            
            
            (130,468
            )Comprehensive
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            *(2,247,605*
            *)*Exercise
                of stock options (note 10)
            
            
            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
            )
            $
            10,868,136





See
      accompanying notes to consolidated financial statements.





43


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Years
      Ended December 31, 2003, 2004 and 2005**





**2003**
            
            **2004**
            
            **2005**Cash
                flows from operating activities:Net
                income (loss)
            
            $
            (668,055
            )
            $
            (3,071,848
            )
            $
            (2,117,137
            )Adjustments
                to reconcile net income (loss) to net cash
                provided by (used in) operating activities:Non-operating
                gain on refund of deposit
            
            
            (40,237
            )
            
            -
            
            
            -Gain
                on sale of investment in Intermute
            
            
            -
            
            
            -
            
            
            (3,495,516
            )Depreciation
                and amortization
            
            
            617,781
            
            
            405,158
            
            
            324,208Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            106,881
            
            
            771,767
            
            
            632,589Inventories
            
            
            2,011,334
            
            
            (259,262
            )
            
            (45,887
            )Prepaid
                expense and other current assets
            
            
            643,276
            
            
            (95,295
            )
            
            219,135Accounts
                payable and accrued expense
            
            
            (430,629
            )
            
            97,969
            
            
            626,798Net
                  cash provided by (used in) operatingactivities
            
            
            2,240,351
            
            
            (2,151,511
            )
            
            (3,855,810
            )Cash
                flows from investing activities:Proceeds
                from sale of investment in Intermute
            
            
            -
            
            
            -
            
            
            3,495,517Purchases
                of property, plant and equipment
            
            
            (50,855
            )
            
            (189,381
            )
            
            (223,976
            )Net
                  cash provided by (used in) investing activities
            
            
            (50,855
            )
            
            (189,381
            )
            
            3,271,541Cash
                flows from financing activities:Repayment
                of long-term debt
            
            
            (213,788
            )
            
            (217,966
            )
            
            (211,926
            )Exercise
                of nonqualified stock options
            
            
            336,052
            
            
            2,080,815
            
            
            447,449Payments
                to acquire treasury stock
            
            
            (5,126
            )
            
            -
            
            
            -Net
                  cash provided by (used in) financingactivities
            
            
            117,138
            
            
            1,862,849
            
            
            235,523Effect
                of exchange rate changes on cash
            
            
            (14,524
            )
            
            12,255
            
            
            (8,728
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            2,292,110
            
            
            (465,788
            )
            
            (357,474
            )Cash
                and cash equivalents at beginning of year
            
            
            7,612,274
            
            
            9,904,384
            
            
            9,438,596Cash
                and cash equivalents at end of year
            
            $
            9,904,384
            
            $
            9,438,596
            
            $
            9,081,122





See
      accompanying notes to consolidated financial statements.





44


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements**


**Years
      Ended December 31, 2003, 2004 and 2005**





**(1)  
      INCORPORATION AND NATURE OF OPERATIONS**


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





In
      February 2002 the Company completed a transaction in which it changed its
      jurisdiction of incorporation from Canada to the State of Delaware effective
      March 1, 2002. In connection with the change in jurisdiction, the Company
      changed its name to Zoom Technologies, Inc. These changes were accomplished
      through a process called a continuance under the laws of Canada and a
      domestication under the laws of the State of Delaware, and were approved by
      the
      Company's shareholders at a stockholders' meeting on February 15,
      2002.





As
      part
      of the continuation, each share of Zoom Telephonics, Inc. was automatically
      converted into one share of Zoom Technologies, Inc.





**(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 and are stated
      in
      US dollars.





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenue and expense during the reporting period. Actual
      results may differ from those estimates. Significant estimates made by the
      Company include the useful lives of property, plant and equipment, the
      recoverability of long-lived assets, the collectibility of accounts receivable,
      the valuation allowance for deferred tax assets, the valuation of sales returns
      and allowances, the reserves for obsolete and slow moving inventory, and the
      write-downs of inventory valuation for the lower of cost or market.





*(b)
      Principles of Consolidation*


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





*(c)
      Cash and Cash Equivalents*


The
      Company considers all investments with original maturities of less than 90
      days
      from date of purchase to be cash equivalents.





*(d)
      Inventories*


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





*(e)
      Property, plant and equipment*


Property,
      plant and equipment is stated and recorded at cost. Depreciation of property,
      plant and equipment is provided by using the straight-line method at rates
      sufficient to amortize the costs of the fixed assets over their estimated useful
      lives.





*(f)
      Accounting for Impairment of Long-Lived Assets*


The
      Company uses the provisions of Statement of Financial Accounting Standards
      (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived
      Assets." This statement requires that long-lived assets and certain identifiable
      intangibles be reviewed for impairment whenever events or changes in
      circumstances indicate that the carrying amount of an asset or asset group
      may
      not be recoverable.





45


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements (Continued)**





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*


The
      Company accounts for income taxes under the asset and liability method. Under
      this method, deferred tax assets and liabilities are recognized for the future
      tax consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      basis and operating loss and tax credit carry forwards. Deferred tax assets
      and
      liabilities are measured using enacted tax rates expected to apply to taxable
      income in the years in which those temporary differences are expected to be
      recovered or settled. The effect on deferred tax assets and liabilities of
      a
      change in tax rates is recognized in income in the period that includes the
      enactment date.





*(h)
      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.




**2003**
            
            **2004**
            
            **2005**Basic
                  weightedAverage
                shares outstanding
            
            
            7,883,400
            
            
            8,590,092
            
            
            9,206,179Net
                    effect of dilutive potentialcommon
                    shares outstanding, basedon
                    the treasury stock method
            
            
            -
            
            
            -
            
            
            -Diluted
                weightedAverage
                shares outstanding
            
            
            7,883,400
            
            
            8,590,092
            
            
            9,206,179





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 206,414, 769,790 and 187,438 shares
      of
      common stock at December 31, 2003, 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 earns a small amount of royalty that is included in its net sales,
      primarily from internet service providers. The Company generally does not sell
      software. The Company began selling services in 2004. The Company introduced
      its
      Global Village VoIP service in late 2004, but sales of those services in 2004
      and 2005 were not material.





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 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 its 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.







46


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements (Continued)**





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 new product introductions, 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.





The
      Company's VoIP service revenues were recorded as the end-user-customer consumed
      billable VoIP services. The end-user-customer became a services customer by
      electing to sign up for the Global Village billable service on the internet.
      The
      Company recorded revenue either as billable services were consumed or as a
      monthly flat-fee service was billed.





*(j)
      Financial Instruments*


Financial
      instruments of the Company consist of cash and cash equivalents, accounts
      receivable, accounts payable, accrued expense, and 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.





*(k)
      Stock-Based Compensation*


The
      Company accounts for stock-based compensation under Statement of Accounting
      Financial Standards (“SFAS”) No. 123, "Accounting for Stock-Based Compensation"
      (SFAS 123). As permitted by SFAS 123, the Company measures compensation cost
      in
      accordance with Accounting Principles Board Opinion (APB) No. 25 (APB 25),
      "Accounting for Stock Issued to Employees," and Financial Accounting Standards
      Board (FASB) Interpretation No. 44 (FIN 44). Accordingly, no accounting
      recognition is given to stock options granted at fair market value until they
      are exercised. Upon exercise, net proceeds, including tax benefits realized,
      if
      any, are credited to equity.





The
      following table illustrates the effect on net income (loss) and earnings (loss)
      per share if the Company had applied the fair value recognition provisions
      of
      SFAS 123 to stock-based compensation.





**YEAR
                ENDED DECEMBER 31,****2003**
            ****
            **2004**
            ****
            **2005**Net
                income (loss), as reported
            
            $
            (668,055
            )
            $
            (3,071,848
            )
            $
            (2,117,137
            )Deduct:
                Total stock-based employee compensationexpense
                determined under fair value based methodfor
                all awards, net of related tax effects
            
            
            (372,009
            )
            
            (591,459
            )
            
            (782,618
            )Pro
                forma net income (loss)
            
            $
            (1,040,064
            )
            $
            (3,663,307
            )
            $
            (2,899,755
            )Earnings
                (loss) per share:Basic
                -- as reported
            
            $
            (0.08
            )
            $
            (0.36
            )
            $
            (0.23
            )Basic
                - pro forma
            
            $
            (0.13
            )
            $
            (0.43
            )
            $
            (0.31
            )Diluted
                -- as reported
            
            $
            (0.08
            )
            $
            (0.36
            )
            $
            (0.23
            )Diluted
                - pro forma
            
            $
            (0.13
            )
            $
            (0.43
            )
            $
            (0.31
            )





47


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements (Continued)**





Weighted-average
      assumptions: 2003-expected dividend yield 0.00%, risk-free interest rate of
      1.82%, volatility 124% and an expected life of 2.0 years; 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.





*(l)
      Advertising Costs*


Advertising
      costs are expensed as incurred and reported in selling, general, and
      administrative 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)
      Investments in Affiliates*


Investments
      in which the Company has no significant influence over the investee are
      accounted for under the cost method of accounting. Investments in which the
      Company exercises significant influence but which the Company does not control
      are accounted for under the equity method of accounting. Under the equity
      method, investments are stated at cost and are adjusted for the Company's share
      of earnings and losses, contributions and distributions





*(n)
      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
      subjects its operations to exposure to foreign currency fluctuations. The impact
      of currency fluctuations can be positive or negative in any given period. The
      Company has no involvement with 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 (loss).





*(o)
      Warranty Costs*


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





*(p)
      Shipping and Freight Costs*


The
      Company records the expense associated with customer-delivery shipping and
      freight costs in selling expense. Approximately $5.5 million, $4.7 million,
      and
      $4.9 million of customer-delivery shipping and freight costs were included
      in
      selling expense in 2003, 2004, and 2005, respectively.





**(3)
      LIQUIDITY**





On
      December 31, 2005, we had working capital of $8.3 million including $9.1 million
      in cash and cash equivalents.





In
      2005
      operating activities used $3.9 million in cash. Our net loss in 2005 was $2.1
      million which was comprised of an operating loss of $5.6 million and a
      non-operating gain from investing activities of $3.5 million. Sources of cash
      from operations included a reduction of accounts receivable of $0.6 million,
      an
      increase of accounts payable and accrued expense of $0.6 million, non-cash
      depreciation and amortization expense of $0.3 million, and a decrease of prepaid
      expense of $0.2 million. Our decrease in accounts receivable reflected our
      lower
      sales, a $0.6 million bad debt write-off for a major customer, Granville Technologies,
      Ltd., and a higher mix of sales with shorter payment terms. Our increase in
      accounts payable was primarily related to the timing of inventory
      receipts.





48


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements (Continued)**




In
      2005
      our net cash provided by investing activities was $3.3 million, which included
      the $3.5 million 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 $0.2 million investment in property, plant and equipment. Zoom may also
      receive additional payments of up to approximately $3 million in 2006 in
      connection with the InterMute sale if certain conditions and performance targets
      are met.





In
      2005
      cash was provided by financing activities of $0.2 million consisting of proceeds
      from the exercise of employee stock options of $0.4 million, partially offset
      by
      $0.2 million for monthly principal payments on our $6.0 million mortgage on
      our
      headquarters facility. Our mortgage is a 5-year balloon mortgage that is
      amortized on a 20-year basis. The interest rate is adjusted annually in January
      of each year based on the Federal
      Home Loan Bank rate plus 2.5% per annum. In 2004 the interest rate was 3.99%.
      As
      of January 10, 2005 the rate of interest changed to 5.80%. We renegotiated
      the
      rate to 5.0% effective February 10, 2005. As of December 31, 2005 $4.872 million
      was outstanding on this loan. The loan was scheduled to be paid in full on
      January 10, 2006 and the final payment was deferred during negotiations for
      a
      new mortgage. On March 30, 2006 we paid the lender $1.166 million to pay down
      the then balance of $4.841 million, and refinanced the balance of $3.675 million
      with a new mortgage with a 15 year amortization for one year and a Maturity
      Date
      of April 10, 2007. The new mortgage rate is equal to the federal prime rate,
      which is 7.75% as of March 30, 2006, and the rate will adjust along with the
      federal prime rate. At Zoom’s option, the mortgage may be extended for an
      additional year to April 10, 2008. The lender has retained a payment reserve
      account equal to six months of principal and interest in a Certificate of
      Deposit. The mortgage contains certain financial and non-financial covenants.
      We
      also believe that we should be able to sell our owned buildings on favorable
      terms if we require additional liquidity. If we were to sell the portion of
      our
      owned buildings that includes our principal headquarters, we believe we would
      be
      able to lease back a portion of the sold property or otherwise find suitable
      space for our principal headquarters on satisfactory terms.





On
      March
      16, 2005 we entered into a one year Loan and Security Agreement with Silicon
      Valley Bank that provides for a revolving line of credit of up to $2 million.
      The revolving line of credit can 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. Revolving loans bear interest at a floating rate
      of
      interest equal to Silicon Valley Bank’s prime rate plus 0.5%. This interest rate
      will be increased to Silicon Valley Bank’s prime rate plus 1.0% if we record two
      consecutive quarters of combined losses. The rate at December 31, 2005 was
      8.25%. 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. We
      are
      currently negotiating a new one year line with Silicon Valley Bank. There can
      be
      no assurance as to the outcome of these negotiations.




To
      conserve cash and manage our liquidity, we continue to implement cost cutting
      initiatives including the reduction of employee headcount and overhead costs.
      The employee headcount was 154 at December 31, 2004 and has been reduced to
      127
      at December 31, 2005. 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 December 31, 2006. 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. Moreover, our
      liquidity could be significantly impaired if we are not able to refinance all
      or
      a significant portion of the mortgage and we are not otherwise able to sell
      our
      owned buildings for adequate consideration.




The
      Company's total current assets at December 31, 2005 were $17.1 million and
      current liabilities were $8.8 million. The Company did not have any long-term
      debt at December 31, 2005. Management believes it has sufficient resources
      to
      fund its planned operations over the next 12 months. However, if the Company
      is
      unable to increase its revenues, reduce its expense, raise capital or sell
      its
      headquarters facility, the Company's longer-term ability to continue as a going
      concern and achieve its intended business objectives could be adversely
      affected.





49


**(4)
      NEW ACCOUNTING PRONOUNCEMENTS**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB
      Statement No. 123 (R), ” Share Based Payment: an amendment of FASB Statements
      No. 123 and 95 ” (“SFAS No. 123R”). FASB Statement 123R requires companies to
      recognize in the income statement, effective for annual periods beginning after
      June 15, 2005, the grant-date fair value of stock options and other equity-based
      compensation issued to employees, but expresses no preference for a type of
      valuation model. Our financial position and results of operations will be
      impacted in periods subsequent to 2005. We expect to incur stock compensation
      expense in the range of $220,000 to $650,000 during fiscal year 2006
      resulting from the adoption of SFAS No. 123R beginning January 1, 2006.





In
      March
      2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 regarding the
      Staff’s interpretation of SFAS No. 123R. This interpretation provides the
      Staff’s views regarding interactions between SFAS No. 123R and certain SEC rules
      and regulations and provides interpretations of the valuation of share-based
      payments for public companies. The interpretive guidance is intended to assist
      companies in applying the provisions of SFAS No. 123R and investors and users
      of
      the financial statements in analyzing the information provided. We will follow
      the guidance prescribed in SAB No. 107 in connection with our adoption of SFAS
      No. 123R.





In
      November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment
      of
      ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No.
      43,
      Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
      of idle facility expense, freight, handling costs, and wasted material
      (spoilage). Among other provisions, the new standard requires that items such
      as
      idle facility expense, excessive spoilage, double freight, and rehandling costs
      be recognized as current-period charges regardless of whether they meet the
      criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151
      requires that the allocation of fixed production overheads to the costs of
      conversion be based on the normal capacity of the production facilities. SFAS
      151 is effective for fiscal years beginning after June 15, 2005 and is required
      to be adopted by the Company in the first quarter of fiscal 2006, beginning
      on
      January 1, 2006. The Company expects that the adoption of SFAS 151 will not
      have
      a material impact on its consolidated results of operations




In
      June 2005, the FASB issued Staff Position (“FSP”)
      No. 143-1, *Accounting
      for Electronic Equipment Waste Obligations,*which
      provides guidance on accounting for historical waste obligations associated
      with
      the European Union Waste, Electrical and Electronic Equipment Directive (“WEEE
      Directive”). FSP No. 143-1 is effective for the Company upon adoption of the
      WEEE Directive into law by the applicable European Union member country.
      Individual European Union Member countries are in various stages of adopting
      the
      steps necessary to enact the legislation. These steps include, among others,
      (i)
      fully enacting their national laws relating to WEEE, (ii) completing
      implementation of their administrative measures and programs, (iii) clarifying
      the scope of products considered WEEE, an/or (iv) establishing pricing for
      recycling of WEEE. No reserves were recorded at December 31, 2005 because we
      believe that the impact of historical obligations were not material to the
      Company.





**(5)
      INVENTORIES**


Inventories
      consist of the following at December 31:


**2004**
                
                **2005**Raw
                    materials
                
                $
                2,595,730
                
                $
                2,333,949Work
                    in process
                
                
                920,075
                
                
                648,034Finished
                    goods
                
                
                1,514,673
                
                
                2,091,195Inventory
                
                $
                5,030,478
                
                $
                5,073,178






50


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements (Continued)**





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


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




**2004**
              
              **2005**
              
              **Estimated
                    useful lives**Land
              
              $
              309,637
              
              $
              309,637
              
              
              -Buildings
                  and improvements
              
              
              2,767,517
              
              
              2,842,766
              
              
              31.5
                  yearsLeasehold
                  improvements
              
              
              483,039
              
              
              492,617
              
              
              5
                  yearsComputer
                  hardware and software
              
              
              3,624,027
              
              
              3,677,616
              
              
              3
                  yearsMachinery
                  and equipment
              
              
              1,837,064
              
              
              1,836,453
              
              
              5
                  yearsMolds,
                  tools and dies
              
              
              1,591,114
              
              
              1,605,119
              
              
              5
                  yearsOffice
                  furniture and fixtures
              
              
              275,516
              
              
              275,516
              
              
              5
                  years10,887,914
              
              
              11,039,724Less
                      accumulated depreciation and amortization
              
              
              (8,184,706
              )
              
              (8,439,064
              )$
              2,703,208
              
              $
              2,600,660




**(7)
      COMMITMENTS AND CONTINGENCIES**


*(a)
      Lease Obligations*


The
      Company leases a manufacturing and warehousing facility in Boston,
      Massachusetts, an office facility in Fleet, United Kingdom, and a technical
      support facility in Boca Raton, Florida. The Boston, Massachusetts lease expires
      in August 2006. 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 $757,821, $795,102, and
      $733,760 for the years ended December 31, 2003, 2004 and 2005,
      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**2006
              
              $
              510,0502007
              
              $
              74,646


*(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. The Company had no Letters of Credit
      outstanding at December 31, 2005.





*(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.


51


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements (Continued)**





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)
      COMPREHENSIVE INCOME (LOSS)**


The
      components of comprehensive income (loss), net of tax, are as
      follows:





**2003**
            
            **2004**
            
            **2005**Net
                income (loss)......................................
            
            $
            (668,055
            )
            $
            (3,071,848
            )
            $
            (2,117,137
            )Foreign
                currency translationadjustment...............................................
            
            
            322,854
            
            
            189,104
            
            
            (130,468
            )Comprehensive
                income (loss)......................
            
            $
            (345,201
            )
            $
            (2,882,744
            )
            $
            (2,247,605
            )





Foreign
      currency translation adjustment represented the entire balance within
      accumulated other comprehensive income (loss) at December 31, 2003, 2004, and
      2005.





**(9)
      LONG-TERM DEBT**


On
      January 10, 2001 the Company obtained a mortgage for $6 million on the real
      estate property located at 201 and 207 South Street, Boston, Massachusetts.
      The
      loan was scheduled to be paid in full on January 10, 2006 and the final payment
      was deferred during negotiations for a new mortgage. On March 30, 2006 we paid
      the lender $1.166 million to pay down the then balance of $4.841 million, and
      refinanced the balance of $3.675 million with a new mortgage with a 15 year
      amortization for one year and a Maturity Date of April 10, 2007. The new
      mortgage rate is equal to the federal prime rate, which is 7.75% as of March
      30,
      2006, and the rate will adjust along with the federal prime rate. At Zoom’s
      option, the mortgage may be extended for an additional year to April 10, 2008.
      The lender has retained a payment reserve account equal to six months of
      principal and interest in a Certificate of Deposit. The mortgage contains
      certain financial and non-financial covenants.





Future
      minimum principal payments are due as follows at December 31, 2005.





**Year**
                
                
                **Total**2006
                
                $
                4,889,928Total
                
                $
                4,889,928







52


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements (Continued)**





**(10)**  **STOCK
      OPTION PLANS**


At
      December 31, 2005 the Company had three stock option plans, which are 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 the availability of 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. Options outstanding
      under this plan are as follows:





Number
                of shares
            
            Weighted
                average exercise priceBalance
                at December 31, 2002
            
            
            1,248,000
            
            $
            3.54Granted
            
            
            310,000
            
            
            1.95Exercised
            
            
            (37,000
            )
            
            1.65Expired
            
            
            (322,000
            )
            
            7.49Balance
                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
            
            $
            2.21





The
      following table summarizes information about fixed stock options under the
      Employee Stock Option Plan outstanding on December 31, 2005:




Options
                  Outstanding
              
              Options
                  ExercisableExercise
                  Prices
              
              Number
                  Outstanding
              
              Weighted
                  Average Remaining Contractual Life
              
              Weighted
                  Average Exercise Price
              
              Number
                  Exercisable
              
              Weighted
                  Average Exercise Price$
                  1.95
              
              
              301,000
              
              
              0.80
              
              $
              1.95
              
              
              301,000
              
              $
              1.952.45
              
              
              335,000
              
              
              2.30
              
              
              2.45
              
              
              167,500
              
              
              2.45$
                  1.95 to $ 2.45
              
              
              636,000
              
              
              1.60
                  years
              
              $
              2.21
              
              
              468,500
              
              $
              2.13






53


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements (Continued)**




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. Prior to the amendment to the Directors
      Plan, eligible directors were automatically granted an option to purchase 6,000
      shares of common stock on July 10 and January 10 of each year, beginning on
      July
      10, 1991. 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.
      Options outstanding under this plan are as follows:




**Number
                of shares**
            
            **Weighted
                average**
              **exercise
                price**Balance
                at December 31, 2002
            
            
            72,000
            
            $
            2.21Granted
            
            
            54,000
            
            
            0.95Exercised
            
            
            (36,000
            )
            
            1.18Expired
            
            
            (36,000
            )
            
            3.26Balance
                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
            
            $
            3.20




The
      following table summarizes information about fixed stock options under the
      Directors Plan on December 31, 2005:





Options
                Outstanding
            
            Options
                ExercisableWeighted
                AverageNumber
            
            Remaining
            
            Weighted
                Average
            
            Number
            
            Weighted
                AverageExercise
                Prices
            
            Outstanding
            
            Contractual
                Life
            
            Exercise
                Price
            
            Exercisable
            
            Exercise
                Price$2.32
            
            
            36,000
            
            
            1.5
            
            $
            2.32
            
            
            0
            
            $
            03.07
            
            
            24,000
            
            
            0.5
            
            
            3.07
            
            
            24,000
            
            
            3.073.31
            
            
            24,000
            
            
            1.0
            
            
            3.31
            
            
            24,000
            
            
            3.314.55
            
            
            24,000
            
            
            0.1
            
            
            4.55
            
            
            24,000
            
            
            4.55$
                2.32 to $ 4.55
            
            
            108,000
            
            
            0.9
                years
            
            $
            3.20
            
            
            72,000
            
            $
            3.64







54
 **ZOOM
        TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements (Continued)**





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. Shares of
      common stock were registered for issuance under the 1998 Plan in accordance
      with
      the Securities Act of 1933. 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.
      Options outstanding under this plan are as follows:





**Number
                of shares**
            
            **Weighted
                average**
              **exercise
                price**Balance
                at December 31, 2002
            
            
            780,500
            
            $
            3.16Granted
            
            
            240,000
            
            
            1.85Exercised
            
            
            (150,750
            )
            
            1.54Expired
            
            
            (287,700
            )
            
            5.77Balance
                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
            
            $
            2.36




The
      following table summarizes information about fixed stock options under the
      1998
      Plan outstanding on December 31, 2005:





Options
                Outstanding
            
            Options
                ExercisableWeighted
                AverageNumber
            
            Remaining
            
            Weighted
                Average
            
            Number
            
            Weighted
                AverageExercise
                Prices
            
            Outstanding
            
            Contractual
                Life
            
            Exercise
                Price
            
            Exercisable
            
            Exercise
                Price$
                1.85
            
            
            168,700
            
            
            0.8
            
            $
            1.85
            
            
            168,700
            
            $
            1.852.42
            
            
            268,000
            
            
            2.3
            
            
            2.42
            
            
            131,750
            
            
            2.422.77
            
            
            5,000
            
            
            1.7
            
            
            2.77
            
            
            2,500
            
            
            2.773.56
                to 3.59
            
            
            47,000
            
            
            1.9
            
            
            3.59
            
            
            23,500
            
            
            3.594.83
            
            
            5,000
            
            
            1.1
            
            
            4.83
            
            
            2,500
            
            
            4.83$
                1.85 to $ 4.83
            
            
            493,700
            
            
            1.8
                years
            
            $
            2.36
            
            
            328,950
            
            $
            2.23





On
      December 31, 2005 there were 965,746 additional shares available for issuance
      under all three stock option plans. The per share weighted-average fair value
      of
      stock options granted during, 2003, 2004, and 2005 was $1.14, $2.18, and $1.35
      respectively, on the date of grant using the Black Scholes option-pricing model
      (see note 2).





55


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements (Continued)**








On
      October 26, 2005, we 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 represent
      33% of the total outstanding unvested stock options and approximately 25% of
      the
      total outstanding stock options. 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 is
      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 we
      expect to reduce the stock option expense we otherwise would be required to
      record by approximately $130,000 total for the first two quarters of 2006. 
We expect to incur stock compensation expense, a non-cash charge, in the range
      of $220,000 to $650,000 during fiscal year 2006.





**(11)
      INCOME TAXES**


Income
      tax expense (benefit) consists of the following:





**Current**
            
            **Deferred**
            
            **Total**Year
                Ended December 31, 2003:US
                federal
            
            $
            -
            
            $
            -
            
            $
            -State
                and local
            
            
            -
            
            
            -
            
            
            -Foreign
            
            
            -
            
            
            -
            
            
            -$
            -
            
            $
            -
            
            $
            -Year
                Ended December 31, 2004:US
                federal
            
            $
            -
            
            $
            -
            
            $
            -State
                and local
            
            
            -
            
            
            -
            
            
            -Foreign
            
            
            -
            
            
            -
            
            
            -$
            -
            
            $
            -
            
            $
            -Year
                Ended December 31, 2005:US
                federal
            
            $
            -
            
            $
            -
            
            $
            -State
                and local
            
            
            -
            
            
            -
            
            
            -Foreign
            
            $
            9,134
            
            
            -
            
            $
            9,134$
            9,134
            
            $
            -
            
            $
            9,134





Income
      tax expense (benefit) for the years ended December 31, 2003, 2004, and 2005,
      and
      differed from the amounts as computed by applying the US federal statutory
      tax
      rate of 34% to pretax loss as a result of the following:





**2003**
            
            **2004**
            
            **2005**Computed
                "expected" US tax benefit
            
            $
            (227,139
            )
            $
            (1,044,428
            )
            $
            (716,721
            )Increase
                (reduction) in income taxes resulting from:State
                  and local income taxes, net of federalincome
                  tax benefit
            
            
            -
            
            
            -
            
            
            -Increase
                (reduction) in federal valuation allowance
            
            
            219,215
            
            
            1,023,535
            
            
            730,525Other,
                net
            
            
            7,924
            
            
            20,893
            
            
            (4,670
            )Income
                tax expense (benefit)
            
            $
            -
            
            $
            -
            
            $
            9,134








56


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements (Continued)**





The
      tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax assets and deferred tax liabilities at December 31, 2003, 2004,
      and
      2005 are presented below:





**2003**
            
            **2004**
            
            **2005**Deferred
                tax assets:Inventories,
                primarily non-deductible reserves
            
            $
            2,409,923
            
            $
            1,861,978
            
            $
            1,654,471Accounts
                receivable, primarily returnsand
                allowances
            
            
            483,057
            
            
            270,041
            
            
            303,392Accrued
                expenses, principally provisionsnot
                currently deductible
            
            
            141,157
            
            
            166,487
            
            
            152,852Net
                operating loss carryforwards and credits
            
            
            9,132,219
            
            
            11,325,988
            
            
            11,770,977Depreciation
                and amortization
            
            
            1,340,233
            
            
            1,616,459
            
            
            988,263Other
            
            
            102,594
            
            
            118,526
            
            
            115,624Total
                gross deferred tax assets
            
            
            13,609,183
            
            
            15,359,479
            
            
            14,985,579Less
                valuation allowance
            
            
            (13,609,183
            )
            
            (15,359,479
            )
            
            (14,985,579
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -
            
            $
            -





On
      December 31, 2005 the Company had federal net operating loss carryforwards
      of
      approximately $31,854,000. These federal net operating losses are available
      to
      offset future taxable income, and are due to expire in years ranging
      from 2018 to 2025. The Company had state net operating loss carryforwards
      in various states of approximately $22,253,000. These state net operating losses
      are available to offset future taxable income, and are primarily due to expire
      in years ranging from 2006 through 2010. The Company recorded a deferred tax
      asset valuation allowance against the portion of the deferred tax assets that
      management believes may expire unused. The valuation allowance reduces deferred
      tax assets to reflect the estimated amount of deferred tax assets, which will
      more likely not be realized. The Company has recorded a valuation allowance
      against its deferred tax assets because management believes 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.





Subsequently
      recognized tax benefits relating to valuation allowances for deferred tax
      assets, if any, will be allocated as follows: $14,199,000 to continuing
      operations and $787,000 to additional paid-in capital which is attributable
      to
      the exercise of employee stock options.





**(12)
      SIGNIFICANT CUSTOMERS**





Relatively
      few customers have accounted for a substantial portion of the Company’s net
      sales. Two customers each comprised approximately 10% or more of net sales
      for
      the year ended December 31, 2005. Three customers each comprised approximately
      10% or more of net sales for the years ended December 31, 2004 and 2003. 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.




Zoom’s
        third largest customer in the first six months of 2005 was Granville
        Technologies, Ltd., which in late July 2005 went into “administration,” a U.K.
        form of receivership. No sales to Granville were recorded in the third or
        fourth
        quarters of 2005. The administrators have decided to discontinue the company
        as
        a going concern and sell the business assets to help satisfy creditors. The
        bad
        debt write-off for 2005 was $0.6 million.





The
      Company’s customers generally do not enter into long-term agreements obligating
      them to purchase our 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.









57


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements (Continued)**





**(13)
      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 recorded a non-operating after-tax
      gain
      of $3.5 million in its second quarter ended June 30, 2005. The Company may
      also
      receive up to $3.0 million in additional payments in 2006 if certain conditions
      and performance targets are met. The recording of the contingent gains from
      these additional payments will not be made until and unless they are fully
      earned.





**(14)
      SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**





**2003**
              
              **2004**
              
              **2005**Cash
                  paid during year for interest
              
              $
              215,571
              
              $
              210,941
              
              $
              252,797Cash
                  paid during year for income taxes
              
              $
              -
              
              $
              -
              
              $
              4,253




The
      tax
      benefit of the exercise of stock options resulted in no increases to additional
      paid-in capital in 2003, 2004 or 2005, since the Company believes that it is
      more likely than not that these deferred tax assets will not be realized.









58


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements (Continued)**





**(15)
      DEPENDENCE ON KEY SUPPLIERS AND CONTRACT MANUFACTURERS**





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





Beginning
      in 2002 the Company entered into supply arrangements with suppliers of some
      components that included price and other concessions, including no-charge
      components, for meeting certain purchase requirements or commitments. Under
      these arrangements, the Company was committed to certain purchase requirements
      over a period of approximately 30-months that commenced on January 1, 2002,
      provided that those components were offered at competitive terms and prices.
      At
      December 31, 2004, those commitments had been met. In connection with these
      arrangements, the Company became entitled to receive at least $3.0 million
      of
      no-charge components, based upon the supplier's market price for the components
      in late 2001 and early 2002, and other pricing concessions based on our purchase
      volumes. The Company received $1.2 million of these no-charge components in
      the
      fourth quarter of 2001. The Company received the remainder of the no-charge
      components in the first quarter of 2002. The Company entered into a two-year
      supply agreement with a major supplier in December 2004. The agreement runs
      from
      October 2, 2004 to September 29, 2006. Under these arrangements, the Company
      is
      entitled to receive no-charge product if certain purchase requirements or
      commitments are met. In conjunction with this agreement, the Company received
      $.2 million in no-charge components in the first quarter of 2005. The favorable
      impact to the Company's statement of operations was calculated as a purchase
      discount over the estimated total number of components acquired through the
      supply agreements and recognized on a delayed basis as the products employing
      the acquired components involved in the supply arrangements were sold. This
      method of accounting was consistent each year, covering 2002 through 2005.





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 Arcadyan,
      Asus Tech, Aztech, Billionton, Taicom, and Xavi to manufacture various
      products.





**(16)
      SEGMENT AND GEOGRAPHIC INFORMATION**





The
      Company's operations are classified into one reportable segment. Substantially
      all of the Company's operations and long-lived assets reside primarily in the
      United States. The Company's net sales in North America and net sales to
      locations outside North America for 2003, 2004, and 2005 were comprised as
      follows:





**2003**
              
              **%
                  of Total**
              
              
              **2004**
              
              **%
                  of Total**
              
              
              **2005**
              
              **%
                  of Total**North
                  America
              
              $
              18,212,110
              
              
              55
              %
              
              $
              14,026,601
              
              
              45
              %
              
              $
              11,575,212
              
              
              45
              %Outside
                  North America
              
              
              15,123,099
              
              
              45
              %
              
              
              17,385,180
              
              
              55
              %
              
              
              13,975,967
              
              
              55
              %Total
              
              $
              33,335,209
              
              
              100
              %
              
              $
              31,411,781
              
              
              100
              %
              
              $
              25,551,179
              
              
              100
              %





( **17)
      RETIREMENT PLAN**





The
      Company established a 401(k) retirement savings plan for employees in January
      1996. Under the provisions of the plan, the Company matches 25% of an employee's
      contribution, up to a maximum of $350 per employee per year. Total Company
      contributions and expense in 2003, 2004, and 2005 were $29,587, $23,654, and
      $20,953, respectively.







59


**ZOOM
        TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements (Continued)**





**(18)
      SELECTED QUARTERLY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA,
      UNAUDITED)**




The
      following table sets forth selected quarterly financial information for the
      years ended December 31, 2004 and 2005. The operating results for any given
      quarter are not necessarily indicative of results for any future
      period.





**2004
                Quarter Ended**
            
            **2005
                Quarter Ended********Mar.
                31**
            
            ******Jun.
                30**
            
            ******Sept.
                30**
            
            ******Dec.
                31**
            
            ******Mar.
                31**
            
            ******Jun.
                30**
            
            ******Sept.
                30**
            
            ******Dec.
                31**Net
                sales
            
            $
            7,792
            
            $
            8,091
            
            $
            7,143
            
            $
            8,386
            
            $
            6,436
            
            $
            6,524
            
            $
            5,309
            
            $
            7,282Costs
                of goods sold
            
            
            5,480
            
            
            5,841
            
            
            5,646
            
            
            6,379
            
            
            4,904
            
            
            5,143
            
            
            4,790
            
            
            6,048Gross
                profit (loss)
            
            
            2,312
            
            
            2,250
            
            
            1,497
            
            
            2,007
            
            
            1,532
            
            
            1,381
            
            
            519
            
            
            1,234Operating
                expense:Selling
            
            
            1,226
            
            
            1,171
            
            
            1,115
            
            
            1,288
            
            
            1,120
            
            
            1,074
            
            
            978
            
            
            887General
                and administrative
            
            
            954
            
            
            1,064
            
            
            780
            
            
            822
            
            
            823
            
            
            1,731
            
            
            314
            
            
            686Research
                and development
            
            
            678
            
            
            665
            
            
            722
            
            
            862
            
            
            749
            
            
            696
            
            
            664
            
            
            589Total
                operating expense
            
            
            2,858
            
            
            2,900
            
            
            2,617
            
            
            2,972
            
            
            2,692
            
            
            3,501
            
            
            1,956
            
            
            2,162Operating
                profit (loss)
            
            
            (546
            )
            
            (650
            )
            
            (1,120
            )
            
            (965
            )
            
            (1,160
            )
            
            (2,120
            )
            
            (1,437
            )
            
            (928
            )Other
                income (expense), net
            
            
            (12
            )
            
            70
            
            
            92
            
            
            59
            
            
            (145
            )
            
            3,541
            
            
            62
            
            
            78Income
                  (loss) before income taxes
            
            
            (558
            )
            
            (580
            )
            
            (1,028
            )
            
            (906
            )
            
            (1,305
            )
            
            1,421
            
            
            (1,375
            )
            
            (850
            )Income
                tax expense (benefit)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            9Net
                income (loss)
            
            $
            (558
            )
            $
            (580
            )
            $
            (1,028
            )
            $
            (906
            )
            $
            (1,305
            )
            $
            1,421
            
            $
            (1,375
            )
            $
            (859
            )Net
                loss per common share:Basic
            
            $
            (0.07
            )
            $
            (0.07
            )
            $
            (0.12
            )
            $
            (0.10
            )
            $
            (0.15
            )
            $
            0.16
            
            $
            (0.15
            )
            $
            (0.09
            )Diluted
            
            $
            (0.07
            )
            $
            (0.07
            )
            $
            (0.12
            )
            $
            (0.10
            )
            $
            (0.15
            )
            $
            0.15
            
            $
            (0.15
            )
            $
            (0.09
            )Weighted
                  average common and common equivalent Shares:Basic
            
            
            8,136
            
            
            8,466
            
            
            8,791
            
            
            8,900
            
            
            8,967
            
            
            9,164
            
            
            9,341
            
            
            9,347Diluted
            
            
            8,136
            
            
            8,466
            
            
            8,791
            
            
            8,900
            
            
            8,967
            
            
            9,397
            
            
            9,341
            
            
            9,347







60


**Schedule
        II**
 
 **ZOOM
        TECHNOLOGIES, INC. AND SUBSIDIARY**
 **VALUATION
        AND QUALIFYING ACCOUNTS**
 **Years
        Ended December 31, 2003, 2004 and 2005**
 
 
 
 **Balance
                  at**
              
              **Charged**
              
              **Deductions
                  charged**
              
              **Balance****Beginning**
              
              **to**
              
              **against**
              
              **at
                  end****Description**
              
              **of
                  year**
              
              **Expense**
              
              **Accounts
                  Receivable**
              
              **of
                  year**Reserve
                  for doubtful accounts
              
              $
              59,406
              
              $
              210,006
              
              $
              147,498
              
              $
              121,914Reserve
                  for price protection
              
              
              664,332
              
              
              168,095
              
              
              722,866
              
              
              109,561Reserve
                  for sales returns
              
              
              914,014
              
              
              3,260,578
              
              
              3,404,030
              
              
              770,562COOP
                    advertising and otherallowances
              
              
              1,008,656
              
              
              2,648,885
              
              
              2,869,373
              
              
              788,168Year
                  ended December 31, 2003
              
              $
              2,646,408
              
              $
              6,287,564
              
              $
              7,143,767
              
              $
              1,790,205Reserve
                  for doubtful accounts
              
              $
              121,914
              
              $
              37,184
              
              $
              40,906
              
              $
              118,192Reserve
                  for price protection
              
              
              109,561
              
              
              145,697
              
              
              236,529
              
              
              18,729Reserve
                  for sales returns
              
              
              770,562
              
              
              2,658,411
              
              
              2,822,674
              
              
              606,299COOP
                    advertising and otherallowances
              
              
              788,168
              
              
              2,989,145
              
              
              3,161,078
              
              
              616,235Year
                  ended December 31, 2004
              
              $
              1,790,205
              
              $
              5,830,437
              
              $
              6,261,187
              
              $
              1,359,455Reserve
                  for doubtful accounts
              
              $
              118,192
              
              $
              761,703
              
              $
              650,041
              
              $
              229,854Reserve
                  for price protection
              
              
              18,729
              
              
              213,913
              
              
              209,566
              
              
              23,076Reserve
                  for sales returns
              
              
              606,299
              
              
              1,887,899
              
              
              1,887,015
              
              
              607,183COOP
                    advertising and otherallowances
              
              
              616,235
              
              
              2,258,906
              
              
              2,440,617
              
              
              434,524Year
                  ended December 31, 2005
              
              $
              1,359,455
              
              $
              5,122,421
              
              $
              5,187,239
              
              $
              1,294,637
  61





(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.*10.10
              
              Summary
                  of Directors' Compensation.*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.*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.
              
              Consent
                  of KPMG LLP, independent registered public accounting
                  firm.31.1
              
              CEO
                  Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
                  of
                  2002.




62


**EXHIBIT
      INDEX (CONTINUED)**




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
                      2002.32.2
                  
                  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








63