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, 2003
                                       or
[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
        EXCHANGE ACT OF 1934
                        For the transition period from to
                         Commission File Number 0-18672

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


                      Delaware                                  51-0448969
                      --------                                  ----------
           (State or Other Jurisdiction of                (I.R.S. Employer
             Incorporation or Organization)               Identification No.)

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

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

                          Common Stock, $.01 Par Value
                                (Title of Class)

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

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [X]

The  aggregate  market  value of the  common  stock,  $0.01  par  value,  of the
registrant  held  by  non-affiliates  of the  registrant  as of  June  30,  2003
(computed by  reference  to the closing  price of such stock on The Nasdaq Small
Cap Market on such date) was approximately $7,046,944.

The number of shares  outstanding of the  registrant's  common stock,  $0.01 par
value, as of March 19, 2004 was 8,182,941 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's  proxy statement for the  registrant's  2004 annual
meeting of shareholders to be filed with the SEC in April 2004 are  incorporated
by reference into Part III, Items 10-14 of this Form 10-K.
<PAGE>
                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:

o    the anticipated development and timing of new product introductions;
o    the success of our V.92 dial-up modems;
o    ability to reach our goal of returning to profitability;
o    the  anticipated  development  and expansion of our existing  technologies,
     markets and sales channels;
o    investment in resources for product design in foreign markets;
o    the development of new competitive technologies and products;
o    approvals, certifications and clearances for our products;
o    production schedules for our products;
o    market acceptance of new products;
o    business strategies;
o    dependence on significant suppliers;
o    dependence on significant manufacturers, distributors and customers;
o    the availability of debt and equity financing;
o    general economic conditions;
o    the realization of cash improvement from the sale of excess inventory;
o    the  realization  of cash  improvement  from the  utilization  of no-charge
     components;
o    the impact of our cost-savings initiatives; and
o    our financial condition or results of operations.

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.
<PAGE>
PART I

ITEM 1 - BUSINESS

OVERVIEW

     We design, produce,  market, sell, and support dial-up and broadband modems
as well as 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  emerging  trends in  communications  including
enhanced Internet access,  higher data rates, and voice calls traveling over the
Internet.

     Most of our  revenues  have come and  continue  to come  from  sales of our
dial-up modems,  though broadband modems have been increasing their share of our
business. 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. Most of our modems connect to a single
telephone  line,  but we also make  multi-line  modems that can connect to up to
sixteen  telephone  lines.  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 and enhanced
modem  functionality,  we have invested  resources to expand our product line to
include  cable and ADSL  modems and related  broadband  access  products.  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 now include cable
service providers, original equipment manufacturers, and retailers.

     Our  Asymmetric  Digital  Subscriber  Line  modems,  known as ADSL  modems,
provide a high-bandwidth connection to the Internet through a standard telephone
line that typically connects to compatible ADSL equipment in or near the central
telephone office.  We are now shipping five basic ADSL modems,  one internal PCI
bus model and four external  models,  with a number of variations of these based
on variations of the unit's power supply, included filters, firmware, packaging,
or other customer-specific requirements.

     We are  working  on a line of  "voice  over  IP" or  "VoIP"  products  that
facilitate  phone  calls  that may  travel  through  the  Internet,  potentially
lowering the cost of the call and providing other  benefits.  We expect to build
VoIP capabilities into some ADSL modems and routers.  In addition,  it is likely
that some of our products  will  include a VoIP  service  with various  features
including the ability to make free VoIP calls to some other Zoom products.

     We have been  designing 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(TM) and  Hotshot(TM).  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.  Zoom plans to
extend its proprietary dialer technology into a range of telephony products.

     Zoom  also  has a  line  of  cameras  designed  to be  used  with  personal
computers.  Some "web camera"  models only function when they are connected to a
computer,  and allow storage or transmission of a still picture or moving video.
Some new models also work when they are not connected to the  computer;  so that
pictures  or videos can be stored into the camera  away from the  computer,  and
later downloaded into the computer.

     We are incorporated in Delaware under the name Zoom  Technologies,  Inc. In
2002 we changed our  jurisdiction of  incorporation  from Canada to Delaware and
our name from Zoom Telephonics,  Inc. to Zoom Technologies,  Inc. We conduct our
business  through our  operating  subsidiary,  Zoom  Telephonics,  Inc.  and its
subsidiaries.  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  http://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.  The information found on
our  website is not part of this or any other  report we file with or furnish to
the SEC.

PRODUCTS

General

     The vast majority of our products facilitate  communication of data through
the Internet.  Our dial-up modems and integrated  services digital  network,  or
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 ADSL 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 PC cameras  provide  pictures that can be  communicated  over the
Internet.

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 IBM PC-compatibles,  the Apple MacIntosh,  Linux computers,
and other  computers.  Our external models include desktop models and multi-line
modems with up to sixteen modems in an enclosure. Our PCMCIA modems are designed
for use with  notebook  and  sub-notebook  computers  as well as PDAs  (personal
digital  assistants)  equipped with standard PCMCIA slots. When sold as packaged
retail  products,  our dial-up  modems are  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 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.  We began shipping pre-standard  K56flex(TM) 56K modems in the second
quarter  of  1997.   In  February   1998  a  committee   of  the   International
Telecommunications  Union ("ITU") agreed upon the V.90 standard for 56K. V.90 is
now widely deployed in equipment made by central site manufacturers, and most of
our dial-up  modem sales  include  V.90.  We are now also  shipping V.92 modems,
which offer  increased  functionality  and faster  upstream data rates than V.90
dial-up modems. We expect V.92 modems to take an increasing share of the dial-up
modem market because of these improvements.

     In March  and April of 1999,  we  acquired  substantially  all of the modem
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 is 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 2001, 2002 and 2003, our dial-up modems and related  products  accounted
for approximately 90%, 84% and 73% of our net sales, respectively.

     The following  sets forth some of the key features  incorporated  in one or
more of our dial-up modems:

o    ZoomGuard(TM).  ZoomGuard  represents the protective circuitry added to our
     modems to improve  their  ability to  withstand  the  effects of  lightning
     striking a phone line to which the modem is connected.  In many  countries,
     lightning is a major cause of modem field failures.
o    PC Card Guard(TM).  PC Card Guard represents the protective circuitry added
     to some of our  PCMCIA  modems to  protect  against  destruction  caused by
     plugging the modem into a digital PBX phone jack.  We were one of the first
     companies to develop this useful feature.
o    Voice  Mail.  Voice mail  capability  allows a PC to serve as an  answering
     machine with message storage and local or remote message retrieval.
o    Distinctive  Ring.  Distinctive  Ring is a  service  offered  by  telephone
     companies  that  assigns more than one phone number to a single phone line,
     with each number ringing  differently.  This service along with appropriate
     modem  functionality  allows  someone to arrange for one phone number to be
     answered as a phone line, a second number to be answered as a fax line, and
     a third number to be answered as a data line.  We have been issued a United
     States patent related to our distinctive ring technology.

International Modems.

     Modems for countries outside the US often vary from a similar modem for the
US due to different regulatory requirements, country-specific phone jacks and AC
power,  and  language-related  specifics.  As a result,  the introduction of new
products into international  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
internationally.  We have received  regulatory  approvals for, and are currently
selling dial-up modems in a number of countries,  including Australia,  Austria,
Belgium,  Denmark,  Finland,  Germany,  Hungary,  India, Ireland,  Italy, Japan,
Mexico, the Netherlands, Peru, Poland, Portugal, Russia, Saudi Arabia, Slovenia,
South Africa,  Spain,  Sweden,  Switzerland,  Turkey,  the United  Kingdom,  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.

Multi-line Modems.

     In 1996 we began shipping a family of multi-line  dial-up  modems  targeted
for local area  network  fax and data  server  applications,  computer  bulletin
boards,  multi-line voice mail, and other applications.  The  Zoom/MultiLine(TM)
products  hold up to eight voice  dial-up  faxmodems in one small  external case
that includes status  indicators for each dial-up modem.  Our Hayes  Century(TM)
product line provides up to 16 dial-up modems in a single enclosure.

ISDN Products.

     We have a family of modems for Integrated Service Digital Network, or 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.  The higher rates
of data  transmission  achievable with ISDN can be  particularly  attractive for
data-intensive  applications  such as the  transmission  of  graphics  and video
images,  Internet browsing,  or video telephony.  ISDN also provides much faster
response times to a source of data than those associated with dial-up modems.

In late 2000 we introduced the following ISDN products:

o    a PCI model that plugs into the PCI slot of a Windows PC,
o    a USB model that plugs into the USB port of a PC, and
o    a serial port model that plugs into the serial port of a PC.

Cable Modems

     Each cable  service  provider  has its own approval  process,  in which the
cable service provider may require CableLabs(R) certification in addition to the
cable service  provider's own company  approval.  We have obtained  CableLabs(R)
certification  for  four  types of  DOCSIS-standard  cable  modems  - PCI,  USB,
Ethernet, and Ethernet/USB models. Some of these models have also received cable
service  provider  approvals;  for instance,  the  Ethernet/USB  model  includes
approvals by AT&T, Adelphia,  Charter,  Comcast, Cox, and Mediacom. 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 Scientific Atlanta.

     In 2003 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 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.

ADSL Modems.

     Our ADSL modems  incorporate  the standards that are most popular with U.S.
telephone companies and Internet Service providers,  including G.DMT and G.Lite.
In 2000,  we designed and shipped our first ADSL  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 an ADSL modem with a built-in router, a USB port, and four
switched  Ethernet  ports.  In 2001,  2002 and 2003, our ADSL modems and related
products  accounted  for  approximately  2%, 3% and 14% of our net  sales.  Zoom
expects to continue to add ADSL modems to our product line during 2004. At least
one new model is planned  to  include  VoIP or "Voice  over  Internet  Protocol"
capabilities  as  summarized  below.  Another  new model is  planned  to include
wireless network  capability  incorporating  the wireless  standards 802.11b and
802.11g.  Other new  models are  planned as new  product  designs  packaged  and
marketed under the Hayes brand.

Voice Over Internet Protocol

     In 2004 we plan to begin  introducing  a line of products that support VoIP
or  "Voice  over  Internet   Protocol".   Our  VoIP   implementations   use  the
standards-based SIP protocol,  and are thus compatible with a wide range of VoIP
gateways and endpoints.  The first two products will each have a phone port that
lets  someone  plug in a normal phone to place and receive free voice calls over
the Internet  when the calls are between two of our VoIP  products or compatible
products. These two products will also allow someone to communicate with a phone
that is not VoIP  enabled,  though this will  typically  trigger a long distance
service  charge.  We expect that some versions of the first two products will be
bundled with phone service,  including a free VoIP phone service and an optional
paid service for communicating with phones that are not VoIP enabled.  The first
product is also  expected to include an ADSL  modem,  a router,  a  firewall,  a
4-port switching hub, and other features. The second product will be the same as
the  first,  except  instead of having a built-in  ADSL  modem,  it will have an
Ethernet  port for  connecting to the Ethernet port of an external ADSL modem or
cable modem. We are devoting  significant  resources to the VoIP product area in
2004, and if our initial efforts are successful, we expect to expand the product
line by, for instance,  increasing  the number of voice ports built into some of
our products.

Wireless

     In general we have been  de-emphasizing  wireless network  interface cards,
and  concentrating  our wireless  network product plans on broadband modems with
built-in wireless networking capability.

Full-Color Video Cameras and Other Video Products.

     In late 1997 we shipped the  Zoom/Video  Cam, a full-color PC video camera.
Since then we have  introduced  new PC camera models.  We have limited  hardware
product  development in the video area.  Typically we purchase another company's
camera hardware,  and license appropriate packing and documentation to achieve a
finished product.

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(R),  in
1981, and in 1983 began shipping the  Hotshot(TM)  dialer.  As the dialer market
diminished due to equal access,  we focused on modems and other  peripherals for
the personal  computer  market.  We recently  began shipping a new generation of
dialers  incorporating   proprietary  technology.   Our  proprietary  technology
includes  proprietary  hardware,   firmware,  and  software,  and  is  currently
protected  by one U.S.  patent.  These  dialers are well suited to easily  route
appropriate  calls  through   money-saving   long-distance   service  providers,
including  prepaid phone card service  providers.  We expect to sell some of our
dialer  models  to  long-distance   service  providers,   and  other  models  to
high-volume retailers.  In 2003, dialer products represented under 1% of our net
sales.

SALES CHANNELS

General

     We  sell  our  products   primarily  through   high-volume   retailers  and
distributors,  Internet  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
products.

     During 2003 our  customers who accounted for more than 10% of our total net
sales were Staples, Best Buy, and Dixons Group (Dixons, Currys, PC World, and PC
City). Together these 3 customers accounted for 37% of our total net sales.

High-volume Retailers.

     In the  United  States,  we reach the PC retail  market  primarily  through
high-volume  retailers.  Our United States retail distribution  network includes
Best Buy, CDW,  Fry's,  Micro  Electronics,  PC  Connection,  Staples,  and many
others.

Distributors.

     We  sell  significant   quantities  of  dial-up  and  ADSL  modems  through
distributors,  who often  sell to  corporate  accounts,  retailers,  value-added
resellers  and other  customers.  Our North  American  distributors  include D&H
Distributing, Gates-Arrow, Ingram Micro, and Tech Data.

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.

International Channels.

     In  international   markets,   we  sell  our  products   primarily  through
independent distributors and retailers.  Our international  distributors include
Beijing Tide Hightech Co. Ltd,  Computer  2000,  Criterium,  Informatics,  Micro
Peripherals,  Olusum,  Pouliadis, Tan Thanh, UMD, and others. Our major European
high-volume retailers include Business Logic, Centromail,  Dixons Group (Dixons,
Currys,  PC World, and PC City), Time Computers,  and others.  Our international
net sales as a  percentage  of total net sales have grown from 8% in 1994 to 45%
in 2003. Our revenues from international sales were $15.7 million in 2001, $14.9
million  in 2002,  and $15.1  million in 2003.  See note 17 to our  accompanying
financial  statements for further  information  regarding our geographic  sales.
Approximately  61%, 75% and 69% of our international net sales in 2001, 2002 and
2003,  respectively,  were  customers in the United  Kingdom.  We believe  sales
growth  outside of the  United  States  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.

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  our own
employees and through commissioned independent sales representatives managed and
supported by our own staff.  Most Internet service providers are serviced by our
employees. North American technical support is primarily handled from our Boston
headquarters  location  and from our  technical  support  offices in Boca Raton,
Florida. We also maintain a sales,  support,  and logistics office in the United
Kingdom. Warehousing, customs clearance, and shipping for the United Kingdom and
some  other  European  countries  are  primarily  handled  by  contract  with an
unaffiliated  specialist  in these  services  located in England.  For countries
outside North America and Europe,  our in-house staff  typically  works directly
with  country-specific  distributors.  Our  worldwide  OEM sales  are  primarily
handled by our staff in the United States and United  Kingdom,  who are at times
assisted by our sales staff or commissioned sales  representatives.  See note 17
to our accompanying  financial statements for geographic  information  regarding
our sales.

     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 generally  provide our  high-volume  retailers  with funds to  advertise  our
products in conjunction with the customers' general advertising. We believe that
this type of advertising efficiently and effectively targets the end-user market
for our products.

     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  World
Wide Web support facility that includes email,  firmware and software downloads,
and the  SmartFacts(TM)  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, Florida, and the United Kingdom.

RESEARCH AND DEVELOPMENT

     Our  research  and  development  efforts  are  focused  on  developing  new
communications  network access products,  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, 2003 we had 20 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,  product testing, foreign and domestic regulatory approval efforts,
end-user and internal  documentation,  and  third-party  software  selection and
testing.

     During 2001, 2002 and 2003 we expended $5.3 million,  $3.5 million and $2.8
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.
For some  products  we supply  large kits of parts to one of  several  automated
contract  manufacturers.  For other products,  our contract manufacturers obtain
some or all of the material  required to assemble the products based upon a Zoom
Telephonics  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,  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 in our Boston  manufacturing
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  contract  manufacturer  for a given design.  We
sometimes  maintain  back-up  production  tooling at a second  assembler for our
highest-volume  products.  Our contract  manufacturers  are normally adequate to
meet  reasonable and properly  planned  production  needs;  but a fire,  natural
calamity,  strike, or other  significant event at an assembler's  facility could
adversely affect our shipments and revenues. Currently, a substantial percentage
of our manufacturing is performed by SameTime Electronics ("SameTime"). The loss
of SameTime's services or a material adverse change in SameTime's business or in
our relationship with SameTime could materially and adversely harm our business.
To lessen the risk  associated  with  using one  manufacturer  of a  substantial
portion  of our  products,  we are  also  using  Mac  Systems,  Lite-On,  Vtech,
Billionton,  Taicom,  Abocom,  Behaviour  Tech,  Well and Billion to manufacture
various of our products.

     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 the two  highest-volume
dial-up modem chipset  manufacturers,  Conexant Systems,  Inc. and Agere Systems
Inc. We also buy chipsets for our ADSL and cable modems from Conexant.  Conexant
and Agere 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 one
or both companies include dial-up modems,  ADSL 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
experiencing  this to some  degree in early 2004,  particularly  for some memory
components.

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:

o    successfully and accurately anticipate customer demand;
o    manage  our  product  transitions,   inventory  levels,  and  manufacturing
     processes efficiently;
o    distribute or introduce our products quickly in response to customer demand
     and technological advances;
o    differentiate our products from those of our competitors; or
o    otherwise compete successfully in the markets for our products.

     Our primary competitors by product group include the following:

o    Dial-up modem  competitors:  Actiontec,  Askey,  Best Data,  Creative Labs,
     Lite-On, Sitecom, and US Robotics.
o    Cable  modem  competitors:   Ambit,  D-Link,  Linksys,  Motorola,  Netgear,
     Scientific Atlanta, SMC, Terayon, Thomson, and Toshiba.
o    ADSL  modem  competitors:   3Com,  Actiontec,  Alcatel,  Siemens  (formerly
     Efficient Networks), Thomson, US Robotics, Westell and Zyxcel.

     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:

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

     We believe we are able to provide a  competitive  mix of the above  factors
for all of our main  product  areas,  particularly  when our  products  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.

Cable and ADSL modems transmit data at significantly  faster speeds than dial-up
modems,  which still account for the vast  majority of our  revenues.  Cable and
ADSL  modems,  however,  typically  require  a more  expensive  Internet  access
service. In addition, the use of cable and ADSL modems is currently impeded by a
number of technical and infrastructure limitations. We began shipping both cable
and ADSL modems in the year 2000.  In the year 2003,  most of our cable and ADSL
modem products were sold through cable service operators,  phone companies,  and
Internet Service Providers. 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.  Only about
one out of eight new US cable modem placements in 2003 were sold at retail,  and
an even lower  percentage were sold through  retailers in most other  countries.
ADSL had even  less  success  at  retail  in the US.  Some  European  countries,
however, sell significant volumes of ADSL modems through retailers. In the U.K.,
for  instance,  this has  resulted in Zoom  placing  five ADSL modem models into
retailer Dixons Group.

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

o    the current limited retail market for broadband modems;
o    the  relatively  small  number of cable,  telecommunications  and  Internet
     service  providers  that  make  up the  majority  part  of the  market  for
     broadband modems;
o    the significant bargaining power of these large volume purchasers;
o    the time  consuming,  expensive  and  uncertain  approval  processes of the
     various cable and ADSL service providers; and
o    the strong  relationships  with service providers enjoyed by some incumbent
     equipment  providers,  including  Motorola and Scientific Atlanta for cable
     modems.

     Our initial sales of broadband products have been adversely affected by all
of these factors.  Nevertheless, we experienced significant growth in ADSL modem
sales in 2003.

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 four  patents  and one
pending patent  application  in the United  States.  The patents which 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  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.

GOVERNMENT REGULATION

     In addition to obtaining  approvals  and  certifications  of our  broadband
products from  CableLabs(R)  and, in some cases, the actual cable,  telephone or
Internet service  provider,  all of our 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  communication  equipments  electromagnetic  radiation  and
susceptibility.  For  each  of our  products  sold in  most  foreign  countries,
specific  regulatory  approvals  must be obtained for matters such as electrical
safety, manufacturing standards,  country-specific  telecommunications equipment
requirements,  and electromagnetic radiation and susceptibility requirements. We
have received  regulatory  approvals for certain  modems in Australia,  Austria,
Belgium,  Bulgaria,  China, Cyprus, Denmark,  Finland,  France, Germany, Greece,
Hungary,  Iceland,  India,  Ireland,  Israel,  Italy,  Japan,  Luxembourg,   the
Netherlands,  Norway, Poland,  Portugal,  Russia,  Slovenia, South Africa, South
Korea, Spain, Sri Lanka, Sweden, Switzerland, Turkey, and the United Kingdom. We
expect to  continue to seek and receive  approvals  for new  products in a large
number  of  countries  throughout  the  world.  The  regulatory  process  can be
time-consuming and can require the expenditure of substantial resources. In many
foreign   countries,   obtaining   required   regulatory   approvals   may  take
significantly longer than in the United States. 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
future change. We cannot predict what impact, if any, such changes may have upon
our business.

SEASONALITY

     We believe our sales are somewhat seasonal,  with increased sales typically
occurring in mid-August  through November.  We expect that our quarterly results
will  continue to fluctuate in the future as a result of  seasonality  and other
factors.

BACKLOG

     Our backlog as of March 3, 2004 was $1.8 million,  and on March 5, 2003 was
$1.6 million.  Many orders included in backlog may be canceled or rescheduled by
customers without significant penalty.  Backlog as of any particular date should
not be relied upon as indicative of our net sales for any future period.

EMPLOYEES

     As of December 31, 2003 we had 159 full-time employees (including employees
hired on a  temporary  basis)  versus 185 in 2002.  Of the 2003  total,  20 were
engaged in research and development,  76 were involved in purchasing,  assembly,
packaging, shipping and quality control, 40 were engaged in sales, marketing and
technical support,  and the remaining 23 performed  accounting,  administrative,
management information systems, and executive functions. Our temporary employees
were comprised of 11 individuals at December 31, 2003.  Most of these  temporary
employees were employed in  manufacturing.  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         55     Chief Executive Officer, President and
                                 Chairman of the Board
Peter R. Kramer          52     Executive Vice President and Director
Robert A. Crist          60     Vice President of Finance and Chief
                                 Financial Officer
Terry J. Manning         52     Vice President of Sales and Marketing
Dean N. Panagopoulos     46     Vice President of Network Products
Deena Randall            50     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.

     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 assistant corporate controller, corporate director
of business planning and analysis,  and corporate  manufacturing and engineering
controller.  Mr. Crist earned his BA degree from  Pennsylvania  State University
and he earned his MBA from the University of Rochester in 1971.

     TERRY J. MANNING  joined 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 2 - PROPERTIES

     Our corporate headquarters are located at 201 and 207 South Street, Boston,
Massachusetts.  Approximately  16,000  square  feet of this  56,000  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. Our mortgage is a five-year balloon mortgage that is amortized on
a 20-year basis.  The interest rate is fixed for one year, based on the one year
Federal Home Loan Bank rate plus 2.5% per annum. The rate is adjusted on January
10th of each  calendar  year.  As of January 10, 2004,  the rate of interest was
changed from 3.81% to 3.99%.

     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  enough
manufacturing  space for our current  operations  and could support  significant
growth.

     In March  1999,  we  assumed  an  office  lease  from  Hayes  Microcomputer
Products, Inc. at 430 Frimley Business Park, Camberley,  Surrey, U.K. We have an
agreement in principle to extend this lease term to 2005.

     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

     Since January  2003,  our common stock has been trading on the Nasdaq Small
Cap Market under the symbol "ZOOM". Prior to that time our common stock had been
trading on the Nasdaq National Market under the same symbol. 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 Small Cap or Nasdaq National Market,  as
applicable.
<TABLE>
<S>                                                      <C>        <C>
Fiscal Year Ending December 31, 2002                       High         Low
                                                           ----         ---
      First Quarter......................                $ 2.130    $  1.040
      Second Quarter.....................                  1.450       0.600
      Third Quarter......................                  1.330       0.560
      Fourth Quarter.....................                  1.140       0.450

Fiscal Year Ending December 31, 2003                       High         Low
                                                           ----         ---
      First Quarter......................                $ 0.870    $  0.650
      Second Quarter.....................                  1.310       0.640
      Third Quarter......................                  3.750       1.040
      Fourth Quarter.....................                  4.450       1.790
</TABLE>
     As of March 19,  2004,  there were  8,182,941  shares of our  common  stock
outstanding and approximately 253 holders of record of our common stock.

RECENT SALES OF UNREGISTERED SECURITIES

     We did not sell any  unregistered  securities  during the fourth quarter of
2003.

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 the fourth  quarter of 2003, we did not repurchase any shares of our
common stock on our own behalf or for any affiliated purchaser.

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 ending  December 31, 2001,  2002 and 2003 and our
balance  sheet data as of December  31, 2002 and 2003 have been derived from our
consolidated  financial  statements,  which  have  been  audited  by  KPMG  LLP,
independent  certified public  accountants,  and are included  elsewhere in this
report.  Our statement of operations data for the years ending December 31, 1999
and 2000 and our balance sheet data as of December 31, 1999, 2000, and 2001 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.
<TABLE>
<S>                                       <C>         <C>         <C>         <C>         <C>
                                                           Years Ending December 31,
                                             1999        2000        2001        2002        2003
                                             ----        ----        ----        ----        ----
                                                       (In thousands) except per share amounts
Statement of Operations Data:
Net sales.............................    $ 62,228    $ 57,708    $ 41,570    $ 37,274    $ 33,335
Cost of goods sold....................      40,550      39,404      35,193      27,937      23,120
                                            ------      ------      ------      ------      ------
   Gross profit.......................      21,678      18,304       6,377       9,337      10,215
                                            ------      ------      ------      ------      ------
Operating expenses:
   Selling............................      11,711      10,672       7,480       5,848       5,271
   General and administrative.........       6,276       6,228       7,938       3,405       3,118
   Research and development...........       6,425       6,249       5,328       3,527       2,767
                                            ------      ------      ------      ------      ------
   Total operating expenses...........      24,412      23,149      20,746      12,780      11,156
                                            ------      ------      ------      ------      ------
   Operating income (loss)............      (2,734)     (4,845)    (14,370)     (3,443)       (941)
Other income (expense), net...........         737         469        (159)         67         273
                                            ------      ------      ------      ------       -----
   Income (loss) before income taxes..      (1,997)     (4,376)    (14,529)     (3,376)       (668)
Income tax expense (benefit)..........        (588)     (1,299)      3,800       2,015           -
                                            ------      ------      ------      ------       -----
Income (loss) before extraordinary
   item...............................      (1,409)     (3,077)    (18,239)     (5,391)       (668)
Extraordinary gain on elimination
of negative goodwill..................           -           -           -          255          -
                                            ------      ------      ------      -------     ------
   Net income (loss)..................      (1,409)     (3,077)    (18,329)     (5,136)       (668)
                                            ======      ======      ======      ======      ======

Earnings (loss) per common and common equivalent share: Loss before
extraordinary item:

   Basic and diluted..................   $    (.19)  $    (.40)  $   (2.33)  $    (.68)  $    (.08)
Extraordinary gain on elimination of
   negative goodwill..................   $       -   $       -   $       -   $     .03   $       -
                                         =========   =========   =========   =========   =========
Net loss:
   Basic and diluted..................   $    (.19)  $    (.40)  $   (2.33)  $    (.65)  $    (.08)
                                         =========   =========   =========   =========   =========

Weighted average common and common equivalent shares:
   Basic and diluted..................       7,483       7,757       7,861       7,861       7,883

                                                           Years Ending December 31,
                                              1999        2000         2001        2002       2003
                                              ----        ----         ----        ----       ----
                                                                  (In thousands)
Balance Sheet Data:
Working capital.......................   $  29,573   $  23,562    $  18,218   $  15,341  $  15,647
Total assets..........................      43,072      46,960       29,185      22,633     21,974
Long-term obligations.................         481         369        6,001       5,342      5,096
Total stockholders' equity............      37,514      36,747       18,416      13,485     13,470
</TABLE>

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  modems,  to retailers,  distributors,  Internet  Service
Providers and Original Equipment  Manufacturers.  We sell our products through a
small  direct  sales force and third  party  sales  agents.  Our  employees  are
primarily  located in our  headquarters in Boston,  Massachusetts  and we have a
sales office in the United Kingdom. We obtain our hardware components from third
party  suppliers and we outsource most of the product  assembly work to contract
manufacturers,  currently  in  Asia.  We  perform  most  of  the  packaging  and
distribution  effort  at  our  production  and  warehouse  facility  in  Boston,
Massachusetts. We also utilize a third party distribution facility in the United
Kingdom.

     Historically  we have  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 in their  personal  computers.  In recent years,  the size of this market,
along  with  our  sales  to this  market  has  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 market for
broadband  Internet  connection  devices,  such as cable modems and ADSL 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 ADSL 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  dial-up  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.

     In recent years, we have realized the benefit of reduced unit costs for our
dial-up  modems.  A portion  of the cost  reduction  realized  in our  financial
statements  is  derived  from  purchase   discount  programs  with  our  chipset
suppliers. From the first quarter of 2002 through the fourth quarter of 2003, we
realized  significant benefits as a result of our adherence to supplier purchase
agreements  with volume  purchase  commitments.  The programs and the  financial
benefits of existing  agreements  expire during 2004.  One of our  objectives in
2004 is to negotiate  and implement new purchase  discount  programs.  It may be
more  difficult for us to do so in 2004 as the market is currently  experiencing
shortages  and increased  lead times for some  chipsets,  particularly  for some
memory components.  To maintain our dial-up gross profit percentage,  we believe
we will require cost reductions in 2004.  Fortunately,  the downward pressure on
retail pricing for dial-up modems appears to be moderating, likely because fewer
suppliers remain active in the market.

     Over the past three  years,  our net sales have  declined an average of 16%
per year. In response to the declining  sales  volume,  we reduced  staffing and
overhead  costs.  In  December  31,  2000,  our  total  headcount  of  full-time
employees,  including temporary workers, was 329, which was reduced to 215, 185,
and 159 at year-end 2001, 2002, and 2003, respectively. As a result of our staff
reductions and the reduction of other discretionary  spending, our operating and
manufacturing expenses over the past three years have been reduced an average of
18%.

     In our most recent  quarter,  the fourth quarter of 2003, our net sales for
the quarter were up 11.5% over the fourth  quarter of 2002.  Fourth quarter 2003
sales were flat  compared  to our sales for the third  quarter of 2003.  We were
profitable in the third and fourth quarters of 2003. Our growing broadband sales
are  currently  concentrated  with a small  number of  customers  so there is no
predictable uniformity for 2004 broadband quarterly sales.

     We  previously  announced  that we expected our first quarter of 2004 sales
through  February  18,  2004 to be about 18% below sales  during the  comparable
period  for the first  quarter of 2003.  Updating  this  information,  our first
quarter of 2004 sales through March 29, 2004 are expected to be slightly greater
than sales  during the  comparable  period for the first  quarter of 2003.  This
improvement primarily reflects the volatility of our sales due to our dependence
on sales to a few significant customers,  and the strong contribution,  compared
to one year ago, of our  increasing  ADSL  sales.  We continue to expect that we
will  experience   decreasing  dial-up  modem  sales  in  2004,  reflecting  the
continuing decline of this market.

     Our  cash  and cash  equivalents  balance  at  December  31,  2003 was $9.9
million, up from $7.6 million at December 31, 2002. Most of the cash improvement
resulted  from our  reduction  of  inventories,  as we  improved  our  inventory
turnover,  primarily  in our  broadband  products.  It is  unlikely  that we can
further reduce inventories significantly and we expect to utilize cash if we are
successful in growing our sales volume.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     The  following  is a  discussion  of what we view as our  more  significant
accounting  policies  and  estimates.  These  policies  and  estimates  are also
described in the notes to our consolidated  financial  statements.  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  sell  hardware  products  to  our
customers.  The products include dial-up modems,  embedded modems, cable modems,
PC cameras,  ISDN and ADSL  modems,  telephone  dialers,  and wireless and wired
networking  equipment.  We generally do not sell software or services. We earn a
small amount of royalty net sales.  We derive our net sales  primarily  from the
sales of hardware products to three types of customers:

o     computer peripherals retailers,
o     computer product distributors, and
o     original equipment manufacturers (OEMs).

     We  recognize  net sales for all three 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
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 are reduced by certain events which are characteristic of the
sales of hardware to computer  peripherals  retailers.  These events are product
returns,  certain  sales and marketing  incentives,  price  protection  refunds,
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.

     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
has remained relatively stable for many years.

     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 $.9 million in 2001,
$.7 million in 2002 and $.2 million in 2003.

     Sales and Marketing Incentives.  Many of our retail customers require sales
and marketing support funding, usually set as a percentage of our sales in their
stores.  Reductions in our net sales due to sales and marketing  incentives were
$2.1 million in 2001, $1.7 million in 2002 and $1.5 million in 2003.

     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 by 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 $1.3 in
2001, $1.6 million in 2002 and $2.1 million in 2003.

     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  have not  been significant  during 2001, 2002 and
2003.

     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.
In the  second  half of 2000,  when  industry  expectations  were  very high for
expansion of the broadband and wireless  markets,  we purchased parts to support
our aggressive forecast for a ramp-up of sales of cable modems, ADSL modems, and
wireless networking products.  The subsequent slow down in the industry resulted
in a significant excess inventory position of materials. During 2001, the market
selling prices for the broadband and wireless  products  declined  significantly
because of an industry-wide oversupply.  Starting in 2001 and to a lesser extent
in 2002 and 2003,  the sales prices for some of the products  dropped  below our
cost and,  accordingly,  we then  valued  our  inventory  on a "lower of cost or
market"  basis.  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 2001,  2002 and 2003,  we recorded  charges  against
inventory  of $4.6  million,  $.7 million and $.3  million,  respectively,  as a
result of lower of cost or market valuation issues.

     We have entered into supply  arrangements with suppliers of some components
that include price and other concessions,  including no-charge  components,  for
meeting certain purchase requirements or commitments.  Under these arrangements,
we are committed to purchase  approximately  $8.0 million of  components  over a
period of  approximately  30-months that commenced on January 1, 2002,  provided
that those components were offered at competitive  terms and prices.  We believe
that at December 31, 2003, we are on track to meet the $8.0 million  commitment.
We are also  required to purchase  either a minimum  percentage,  as measured by
unit purchases or dollar amount of  components,  from a supplier over a two-year
period  commencing  on January  1, 2002,  and we are  currently  exceeding  that
percentage. In connection with these arrangements, we 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.  We received  $1.2 million of these
no-charge components in the fourth quarter of 2001. We received the remainder of
the no-charge  components in the first quarter of 2002. The favorable  impact to
our statement of operations is being calculated as a purchase  discount over the
estimated  total  number of  components  acquired  through  the 30 month  supply
agreement  and  recognized  on a delayed  basis as the  products  employing  the
acquired  components involved in the supply arrangement are sold. This method of
accounting has been consistent each year.

     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.

     Significant  management  judgment is required in determining  our provision
for income taxes and any valuation  allowance  recorded against our net deferred
tax assets.  In 2001, we recorded a $3.8 million income tax charge to reflect an
additional increase in our deferred tax asset valuation allowance.  Management's
decision  to  record  the  valuation   allowance  was  based  on  the  uncertain
recoverability  of our deferred tax asset  balance.  In our first quarter ending
March 31, 2002, we recorded an  additional  $2.0 income tax charge and valuation
reserve,  which  reduced  our net  deferred  tax  asset  balance  to zero.  This
additional  reserve  reflected  our  decision to  discontinue  our  specific tax
planning  strategy to sell our  headquarters  building in Boston in light of the
less favorable market conditions for the sale of such building.  At December 31,
2003,  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,  2003,   the  Company  had  federal  net  operating  loss
carryforwards of approximately  $22,531,000.  These federal net operating losses
are available to offset future taxable income,  and are due to expire  beginning
2019.  The  Company  had  Massachusetts  net  operating  loss  carryforwards  of
approximately  $20,240,000.  These federal net operating losses are available to
offset future taxable income, and are due to expire beginning 2004.

RESULTS OF OPERATIONS

     The  following  table sets forth  certain  financial  data for the  periods
indicated as a percentage of net sales:
                                             Years Ending December 31,
                                                2001    2002    2003
                                                ----    ----    ----
Net sales...............................       100.0%  100.0%  100.0%
Cost of goods sold......................        84.7    75.0    69.4
                                                ----    ----    ----
  Gross profit..........................        15.3    25.0    30.6
Operating expenses:
  Selling...............................        18.0    15.7    15.8
  General and administration............        19.1     9.1     9.3
  Research and development..............        12.8     9.5     8.3
                                                ----    ----    ----
  Total operating expenses..............        49.9    34.3    33.4
                                                ----    ----    ----
Operating income (loss).................       (34.6)   (9.3)   (2.8)
   Other income (expense), net..........         (.4)     .2      .8
                                                 ---    ----    ----
Loss before income taxes..  ............       (35.0)   (9.1)   (2.0)
   Income tax expense (benefit).........         9.1     5.4       -

Extraordinary Gain......................           -      .7       -
                                                -----   -----  ------
Net income (loss) ......................       (44.1)% (13.8)%  (2.0)%
                                                =====   =====  ======

YEAR ENDING DECEMBER 31, 2003 COMPARED TO YEAR ENDING DECEMBER 31, 2002

     Following  is a  discussion  of the major  categories  of our  consolidated
statement of  operations,  comparing the  financial  results for the year ending
December 31, 2003 with the year ending December,  31, 2002. The major categories
discussed  are:  Net  Sales,  Cost of Goods  Sold and  Gross  Profit,  Operating
Expenses,  Operating Profit (Loss),  Other Income (Expense),  Income Tax Expense
(Benefit), Extraordinary Gain, and Net Income (Loss).

     NET  SALES.  Our total  net sales  declined  year-over-year.  We  primarily
generate our sales by selling dial-up modems to the electronics after-market via
distributors and retailers.  As noted in the overview,  this part of the dial-up
modem market continues to decline.  Our efforts to increase share in this market
have only moderated our  year-over-year  sales  decline,  which was comprised of
declines of both unit sales volume and average selling prices. Our growing sales
category,  broadband  modems,  did not grow  sufficiently  in 2003 to offset the
decline in our dial-up modem sales,  as our total net sales  decreased  10.6% to
$33.3 million in 2003 from $37.3 million in 2002.

     As shown in the table below, our net sales for dial-up modems declined $7.2
million,  or 23.0%,  from $31.4 million in 2002 to $24.2  million in 2003.  This
decline was  primarily  attributable  to both lower unit sales and lower prices,
reflecting the declining retail market for these modems. Our broadband net sales
increased  $3.3  million,  or 99%,  from $3.3 million in 2002 to $6.6 million in
2003.  This increase was primarily  attributable to increased unit sales of ADSL
modems.  Net sales in our other  product  sales  categories,  which include ISDN
modems,  cameras,  wireless  networking  equipment,   telephone  dialers,  etc.,
declined 1.0%, from $2.5 million to $2.5 million.  Our total net sales decreased
$3.9 million, or 10.6%, from 2002 to 2003.
<PAGE>
     $000              Total Year   Total Year       $            %
   Net Sales              2002       2003         Change       Change
--------------         ----------   ----------   ---------    --------
Dial-up                 $ 31,407    $ 24,198     $( 7,208)    ( 23.0)%
Broadband               $  3,340    $  6,629     $  3,289       98.5 %
Other Products          $  2,528    $  2,508     $(    20)    (  0.8)%
                        =========   =========    =========    ========
Total Net Sales         $ 37,274    $ 33,335     $( 3,939)     ( 10.6)%

     Our net sales in North America decreased by 18.5% to $18.2 million in 2003,
compared to our net sales in 2002. Our 2003 international net sales increased by
1.3% to $15.1 million,  compared to our net sales in 2002. These changes reflect
our declining sales of dial-up modems worldwide, our stronger broadband sales in
the International  markets,  and the positive currency  translation  impact, for
converting British Pounds and Euros to dollars,  of a significant portion of our
International sales.

     $000              Total Year   Total Year       $           %
   Net Sales              2002          2003      Change      Change
---------------        ----------   ----------   --------    --------
North America          $  22,343    $  18,212    $(4,131)    ( 18.5)%
International          $  14,931    $  15,123    $   192        1.3 %
                       =========    =========    ========    ========
Total Net Sales        $  37,274    $  33,335    $(3,939)    ( 10.6)%

     GROSS  PROFIT.  Our gross profit was $10.2 million in 2003 compared to $9.3
million in 2002.  Our gross  profit as a  percentage  of net sales  increased to
30.6% in 2003 from 25.0% in 2002. The primary reason for this  improvement was a
marked  improvement in the gross profit  percentage of net sales of both dial-up
modems and broadband  modems.  The improved gross profit  percentage for dial-up
modems resulted from cost reductions which exceeded market price reductions. The
improved gross profit percentage for broadband modems resulted from product cost
savings, which exceeded the negative impact of market price reductions.

     OPERATING  EXPENSE.  Total operating  expense  decreased by $1.6 million to
$11.2 million in 2003 from $12.8 million in 2002.  Total operating  expense as a
percentage of net sales  improved to 33.5% in 2003 from 34.3% in 2002. The table
below shows total  operating  expenses and its three major  categories:  selling
expense,  general and  administrative  expense,  and  research  and  development
expense.
<TABLE>
<S>                          <C>           <C>      <C>           <C>      <C>         <C>
     $000                    Total Year    % Net    Total Year    % Net      $000        %
Operating Expenses               2002      Sales       2003       Sales     Change     Change
--------------------------   ----------    -----    ----------    -----    --------    -------
Selling Expense                $ 5,848     15.7%      $ 5,271     15.8%    $(  577)    ( 9.9)%
General and Administrative
 Expense                       $ 3,405      9.1%      $ 3,117      9.4%    $(  288)    ( 8.5)%
Research and Development
 Expense                       $ 3,527      9.5%      $ 2,767      8.3%    $(  760)    (21.5)%
Total Operating Expense        $12,780     34.3%      $11,155     33.5%    $(1,625)    (12.7)%
</TABLE>
     Selling Expense.  Selling expense  decreased by $.6 million to $5.3 million
in 2003, from $5.8 million in 2002. Selling expense as a percentage of net sales
were  15.8% in 2003 and  15.7% in 2002.  The $.6  million  decrease  in  selling
expenses was primarily due to reduced  personnel  costs,  marketing  costs,  and
sales commissions, which were partially offset by higher freight delivery costs.

     General and  Administrative  Expense.  General and  administrative  expense
decreased  by $.3  million to $3.1  million  in 2003 from $3.4  million in 2002.
General and  administrative  expenses as a percentage  of net sales were 9.4% in
2003 and 9.1% in 2002.  The $.3 million  decrease in general and  administrative
expense  was  primarily  due  to  reduced  personnel  costs,   depreciation  and
amortization, insurance costs, and legal and audit costs.

     Research  and  Development   Expense.   Research  and  development  expense
decreased  by $.8  million to $2.8  million  in 2003 from $3.5  million in 2002.
Research and development expenses as a percentage of net sales decreased to 8.3%
in 2003 from 9.5% in 2002. The $.8 million  decrease in research and development
expenses was primarily due to reduced personnel costs and related expenses.

     OTHER INCOME (EXPENSE).  Other income, net improved to $.27 million in 2003
from $.07 million in 2002.  The  improvement  was primarily the result of higher
rental income from leased excess space at our headquarters  facility and reduced
interest  payments  on our  variable-rate  mortgage  note  for our  headquarters
facility.

     INCOME TAX  EXPENSE  (BENEFIT).  We did not  record any net tax  expense in
2003.  In 2002,  we recorded a $2.0  million  income tax expense to increase our
valuation allowance against our then remaining net deferred tax asset, which has
remained  at a net zero value  since that time.  This  accounting  treatment  is
described in further detail under the caption "Critical  Accounting Policies and
Estimates" above and in footnote 12 to the consolidated financial statements.

     EXTRAORDINARY  GAIN.  In 2003 we did not record any  extraordinary  gain or
(loss).  In 2002 we  recorded an  extraordinary  gain of $.26  million  from the
elimination of the remaining negative goodwill on our balance sheet related to a
previous acquisition.

YEAR ENDING DECEMBER 31, 2002 COMPARED TO YEAR ENDING DECEMBER 31, 2001

     NET  SALES.  Our net sales  decreased  10.3% to $37.3  million in 2002 from
$41.6  million  in  2001.   Our  sales  decline   resulted   primarily   from  a
year-over-year net sales decline in retail and distributor  dial-up modem sales,
a year-over-year net sales decline from an OEM modem contract,  and a decline in
camera sales,  partially  offset by increased  sales in the broadband  cable and
ADSL modem categories.

     Although our unit sales of dial-up modems were up slightly in 2002 compared
to 2001,  reflecting  our  increased  unit and dollar  market share at retail in
North  America and the U.K.,  our net sales of dial-up  modems were down in 2002
compared  to 2001,  primarily  due to the lower  average  selling  prices of our
dial-up modems and a shift in our unit sales mix to lower-priced modems.

     Our net sales in the North  America  decreased by 12.4% to $22.2 million in
2002,  compared to our net sales in 2001. Our 2002 international sales decreased
by 7.0% to $15.1  million,  compared to our net sales in 2001.  These  decreases
were due  primarily  to the  sales  decline  of  dial-up  modems  and  primarily
resulting from a shift in demand to lower priced modems.

     GROSS  PROFIT.  Our gross profit was $9.3 million in 2002  compared to $6.4
million in 2001.  Our gross  profit as a  percentage  of net sales  increased to
25.0% in 2002 from 15.3% in 2001. The primary reason for this  improvement was a
reduction of  inventory  write-downs  for lower of cost of market and  inventory
obsolescence  expenses  totaling $4.0 million in 2001 compared to $.9 million in
2002. Our gross profit  percentage also improved in 2002 as a result of supplier
cost reductions, and manufacturing expense reductions that were partially offset
by decreases in modem prices.

     SELLING EXPENSE.  Selling expense decreased by $1.6 million to $5.8 million
in 2002,  from $7.5 million in 2001.  Selling  expenses as a  percentage  of net
sales  decreased to 15.7% in 2002 from 18.0% in 2001. The $1.6 million  decrease
was primarily due to reduced personnel costs,  marketing costs, freight delivery
costs, and sales commissions.

     GENERAL AND  ADMINISTRATIVE  EXPENSE.  General and  administrative  expense
decreased by $4.5 million to $3.4 million in 2002 from $7.9 million in 2001. The
year-over-year  $4.5 million decrease  included a $2.3 million decrease from the
fourth quarter 2001 write-off of all of our positive  goodwill and a $.9 million
decrease from related  amortization  charges.  Other general and  administrative
expense  reductions  were primarily  attributable  to decreases in personnel and
related expenses, bank fees, bad-debt expense, and legal and audit expenses.

     RESEARCH  AND  DEVELOPMENT   EXPENSE.   Research  and  development  expense
decreased  by $1.8  million to $3.5  million in 2002 from $5.3  million in 2001.
Research and development  expense as a percentage of net sales decreased to 9.5%
in 2002  from  12.8%  in  2001.  The  $1.8  million  decrease  in  research  and
development  expense was  primarily due to reduced  personnel  costs and related
expenses,  industry and  government  approval  costs  associated  with obtaining
licenses, consulting, recruiting, and outside services.

     OTHER INCOME (EXPENSE). Other income (expense), net improved from a loss of
$.16 million in 2001 to income of $.07 million in 2002. Included in other income
(expense) are interest income (expense),  other income and non-interest  income,
equity  losses of an  affiliate,  and rental  income from  leasing  space at our
headquarters.

     INCOME TAX  EXPENSE  (BENEFIT).  We did not  record any net tax  benefit to
offset our $3.4 million pre-tax loss in 2002. In addition, in 2002 we recorded a
$2.0 million income tax charge to increase our valuation  allowance  against our
net deferred tax asset.

     EXTRAORDINARY  GAIN.  In 2002 we  recorded  an  extraordinary  gain of $.26
million from the elimination of the remaining  negative  goodwill on our balance
sheet related to a previous acquisition.

LIQUIDITY AND CAPITAL RESOURCES

     On December 31, 2003, we had working  capital of $15.6  million,  including
$9.9 million in cash and cash equivalents.

     In 2003 operating  activities  generated $2.2 million in cash. Our net loss
in 2003 was $.7 million which included  non-cash  depreciation  and amortization
expense of $.6 million.  Sources of cash from operations included a reduction of
inventory of $2.0  million,  a decrease of prepaid  expenses  and other  current
assets of $.6  million,  and a decrease in accounts  receivable  of $.1 million.
Uses of cash included a decrease of accounts payable and accrued expenses of $.4
million.

     Our $2.0 million  year-over-year  inventory  reduction  was  primarily  the
result of  reduced  inventory  levels  for our  broadband  products,  reflecting
improved inventory  turnover.  Our inventory turnover of dial-up modems remained
constant as our  inventory  level  decreased  in  proportion  to our decrease in
dial-up  sales  activity.  We believe  that it is  unlikely  that we can further
reduce  inventory  significantly,  and  we  expect  to  utilize  cash  if we are
successful in growing our sales volume.

     In 2003 our net cash used in investing  activities  was $.1 million,  which
was used to purchase plant and equipment.

     In 2003 cash was provided by financing activities of $.1 million consisting
of employee  funding from the exercise of employee stock options of $.3 million,
partially  offset by $.2  million  for  monthly  principal  payments on our $6.0
million mortgage on our headquarters  facility. Our mortgage is a 5-year balloon
mortgage,  payable in full in  January,  2006,  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 2003, the interest rate
was 3.81%. As of January 10, 2004, the rate of interest was changed to 3.99%.

     Currently we do not have a debt facility  from which we can borrow,  and to
obtain  one  on   acceptable   terms  unless  there  is  operating   performance
improvement.  However,  we believe we would be able to obtain funds, if and when
required,  by factoring accounts  receivable.  We do not plan to put a factoring
arrangement  in place until and unless it is  necessary  since there would be an
up-front cost to negotiate and document the arrangement.

     To  conserve  cash  and  manage  our  liquidity,   we  implemented  expense
reductions throughout 2003. Our employee headcount was 185 at December 31, 2002,
which has been reduced to 159 at December 31, 2003.  We will  continue to assess
our cost structure as it relates to our net sales and cash position in 2004, and
we may make further reductions if the actions are deemed necessary.

     Management  believes  it has  sufficient  resources  to  fund  its  planned
operations  over the next 12 months.  However,  if we are unable to generate net
income,  reduce our  expenses,  or raise  capital,  our  longer-term  ability to
continue as a going concern and achieve our intended  business  objectives could
be adversely  affected.  See "Risk Factors" below, for further  information with
respect to events and  uncertainties  that  could harm our  business,  operating
results, and financial condition.

COMMITMENTS

     The following table summarizes our contractual  obligations and commitments
as of December 31, 2003.
<TABLE>
<CAPTION>
                                                 Contractual  Obligations
                                                  Payments Due by Period
<S>                          <C>           <C>           <C>          <C>           <C>
                                              LESS THAN                               AFTER 5
                                  TOTAL         1 YEAR     1-3 YEARS    3-5 YEARS      YEARS
                                  -----       ---------    ---------    ---------     -------
Long Term Debt (1)           $  5,319,819  $    223,833  $ 5,095,986            -           -
Capital Lease Obligations               -             -            -            -           -
Operating Leases (2)            1,796,441       832,055      964,386            -           -
Purchase Commitments (3)        1,942,503     1,942,503            -            -           -
                             ------------  ------------  -----------  -----------   ---------
Total                        $  9,058,763  $  2,998,391  $ 6,060,372            -           -
                             ============  ============  ===========  ===========   =========
</TABLE>
(1)  Represents the mortgage on our corporate headquarters.  In January 2001, we
     received $6.0 million in financing by securing a mortgage on this property.
     Our mortgage is a five-year balloon mortgage that is amortized on a 20-year
     basis.
(2)  Represents anticipated minimum lease payments, excluding executory costs to
     be made under  leases for our  manufacturing  facility  in Boston,  MA, our
     office facility in Camberley,  U.K., and our technical  support facility in
     Boca Raton, FL.
(3)  See  discussion  of purchase  commitments  for  chipsets  under the section
     entitled "Critical Accounting Policies" above.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In  January  2003,  the  FASB  issued   Interpretation  No.  46  (FIN  46),
"Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51",
and, in October 2003,  the FASB issued FASB Staff  Position  (FSP) No. FIN 46-6,
"Effective  Date of FASB  Interpretation  46." This staff position  deferred the
effective date for applying FIN 46 to an interest held in a VIE or potential VIE
that was created  before  February 1, 2003 until the end of the first interim or
annual period ending after December 15, 2003,  except if the company had already
issued statements  reflecting a VIE in accordance with FIN 46. In December 2003,
the FASB issued  Interpretation  No. 46R (FIN 46R),  "Consolidation  of Variable
Interest  Entities -- An  Interpretation of ARB No. 51." FIN 46R replaces FIN 46
and  addresses  consolidation  by  business  enterprises  of  variable  interest
entities  that  possess  certain  characteristics.  A variable  interest  entity
("VIE") is defined as (a) an ownership,  contractual or monetary  interest in an
entity where the ability to influence financial decisions is not proportional to
the  investment  interest,  or  (b)  an  entity  lacking  the  invested  capital
sufficient to fund future  activities  without the support of a third party. FIN
46R establishes  standards for determining under what  circumstances VIEs should
be  consolidated  with their primary  beneficiary,  including those to which the
usual  condition  for  consolidation  does not apply.  Adoption of the  required
sections of FIN 46, as modified and interpreted, including the provisions of FIN
46R, did not have any effect on the Company's  consolidated financial statements
or  disclosures.  The Company  intends to adopt the  remaining  sections of this
guidance when required in 2004. The Company does not expect  adoption of FIN 46,
as modified and  interpreted,  including  the  provisions  of FIN 46R, to have a
significant impact on the Company's financial statements or disclosures.

     In December  2003,  the  Securities  and Exchange  Commission  issued Staff
Accounting  Bulletin No. 104, "Revenue  Recognition" (SAB 104), which supersedes
SAB 101, "Revenue Recognition in Financial  Statements".  The primary purpose of
SAB 104 is to  rescind  accounting  guidance  contained  in SAB 101  related  to
multiple element revenue  arrangements,  which was superseded as a result of the
issuance  of EITF 00-21,  "Accounting  for Revenue  Arrangements  with  Multiple
Deliverables".  While the wording of SAB 104 has changed to reflect the issuance
of EITF 00-21,  the revenue  recognition  principles  of SAB 101 remain  largely
unchanged  by the  issuance of SAB 104.  The  adoption of SAB 104 did not have a
material impact on the Company's financial statements.

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  continue  to  decline  primarily  due to the  decline in the
dial-up modem market, decreases in 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.

TO STAY IN BUSINESS WE MAY REQUIRE FUTURE ADDITIONAL FUNDING WHICH WE MAY BE
UNABLE TO OBTAIN ON FAVORABLE TERMS, IF AT ALL.

     Over the next twelve months,  we may require  additional  financing for our
operations either to fund losses beyond those we anticipate or to fund growth in
our inventory and accounts  receivable  should growth occur. We currently do not
have a debt facility from which we can borrow and we do not expect to obtain one
on  acceptable  terms  unless our  operating  performance  improves.  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.
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, which has been our primary source of net
sales. 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.

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,   cable  and  ADSL,  modem  markets.  These  markets  have  been
challenging  markets,  with significant  barriers to entry,  that have adversely
affected  our sales to these  markets.  Although  some cable and ADSL 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:

o    the current limited retail market for broadband modems;
o    the  relatively  small  number of cable,  telecommunications  and  Internet
     service  provider  customers that make up a substantial  part of the market
     for broadband modems;
o    the significant bargaining power of these large volume purchasers;
o    the time consuming, expensive, uncertain and varied approval process of the
     various cable service providers; and
o    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 ADSL service in these countries. We
cannot assure that we will be able to successfully penetrate these markets.

OUR EXISTING  INDEBTEDNESS COULD PREVENT US FROM OBTAINING  ADDITIONAL FINANCING
AND HARM OUR LIQUIDITY.

     In  January  2001,  we  obtained a $6  million,  20 year  direct  reduction
mortgage from a bank, secured by our owned real estate in Boston, Massachusetts.
As of December 31, 2003, our  outstanding  indebtedness  was $5.3 million.  This
mortgage has a balloon payment due in January 2006. Our outstanding indebtedness
could adversely  affect our ability to obtain  additional  financing for working
capital,  acquisitions,  or other purposes. Our existing indebtedness could also
make us more vulnerable to economic downturns and competitive pressures, make it
more difficult to obtain  additional  debt financing,  and adversely  affect our
liquidity.  In the event of a cash shortfall, we could be forced to reduce other
expenditures to meet our requirements  with respect to our outstanding debt. Our
ability to meet our obligations  will be dependent upon our future  performance,
which will be subject to  financial,  business and other  factors  affecting our
operations.  Many of these  factors are beyond our control.  If we are unable to
generate sufficient cash flow from operations in the future to service our debt,
we may be required to refinance all or a portion of these  obligations or obtain
additional financing in order to stay in business.

OUR  FAILURE  TO MEET  CHANGING  CUSTOMER  REQUIREMENTS  AND  EMERGING  INDUSTRY
STANDARDS WOULD ADVERSELY IMPACT OUR ABILITY TO SELL OUR PRODUCTS.

     The market for PC communications  products and high-speed  broadband access
products 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  developments  and
enhancements have taken longer than planned and have delayed the availability of
our products,  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 our results of  operations  and  financial  condition may be
adversely  affected.  Our  future  success  will  depend in large  part upon our
ability to:

o    identify and respond to emerging technological trends in the market;
o    develop and  maintain  competitive  products  that meet  changing  customer
     demands;
o    enhance our products by adding innovative  features that  differentiate our
     products from those of our competitors;
o    bring products to market on a timely basis;
o    introduce products that have competitive prices;
o    manage  our  product   transitions,   inventory  levels  and  manufacturing
     processes efficiently; and
o    respond   effectively   to  new   technological   changes  or  new  product
     announcements by others.

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

OUR OPERATING  RESULTS HAVE BEEN ADVERSELY  AFFECTED BECAUSE OF PRICE PROTECTION
PROGRAMS.

     Our operating results have been adversely affected by reductions in average
selling  prices  because we gave credits to some of our customers as a result of
contractual price protection guarantees.  Specifically, when we reduce the price
for a product,  the customer  receives a credit for the  difference  between the
customer's most recent purchase price and our reduced price for the product, for
all unsold product at the time of the price reduction. For fiscal 2003 and 2002,
we  recorded  a  reduction  of  net  sales  of  $.2  million  and  $.7  million,
respectively, for customer price protection.

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:

o    delays in the development of our products;
o    numerous product returns; and
o    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 too higher than normal returns.

OUR FAILURE TO  EFFECTIVELY  MANAGE OUR INVENTORY  LEVELS COULD  MATERIALLY  AND
ADVERSELY AFFECT OUR LIQUIDITY AND HARM OUR BUSINESS.

     During fiscal 2000, in anticipation of future sales of our broadband access
products,  particularly  cable modems, we significantly  increased our inventory
for these products.  We also built up this inventory in response to shortages of
components for these products  earlier in that year. We have also had difficulty
in  generating  significant  orders  for  some  of  our  products,  particularly
broadband  products,  and as a result, we experienced a significant  increase in
our  inventory,  to $21.7  million on December  31,  2000 from $14.3  million on
December 31, 1999.  During  fiscal  2001,  we were able to reduce our  inventory
levels to $11.1 million as a result of sales, raw material returns to suppliers,
and the write-down of value of some of our inventory.  At December 31, 2003, our
inventory  level is $4.8 million,  a reduction of $2.0 million from December 31,
2002 primarily  attributable  to lower  inventory  levels to support the reduced
sales  activity  in 2003,  improved  inventory  turnover,  and  sales of  excess
broadband  and  wireless  inventory.  Our  failure  to  effectively  manage  our
inventory may adversely affect our liquidity and increases the 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:

o    reduced management and control of component purchases;
o    reduced control over, delivery schedules;
o    reduced control over quality assurance;
o    reduced control over manufacturing yields;
o    lack of adequate capacity during periods of excess demand;
o    limited warranties on products supplied to us;
o    potential increases in prices;
o    interruption  of supplies from  assemblers  as a result of a fire,  natural
     calamity,  strike or other significant event; and
o    misappropriation of our intellectual property.

WE MAY BE UNABLE TO PRODUCE  SUFFICIENT  QUANTITIES  OF OUR PRODUCTS  BECAUSE WE
OBTAIN KEY COMPONENTS FROM, AND DEPEND ON, SOLE OR LIMITED SOURCE SUPPLIERS.

     We obtain certain key parts, components, and equipment from sole or limited
sources of supply. For example, we purchase dial-up and broadband modem chipsets
from  Conexant  Systems and Agere  Systems.  Integrated  circuit  product  areas
covered by one or both companies  include  dial-up  modems,  ADSL 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  could  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.

OUR FAILURE TO SATISFY MINIMUM PURCHASE REQUIREMENTS OR COMMITMENTS WE HAVE WITH
OUR SOLE  SOURCE  SUPPLIERS  COULD  HAVE AN  ADVERSE  AFFECT ON OUR  RESULTS  OF
OPERATIONS.

     We have entered into supply  arrangements with suppliers of some components
that include price and other concessions,  including no-charge  components,  for
meeting minimum purchase  requirements or commitments.  Our business and results
of  operations  could be  harmed  if we fail to  satisfy  the  minimum  purchase
requirements or commitments contained in our supply arrangements.

OUR FAILURE TO OBTAIN NEW CHIPSET PURCHASE PROGRAMS WITH CHIPSET SUPPLIERS COULD
HAVE AN ADVERSE AFFECT ON OUR RESULTS OF OPERATIONS.

     Our current  chipset  purchase  agreements,  which  include price and other
concessions for meeting minimum purchase requirements or commitments, are due to
expire in 2004. If we are unable to obtain new or otherwise  negotiate favorable
chipset purchase discount  programs,  our expenses could increase  significantly
and our results of operations could be adversely affected.

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:

o    using a standard telephone line and appropriate service for dial-up modems,
     ISDN modems, or ADSL modems, possibly in combination;
o    using a cable modem with a cable TV line and cable modem service;
o    using a router and some type of modem to service the computers connected to
     a local area network; or
o    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.

OUR BUSINESS IS DEPENDENT  ON THE INTERNET AND THE  DEVELOPMENT  OF THE INTERNET
INFRASTRUCTURE.

     Our success will depend on the continued  growth of the use of the Internet
by businesses, particularly for applications that utilize multimedia content and
that require high  bandwidth.  The recent  growth in the use of the Internet has
caused  frequent  periods of  performance  degradation.  This has  required  the
upgrade of routers,  telecommunications  links and other components  forming the
infrastructure   of  the  Internet  by  Internet  service  providers  and  other
organizations with links to the Internet.

CHANGES IN CURRENT OR FUTURE LAWS OR  GOVERNMENTAL  REGULATIONS  THAT NEGATIVELY
IMPACT OUR PRODUCTS 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 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.

OUR  INTERNATIONAL  OPERATIONS  ARE  SUBJECT  TO A NUMBER OF RISKS  INHERENT  IN
INTERNATIONAL ACTIVITIES.

     Our international  sales continue to represent an increasingly  significant
portion of our sales.  International  sales have increased from 38% of net sales
in 2001 to approximately 45 % of our net sales in 2003. Currently our operations
are significantly dependent on our international operations,  particularly sales
of our ADSL modems, and may be materially and adversely affected by many factors
including:

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

     We anticipate that our  international  sales 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.

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, 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.

OUR FUTURE  SUCCESS  WILL  DEPEND ON THE  CONTINUED  SERVICES  OF OUR  EXECUTIVE
OFFICERS AND KEY RESEARCH AND  DEVELOPMENT  PERSONNEL WITH EXPERTISE IN HARDWARE
AND SOFTWARE DEVELOPMENT.

     The loss of any of our executive  officers or key research and  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 management  team, a key
engineer,  or  other  key  contributors,  could  harm  our  relations  with  our
customers, our ability to respond to technological change, and our business.

OUR BUSINESS MAY BE HARMED BY ACQUISITIONS WE MAY COMPLETE IN THE FUTURE.

     We may pursue  acquisitions of related  businesses,  technologies,  product
lines,  or  products.  Our  identification  of suitable  acquisition  candidates
involves risk inherent in assessing the values, strengths, weaknesses, risks and
profitability of acquisition  candidates,  including the effects of the possible
acquisition on our business,  diversion of our management's  attention,  risk of
increased  leverage,  shareholder  dilution,  risk associated with unanticipated
problems, and risks associated with liabilities we assume.

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 company.

ITEM 7A.

     We invest our cash in 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.
For our floating rate mortgage  arrangement,  interest rate changes generally do
not affect the fair market value,  but do affect future  earnings and cash flow.
Based on our  borrowings  of $5.3 million under our mortgage  arrangement  as of
December 31,  2003,  a  one-percentage  point  increase in interest  rates would
decrease cash flow and earnings for a year by approximately $53,000.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ZOOM TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
                                                                            Page
Index to Consolidated Financial Statements                                   32
Independent Auditors' Report                                                 33
Consolidated Balance Sheets as of December 31, 2002 and 2003                 34
Consolidated Statements of Operations for the years ending December 31,      35
2001, 2002 and 2003
Consolidated Statements of  Stockholders' Equity and Comprehensive Loss
for the years ending December 31, 2001, 2002 and 2003                        36
Consolidated Statements of Cash Flows for the years ending December 31,      37
2001, 2002 and 2003
Notes to Consolidated Financial Statements                                 38-51
Schedule II:  Valuation and Qualifying Accounts for the years ending
December 31, 2001, 2002 and 2003                                             56

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 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  recognized 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,  2003,  we  carried  out  an  evaluation,  under  the
supervision and with the  participation  of our management,  including our Chief
Executive  Officer and Chief  Financial  Officer,  of the  effectiveness  of the
design and operation of our disclosure  controls and  procedures,  as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities  Exchange Act of 1934.  Based
upon that evaluation,  our Chief Executive  Officer and Chief Financial  Officer
concluded that our disclosure  controls and procedures are effective in enabling
us to record, process,  summarize and report information required to be included
in our periodic SEC filings within the required time period.

     There have been no changes in our internal control over financial reporting
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.

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", "Audit Committee Financial Expert", "Code of Ethics" and "Compliance
With Section  16(a) of the  Securities  Exchange  Act" in our  definitive  proxy
statement for our 2004 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," "Directors' Compensation",  in our definitive proxy statement for
our 2004 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, 2003
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
<TABLE>
<S>                                  <C>                    <C>                         <C>
                                                                                             Number Of Securities
                                     Number Of Securities                                   Remaining Available For
                                       To Be Issued Upon    Weighted-Average Exercise    Future Issuance Under Equity
                                          Exercise Of         Price Of Outstanding      Compensation Plans (excluding
                                     Outstanding Options,           Options,               securities reflected in
Plan Category                         Warrants And Rights      Warrants And Rights                  column (a))
-------------                         -------------------   -------------------------   -----------------------------
                                              (a)                      (b)                            (c)
                                              ---                      ---                            ---
Equity compensation plans                  1,253,000                 $2.0743                        718,646
approved by security holders(1)

Equity compensation plans                    582,050                 $1.7567                        420,500
not approved by security holders(2)
-----------------------------------   -------------------   -------------------------   -----------------------------
Total                                      1,835,050                 $1.9736                      1,139,146
</TABLE>
(1)  Includes the  following  plans:  1990  Employee  Stock Option Plan and 1991
     Directors  Stock  Option Plan,  each as amended.  Please see note 11 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 Stock Option  Committee of the
     Board of Directors.  In 1999,  the Board of Directors  authorized our Chief
     Executive  Officer to grant stock options to purchase up to 100,000  shares
     in any fiscal  quarter,  not to exceed  stock  options to purchase  350,000
     shares in any  fiscal  year to  eligible  employees  under  the 1998  Plan.
     Participants in the 1998 Plan are eligible to receive  non-qualified  stock
     options at an option price  determined by the Stock Option  Committee.  All
     stock  options  granted  under the 1998 Plan have been granted for at least
     the fair market value on the date of grant. A total of 1,200,000  shares of
     our common stock have been authorized for issuance under the 1998 Plan.

     The  additional  information  required  by  this  item is  incorporated  by
reference to the section  entitled "Share  Ownership of Directors,  Officers and
Certain Beneficial Owners" in our Definitive Proxy Statement for our 2004 annual
meeting of stockholders to be filed with the SEC within 120 days after the close
of the fiscal year.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information  required by this item may appear  under the  caption  "Certain
Transactions"  in our Definitive  Proxy Statement for our 2004 annual meeting of
Stockholders  to be filed  with the SEC  within  120 days after the close of the
fiscal year and is incorporated herein by reference.

ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES

     Information  required by this item may appear under the caption  "Principal
Accountant  Fees and Services" in our  Definitive  Proxy  Statement for our 2004
annual  meeting of  stockholders  to be filed with the SEC within 120 days after
the close of the fiscal year and is incorporated herein by reference.

PART IV

ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(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 10.1 to the
              Company's  Quarterly Report  on Form  10-Q for  the fiscal quarter
              ended June 30, 1998. *

     **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   Operating Agreement, Zoom  Group LLC dated  as of  March 29, 2002,
              filed  as Exhibit 10.1  to the Company's Quarterly  Report on Form
              10-Q for the fiscal quarter ended March 2002. *

       10.10  Agreement  between Zoom  Telephonics, Inc  and Members of the Zoom
              Group  dated as of  March 22, 2002, filed as  Exhibit 10.2  to the
              March 2002 Form 10-Q. *

       10.11  Reinstatement Agreement, Assignment Agreement and Second amendment
              of Purchase and Sale dated as  of March 29, 2002, filed as Exhibit
              10.3 to the March 2002 Form 10-Q. *

       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.

       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.
<PAGE>

ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)

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

  (c)         Exhibits  -  See Item  15 (a) (3)  above for  a list  of  Exhibits
              incorporated herein by reference or filed with this Report.

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

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

   **         Compensation Plan or Arrangement.
<PAGE>


                                   SIGNATURES

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


                                         ZOOM TECHNOLOGIES, INC.
                                         (Registrant)


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

Date:  March 29, 2004


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        March 29, 2004
--------------------       and Chairman of the Board
    Frank B. Manning

/s/ Robert A. Crist        Principal Financial and            March 29, 2004
--------------------       Accounting Officer
    Robert A. Crist

/s/ Peter R. Kramer        Director                           March 29, 2004
--------------------
    Peter R. Kramer

/s/ Bernard Furman         Director                           March 29, 2004
--------------------
    Bernard Furman

/s/ L. Lamont Gordon       Director                           March 29, 2004
--------------------
    L. Lamont Gordon

/s/ J. Ronald Woods        Director                           March 29, 2004
--------------------
    J. Ronald Woods
<PAGE>

                     ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                  AND SCHEDULE

                                                                            Page

Independent Auditors' Report                                                33
Consolidated Balance Sheets as of December 31, 2002 and 2003                34
Consolidated Statements of Operations for the years ending December 31,     35
2001, 2002 and 2003
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the years ending December 31, 2001, 2002 and 2003                       36
Consolidated Statements of Cash Flows for the years ending December 31,     37
2001, 2002 and 2003
Notes to Consolidated Financial Statements                                 38-51
Schedule II:  Valuation and Qualifying Accounts for the years ending
December 31, 2001, 2002 and 2003                                            56

<PAGE>


                          INDEPENDENT AUDITORS' REPORT


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, 2002 and 2003,  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, 2003. 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 auditing standards generally accepted
in the  United  States of  America.  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, 2002 and 2003,  and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 2003 in  conformity  with  accounting  principles  generally
accepted in the United States of America.



                                        /s/ KPMG LLP





Boston, Massachusetts
February 11, 2004.
<PAGE>
                       ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<S>                                                          <C>                 <C>
                                                                         DECEMBER 31,
                                                             ----------------------------------
    ASSETS                                                         2002                 2003
    ------                                                         ----                 ----
Current assets:
   Cash and cash equivalents..........................       $   7,612,274        $   9,904,384

   Accounts receivable, net of reserves for doubtful
      accounts, returns, and allowances $2,646,408 in
      2002 and $1,790,205 in 2003 (note 13)...........           3,714,202            3,944,699
   Inventories, net (note 5)..........................           6,782,550            4,771,216
   Prepaid expenses and other current assets..........           1,037,733              434,694
                                                                ----------           ----------
             Total current assets.....................          19,146,759           19,054,993

Property, plant and equipment, net (note 6)...........           3,485,911            2,918,985
                                                                ----------           ----------
              Total assets............................       $  22,632,670        $  21,973,978
                                                                ==========           ==========

    LIABILITIES AND STOCKHOLDERS' EQUITY
    ------------------------------------

Current liabilities:
    Accounts payable..................................       $   2,406,843        $   2,172,028
    Accrued expenses..................................           1,207,724            1,011,910
    Current portion of long term debt (note 10).......             191,550              223,833
                                                                ----------           ----------
             Total current liabilities................           3,806,117            3,407,771

Long-term debt, less current portion (note 10)........           5,342,057            5,095,986
                                                                ----------           ----------
              Total liabilities.......................           9,148,174            8,503,757
                                                                ----------           ----------

Stockholders' equity (note 11): Common stock, $0.01 par value.
    Authorized 25,000,000 shares; issued 8,084,616 shares;
    outstanding 7,858,266 and 8,076,216 shares at December
    31, 2002 and December 31, 2003, respectively......              78,608               80,846
  Additional paid-in capital..........................          28,166,607           28,500,421
  Retained earnings (accumulated deficit).............         (14,770,278)         (15,438,333)
  Accumulated other comprehensive income (loss).......              11,755              334,609
  Treasury stock, at cost.............................              (2,196)              (7,322)
                                                                ----------           ----------
             Total stockholders' equity...............          13,484,496           13,470,221
                                                                ----------           ----------
             Total liabilities and stockholders'
               equity.................................       $  22,632,670        $  21,973,978
                                                                ==========           ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>







                               ZOOM  TECHNOLOGIES, INC. AND SUBSIDIARY
                                CONSOLIDATED STATEMENTS OF OPERATIONS
                            Years Ending December 31, 2001, 2002 and 2003
<TABLE>
<S>                                                       <C>             <C>             <C>
                                                              2001            2002            2003
                                                          ------------    ------------    ------------

Net sales (notes 13 and 17)...........................    $ 41,570,276    $ 37,274,287    $ 33,335,209
Cost of goods sold (note 5)...........................      35,193,449      27,937,544      23,120,573
                                                           -----------     -----------     -----------
                     Gross profit ....................       6,376,827       9,336,743      10,214,636
                                                           -----------     -----------     -----------

Operating expenses:
        Selling ......................................       7,480,297       5,848,137       5,270,585
        General and administrative (note 8)...........       7,938,175       3,405,043       3,117,764
        Research and development......................       5,327,968       3,526,350       2,766,967
                                                           -----------     -----------     -----------
                     Total operating expenses.........      20,746,440      12,779,530      11,155,316
                                                           -----------     -----------     -----------

                     Operating loss...................     (14,369,613)     (3,442,787)       (940,680)
                                                           -----------     -----------     -----------
Other income (expense):
        Interest income ..............................         198,805         102,604          87,427
        Interest expense..............................        (454,708)       (293,104)       (211,165)
        Equity in losses of affiliate (note 14).......        (145,165)        (56,666)              -
        Other, net....................................         241,759         313,619         396,363
                                                           -----------     -----------     -----------
                     Total other income (expense), net        (159,309)         66,453         272,625
                                                           -----------     -----------     -----------
                     Income (loss) before income taxes
                       and extraordinary item.........     (14,528,922)     (3,376,334)       (668,055)

Income tax expense (benefit)(note 12).................       3,800,000       2,014,539               -
                                                           -----------     -----------     -----------
                     Income (loss) before extraordinary
                       item...........................     (18,328,922)     (5,390,873)       (668,055)
                     Extraordinary gain on elimination
                       of negative goodwill...........               -         255,287               -
                                                           -----------     -----------     -----------
                     Net Income (loss)................    $(18,328,922)   $ (5,135,586)   $   (668,055)
                                                           ===========     ===========     ===========
Basic and diluted earnings (loss) per share (note 2):

Loss before extraordinary item:
                     Basic and diluted................    $      (2.33)   $       (.68)   $       (.08)
                                                           ===========     ===========     ===========

Extraordinary gain on elimination of negative goodwill    $          -    $        .03    $          -
                                                           ===========     ===========     ===========
Net loss:
                     Basic and diluted................    $      (2.33)   $       (.65)   $       (.08)
                                                           ===========     ===========     ===========

Weighted average common and common equivalent shares:
                     Basic and diluted................       7,860,866       7,860,650       7,883,400
                                                           ===========     ===========     ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
                                                     ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
                                              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
                                                                COMPREHENSIVE LOSS
<CAPTION>
<S>                               <C>        <C>           <C>         <C>            <C>            <C>       <C>     <C>
                                                                        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, 2000 ..  7,860,866  $28,145,375            -   $ 8,694,230    $  (92,159)      -         -   $36,747,446

Net profit (loss) .............          -            -            -   (18,328,922)            -       -         -   (18,328,922)
Foreign currency translation
adjustment ....................          -            -            -             -      (102,689)      -         -      (102,689)
Unrealized holding gain on
investments ...................          -            -            -             -            53       -         -            53
 Comprehensive loss . .........          -            -            -             -             -       -         -   (18,431,558)
Compensation expense related to
issuance of restricted stock ..          -       99,840            -             -             -       -         -        99,840
                                ----------  -----------  -----------  -------------  ------------  -----   -------   -----------
Balance at December 31, 2001 ..  7,860,866  $28,245,215            -   $(9,634,692)   $ (194,795)      -         -   $18,415,728

Net profit (loss) .............          -            -            -    (5,135,586)            -       -         -    (5,135,586)
Foreign currency translation
adjustment ....................          -            -            -             -       206,550       -         -       206,550
 Comprehensive loss ...........          -            -            -             -             -       -         -    (4,929,036)
Incorporation to Delaware
 corporation ..................          -  (28,166,607)  28,166,607             -             -       -         -             -
Purchase of treasury stock ....          -            -            -             -             -   2,600    (2,196)       (2,196)
                                ----------  -----------  -----------  -------------  ------------  -----   --------  ------------
Balance at December 31, 2002 ..  7,860,866  $    78,608  $28,166,607  $(14,770,278)   $   11,755   2,600   $(2,196)  $13,484,496

Net profit (loss) .............          -            -            -      (668,055)            -       -         -      (668,055)
Foreign currency translation
adjustment ....................          -            -            -             -       322,854       -         -       322,854
 Comprehensive loss ...........          -            -            -             -             -       -         -      (345,201)
Exercise of stock options (note
11) ...........................    223,750        2,238      333,814             -             -       -         -       336,052
Purchase 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)  $13,470,221
                                ==========  ===========  ===========  =============  ============  ======  ========  ============

</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>

                                ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                             Years Ending December 31, 2001, 2002 and 2003
<TABLE>
<S>                                                       <C>               <C>             <C>
                                                               2001             2002             2003
                                                               ----             ----             ----
Cash flows from operating activities:
       Net income (loss)................................. $(18,328,922)    $ (5,135,586)    $   (668,055)

       Adjustments to reconcile net income (loss) to net
        cash provided by (used in) operating activities:
             Non-operating gain on refund of deposit.....            -                -          (40,237)
             Extraordinary gain on negative goodwill.....            -         (255,287)               -
             Depreciation and amortization...............    1,769,608          837,968          617,781
             Impairment of goodwill......................    2,294,881                -                -
             Amortization of unearned compensation
               expense...................................       99,840                -                -
             Equity in losses of affiliate...............      145,165           56,666                -
             Net deferred income taxes...................    3,800,000        2,012,844                -
             Changes in operating assets and liabilities,
                 net of acquisitions.....................
               Accounts receivable.......................    2,271,932        2,139,336          106,881
               Inventories...............................   10,813,740        4,300,593        2,011,334
               Prepaid expenses and other current assets.     (296,655)         (38,071)         643,276
               Accounts payable and accrued expenses        (5,214,009)      (1,015,173)        (430,629)
                                                            ----------       ----------       ----------
                     Net cash provided by (used in)
                       operating activities..............   (2,644,420)       2,903,290        2,240,351
                                                            ----------       ----------       ----------
Cash flows from investing activities:
       Sales of investment securities, net...............           53                -                -
       Investment in affiliates..........................     (141,665)               -                -
       Purchases of property, plant and equipment........     (650,060)        (194,963)         (50,855)
                                                            ----------       ----------       ----------
                     Net cash provided by (used in)
                       investing activities..............     (791,672)        (194,963)         (50,855)
                                                            ----------       ----------       ----------
Cash flows from financing activities:
       Proceeds from the issuance of long-term debt......    6,000,000                -                -
       Repayment of long-term debt.......................     (115,431)        (350,962)        (213,788)
       Exercise of nonqualified stock options............            -                -          336,052
       Payments to acquire treasury stock................            -           (2,196)          (5,126)
                                                            ----------       ----------       ----------
                      Net cash provided by (used in)
                        financing activities.............    5,884,569         (353,158)         117,138
                                                            ----------       ----------       ----------
Effect of exchange rate changes on cash..................     (102,689)           5,047          (14,524)
                                                            ----------       ----------       ----------
Net increase (decrease) in cash and cash equivalents.....    2,345,788        2,360,216        2,292,110
                                                            ----------       ----------       ----------
Cash and cash equivalents at beginning of year...........    2,906,270        5,252,058        7,612,274
                                                            ----------       ----------       ----------
Cash and cash equivalents at end of year.................  $ 5,252,058      $ 7,612,274      $ 9,904,384
                                                            ==========       ==========       ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
                      ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements
                  Years Ending December 31, 2001, 2002 and 2003

(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 faxmodems
          and  other  communication   peripherals,   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 expenses  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  and
          goodwill,  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 cost of market.

     Certain amounts  from prior  periods have been  reclassified  to conform to
          current period presentation.

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

     (c) Cash and Cash Equivalents
     The  Company  considers all  investments  with original  maturities of less
          than 90  days  to be cash  equivalents.  Included  in  cash  and  cash
          equivalents   at  December  31,  2003  and  2002  was  a  deposit  for
          approximately $267,000 and $241,000, respectively, in a duty deferment
          account  approved by H.M. Customs and Excise in the United Kingdom for
          the deferment of value added taxes for imports.

     (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.
<PAGE>
                    ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements (Continued)

     (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 may not be recoverable.

          Recoverability  of  assets  to be  held  and  used  is  measured  by a
          comparison of the carrying amount of an asset to  undiscounted  future
          net cash flows  expected to be generated by the asset.  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.
                                         2001            2002            2003
                                         ----            ----            ----
Basic weighted
   average shares outstanding .......  7,860,866       7,860,650       7,883,400

Net effect of dilutive potential
   common shares outstanding, based
   on the treasury stock method......          -               -               -
                                       ---------       ---------       ---------
Diluted weighted
   average shares outstanding........  7,860,866       7,860,650       7,883,400
                                       =========       =========       =========

     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 13,870,  3,814 and 206,414 shares of common stock at December
          31, 2001,  2002, and 2003,  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 sells  hardware  products to its  customers.  The products are
          dial-up modems,  embedded modems,  cable modems, PC cameras,  ISDN and
          ADSL modems,  telephone  dialers,  and  wireless and wired  networking
          equipment.  The Company  generally does not sell software or services.
          The  Company  earns a small  amount of royalty  revenue.  The  Company
          derives its net sales primarily from the sales of hardware products to
          three types of  customers  (1)  computer  peripherals  retailers,  (2)
          computer   product   distributors,    and   (3)   original   equipment
          manufacturers  (OEMs).  The Company  sells a very small  amount of its
<PAGE>
                     ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements (Continued)

          hardware  products to direct  consumers  or to any  customers  via the
          Internet. As described below,  management judgments and estimates must
          be made and used in  connection  with the net sales  recognized in any
          accounting period.  Material  differences may result in the amount and
          timing of the  Company's  net sales for any  period if its  management
          makes different judgments or utilizes different estimates.

     Net  Sales is recognized by the Company for all three types of customers at
          the point when the  customers  take legal  ownership of the  delivered
          products.  Legal  ownership  passes from the  Company to the  customer
          based on the contractual  FOB point specified in signed  contracts and
          purchase  orders,  which  are  both  used  extensively.  Many  of  the
          Company's   customer   contracts  or  purchase   orders   specify  FOB
          destination. The Company verifies the delivery date on all significant
          FOB  destination  shipments  made during the last 10 business  days of
          each quarter.

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

     (j) Financial Instruments
     Financial instruments of the Company consist of cash and cash  equivalents,
          accounts   receivable,   accounts  payable,   accrued  expenses,   and
          borrowings.  Due to the  short  term  nature of these  instruments  of
          conversion  to  cash  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 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 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 FASB 123 to stock-based compensation.
<PAGE>
                     ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements (Continued)
<TABLE>
<S>                                                  <C>              <C>              <C>
                                                                YEAR ENDED DECEMBER 31,
                                                         2001              2002             2003
                                                      -----------     ------------     -----------
Net income (loss), as reported....................    $(18,328,922)   $(5,135,586)     $  (668,055)

Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects........      (1,834,280)    (1,109,003)        (372,009)
                                                        ----------      ----------       ----------
Proforma net income (loss)........................    $(20,163,202)   $(6,244,589)     $(1,040,064)
                                                        ==========      ==========       ==========
Earnings (loss) per share:
Basic -- as reported..............................    $      (2.33)   $     (0.65)     $      (.08)
Basic -- proforma.................................    $      (2.57)   $     (0.79)     $      (.13)
                                                         =========       =========        =========
Diluted -- as reported............................    $      (2.33)   $     (0.65)     $      (.08)
Diluted -- proforma...............................    $      (2.57)   $     (0.79)     $      (.13)
</TABLE>
     Weighted-average assumptions:  2001-expected dividend yield 0.0%, risk-free
          interest  rate of 3.83%,  volatility  102% and an expected life of 2.0
          years;  2002-expected dividend yield 0.00%, risk-free interest rate of
          2.65%,   volatility   106%  and  an   expected   life  of  2.5  years;
          2003-expected  dividend yield 0.00%, risk-free interest rate of 1.82%,
          volatility 124% and an expected life of 2.0 years.

     (l) Advertising Costs
     Advertising  costs are  expensed  as  incurred  and  reported  in  selling,
          general, and administrative expenses in the accompanying  consolidated
          statements of operations and include costs of advertising, production,
          trade shows, and other  activities  designed to enhance demand for the
          Company's  products.  There are no 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 international  markets
          and denominated in foreign  currencies,  which subjects its operations
          to exposure to foreign currency  fluctuations.  The impact of currency
          fluctuations  can be positive or negative in any given period.  During
          the years ending  December 31, 2001,  2002, and 2003 foreign  currency
          transaction activity, gains, and losses were not material. At December
          31, 2003, the Company's foreign  currency-denominated  net assets were
          not material. The Company has no involvement with derivative financial
          instruments.

     The  Company considers the local currency to be the functional currency for
          its international  subsidiary.  Assets and liabilities  denominated in
          foreign  currencies  are  translated  using the  exchange  rate 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.

(3)  LIQUIDITY
     In   2003, the Company's net cash provided by operating activities was $2.2
          million,  net cash used in investing  activities was $.1 million,  and
          net cash provided by financing activities was $.1 million. On December
          31, 2002 and 2003 Zoom had cash and cash  equivalents of approximately
          $7.6 million and $9.9  million,  respectively.  Currently  the Company
          does not have a debt  facility  from which it can borrow,  and it does
          not expect to obtain one on acceptable terms unless there is operating
          performance improvement.
<PAGE>
                     ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements (Continued)

     To   conserve  cash and manage the  Company's  liquidity,  the  Company has
          implemented  expense  reductions  throughout 2001, 2002, and 2003. The
          employee  headcount was 329 at December 31, 2000, which was reduced to
          215 at December  31, 2001,  185 at December  31,  2002,  and to 159 at
          December  31 2003.  The  Company  will  continue  to  assess  its cost
          structure as it relates to its revenues and cash position in 2003, and
          may make further reductions if these actions are deemed necessary.

     In   recent years,  the Company's  sales have declined as its major product
          market,  the dial-up modem retail  after-market,  has  declined.  This
          trend  continues,  as personal  computer  manufacturers  incorporate a
          dial-up  modem  as a  built-in  component  in most  consumer  personal
          computers and increasing numbers of consumers world-wide are switching
          to broadband  Internet access. The company's sales of products for the
          broadband  Internet market have been growing,  but in 2003 represented
          only 20% of total net sales.  The Company's future success will depend
          in large part on the ability to improve its penetration of the growing
          broadband modem markets.

     The  Company's total current assets at December 31, 2003 were $19.1 million
          and current  liabilities were $3.4 million and long-term debt was $5.3
          million.  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  expenses,  or raise
          capital,  the  Company's  longer-term  ability to  continue as a going
          concern  and  achieve  its  intended  business   objectives  could  be
          adversely affected.

(4)  NEW ACCOUNTING PRONOUNCEMENTS
     In   January  2003,  the  FASB  issued  Interpretation  No.  46  (FIN  46),
          "Consolidation  of Variable  Interest  Entities - an Interpretation of
          ARB No. 51", and, in October 2003, the FASB issued FASB Staff Position
          (FSP) No. FIN 46-6,  "Effective Date of FASB  Interpretation 46." This
          staff  position  deferred the effective date for applying FIN 46 to an
          interest  held in a VIE or  potential  VIE  that  was  created  before
          February 1, 2003 until the end of the first  interim or annual  period
          ending  after  December  15,  2003,  except if the company had already
          issued  statements  reflecting  a VIE in  accordance  with FIN 46.  In
          December  2003,  the FASB  issued  Interpretation  No.  46R (FIN 46R),
          "Consolidation  of Variable  Interest Entities -- An Interpretation of
          ARB No. 51." FIN 46R replaces FIN 46 and  addresses  consolidation  by
          business  enterprises  of  variable  interest  entities  that  possess
          certain characteristics. A variable interest entity ("VIE") is defined
          as (a) an  ownership,  contractual  or monetary  interest in an entity
          where the ability to influence financial decisions is not proportional
          to the  investment  interest,  or (b) an entity  lacking the  invested
          capital  sufficient to fund future activities without the support of a
          third party. FIN 46R establishes  standards for determining under what
          circumstances   VIEs  should  be   consolidated   with  their  primary
          beneficiary,   including  those  to  which  the  usual  condition  for
          consolidation does not apply. Adoption of the required sections of FIN
          46, as modified and interpreted,  including the provisions of FIN 46R,
          did not  have  any  effect  on the  Company's  consolidated  financial
          statements or disclosures.  The Company intends to adopt the remaining
          sections of this guidance when required in 2004.  The Company does not
          expect adoption of FIN 46, as modified and interpreted,  including the
          provisions of FIN 46R, to have a  significant  impact on the Company's
          financial statements or disclosures.

     In   December 2003, the  Securities  and Exchange  Commission  issued Staff
          Accounting  Bulletin No. 104,  "Revenue  Recognition" (SAB 104), which
          supersedes SAB 101, "Revenue Recognition in Financial Statements". The
          primary purpose of SAB 104 is to rescind accounting guidance contained
          in SAB 101 related to multiple element revenue arrangements, which was
          superseded as a result of the issuance of EITF 00-21,  "Accounting for
          Revenue Arrangements with Multiple Deliverables". While the wording of
          SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
          recognition  principles  of SAB 101 remain  largely  unchanged  by the
          issuance of SAB 104.  The  adoption of SAB 104 did not have a material
          impact on the Company's financial statements.
<PAGE>
                     ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements (Continued)

(5)  INVENTORIES
     Inventories consist of the following at December 31:

                                            2002          2003
                                            ----          ----
        Raw materials.............      $ 2,808,421   $ 1,754,850
        Work in process...........          673,275       639,425
        Finished goods............        3,300,854     2,376,941
                                         ---------    -----------
                     Net Inventory      $ 6,782,550   $ 4,771,216
                                        ===========   ===========

     During 2002  and  2003  the  Company  recorded  lower  of  cost  or  market
          write-downs of $0.7 million and $0.3 million, respectively, related to
          broadband and wireless inventory.

(6)  PROPERTY, PLANT AND EQUIPMENT
     Property, plant and equipment consists of the following at December 31:

                                                                      Estimated
                                             2002          2003     useful lives
                                             ----          ----     ------------
        Land........................... $   309,637    $   309,637        -
        Buildings and improvements.....   2,761,616      2,774,281    31.5 years
        Leasehold improvements.........     483,039        483,039     5 years
        Computer hardware and software.   3,550,749      3,565,595     3 years
        Machinery and equipment........   1,735,057      1,753,001     5 years
        Molds, tools and dies..........   1,532,064      1,537,464     5 years
        Office furniture and fixtures..     275,516        275,516     5 years
                                        -----------    -----------
                                        $10,647,678    $10,698,533
        Less accumulated depreciation
          and amortization               (7,161,767)    (7,779,548)
                                        -----------    -----------
                                        $ 3,485,911    $ 2,918,985
                                        ===========    ===========

(7)  COMMITMENTS AND CONTINGENCIES
     (a) Lease Obligations
     The  Company leases a  manufacturing  and  warehousing  facility in Boston,
          Massachusetts,  an office facility in Camberley, United Kingdom, and a
          technical  support  facility  in  Boca  Raton,  Florida.  The  Boston,
          Massachusetts  lease  expires in March 2006.  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. In March
          1999,  the Company  assumed an office  lease from Hayes  Microcomputer
          Products, Inc. at 430 Frimley Business Park, Camberley Surrey, U.K. We
          have  agreed to extend  this  lease  term to March  2005.  Total  rent
          expense, under non-cancelable operating leases, was $546,034, $782,000
          and $757,821 for the years  ending  December 31, 2001,  2002 and 2003,
          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
                                  ----             -------
                                  2004             832,055
                                  2005             714,852
                                  2006             215,140
                                  2007              34,394

     (b) Purchase Commitments
     The  Company  entered into  arrangements  with suppliers of some components
          that  include  price  and  other  concessions,   including   no-charge
          components,  for meeting certain purchase requirements or commitments.
          Under  these  arrangements,  the  Company  is  committed  to  purchase
          approximately   $8.0   million   of   components   over  a  period  of
          approximately  30-months that  commenced on January 1, 2002,  provided
          that those  components  were offered at competitive  terms and prices.
          The Company believes that at December 31, 2003, it is on track to meet
          the $8.0 million  commitment by December 31, 2004. In connection  with
<PAGE>
                     ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements (Continued)

          this arrangement, 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.  At December 31,
          2003, the remaining  purchase  commitment is for $1.9 million worth of
          components.

     (c) 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, 2003.

     (d) Concentrations
     The  Company  participates  in  the  PC  peripherals  industry,   which  is
          characterized by aggressive  pricing practices,  continually  changing
          customer demand  patterns and rapid  technological  developments.  The
          Company's  operating  results could be adversely  affected  should the

          Company  be  unable  to   successfully   anticipate   customer  demand
          accurately;  manage  its  product  transitions,  inventory  levels and
          manufacturing  process efficiently;  distribute its product quickly in
          response to customer demand;  differentiate its products from those of
          its  competitors  or compete  successfully  in the markets for its new
          products.

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

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

(8)   IMPAIRMENT
      In  March  1999,  the  Company   entered  into  a  series  of  independent
          agreements to acquire most of the modem assets of Hayes  Microcomputer
          Products,  Inc.  for $5.0 million in cash.  The purchase  included the
          Hayes, Practical Peripherals,  Accura, Optima, Century 2, and Cardinal
          brands  and  product  rights  for the  USA,  Canada,  South &  Central
          America,  Europe,  and the  Middle  East.  In July  1999  the  Company
          finalized the purchase of Hayes Asia Pacific for $1.1 million in cash.
          The acquisitions  were accounted for as purchases.  The excess of cost
          over  fair  value of net  assets  acquired  was being  amortized  on a
          straight-line method over five years.

     The  Company  also  recorded  negative  goodwill  that  resulted  from  the
          purchase  of the  Hayes  U.K.,  business,  where  the value of the net
          assets acquired exceeded the cost. This transaction was independent of
          other Hayes purchases.

     The  Company recorded goodwill for two acquisitions,  Tribe Computer Works,
<PAGE>
                     ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements (Continued)

          Inc. in 1996 and certain assets of Hayes Microcomputer  Products, Inc.
          in 1998. The goodwill  values for Tribe and Hayes were being amortized
          over  13  years  and 5  years,  respectively.  In  2001,  the  Company
          determined  that  based on its  history  of  negative  cash flows from
          operations,  a forecast  of future  positive  cash flows  could not be
          sufficiently  relied upon to support retaining the remaining  goodwill
          assets on the  consolidated  balance  sheet.  Therefore,  the  Company
          recorded an  impairment  charge of $2.3 million in 2001 and on January
          1, 2002, the Company  recorded an  extraordinary  gain of $0.3 million
          upon  the  adoption  of SFAS  No.  142.  The  gain  resulted  from the
          elimination  of the  remaining  negative  goodwill  on  the  Company's
          consolidated balance sheet. As of December 31, 2003, the Company's net
          goodwill and negative  goodwill  balances on its consolidated  balance
          sheet are zero.

     Net  loss before  goodwill  amortization,  net of tax and related per share
          amounts  for the years  ended  December  31,  2001,  2002,  2003 is as
          follows (in thousands, except per share amounts):

                                             Year ended December 31,
                                          2001         2002        2003
                                          ----         ----        ----
Net loss as reported...............    $(18,329)    $ (5,136)    $  (668)
Add back: Goodwill amortization
 expense net of tax effect.........         781            -           -
                                         ------       ------      ------
Adjusted net loss..................    $(17,548)    $ (5,136)    $  (668)

Basic and diluted loss per share,
 as reported.......................    $  (2.33)    $  (0.65)    $ (0.08)
Add back: Goodwill amortization
 expense net of tax effect.........        0.10            -           -
                                         ------       ------      ------
Proforma basic and diluted loss
 per share.........................    $  (2.23)    $  (0.65)    $ (0.08)

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

                                          2001           2002           2003
                                          ----           ----           ----
Net income (loss)................    $(18,328,922)   $(5,135,586)   $  (668,055)
Foreign currency translation
 adjustment......................        (102,689)       206,550        322,854
Net unrealized holding gain
 on investment securities........              53              -              -
                                      ------------    -----------    -----------
Comprehensive income (loss)......    $(18,431,558)   $(4,929,036)   $  (345,201)
                                      ============    ===========    ===========

     Foreign currency  translation  adjustment  represented  the entire  balance
          within accumulated other  comprehensive  income (loss) at December 31,
          2002 and 2003.

(10) 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.  This is a 20-year  direct  reduction  mortgage  with a
          five-year balloon due January 10, 2006. The interest rate is fixed for
          one year, based on the one year Federal Home Loan Bank rate plus 2.5 %
          per annum.  The rate is adjusted on January 10th of each calendar year
          commencing  on January  10,  2002.  The rate was  adjusted to 3.99% on
          January 10, 2004. On September 24, 2002 the Company paid an additional
          principal payment of $178,761 in compliance with a mortgage  covenant.
          Future minimum  principal  payments are due as follows at December 31,
          2003.
                          Year                Total
                          ----                -----
                          2004           $   223,833
                          2005               233,210
                          2006             4,862,776
                                           ---------
                          Total          $ 5,319,819
<PAGE>
                     ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements (Continued)

(11) STOCK OPTION PLANS
     At   December 31, 2003, 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 2,800,000 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:
                                                                Weighted average
                                          Number of shares       exercise price
        Balance at December 31, 2000           957,611               $ 6.40
          Granted...................           631,000                 2.77
          Exercised.................                 -                    -
          Expired...................          (550,611)                5.85
                                             ----------                ----
        Balance at December 31, 2001         1,038,000               $ 4.48
          Granted...................           325,000                 1.00
          Exercised.................                 -                    -
          Expired...................          (115,000)                4.84
                                              ---------                ----
        Balance at December 31, 2002         1,248,000               $ 3.54
          Granted...................           310,000                 1.95
          Exercised.................           (37,000)                1.65
          Expired...................          (322,000)                7.49
                                             ---------                 ----
Balance at December 31, 2003                 1,199,000               $ 2.13
                                             =========                 ====

     The  following table summarizes information about fixed stock options under
          the Employee Stock Option Plan outstanding on December 31, 2003:
<TABLE>
<S>                  <C>              <C>                 <C>                  <C>            <C>
                                     Options Outstanding                             Options Exercisable
                     -----------------------------------------------------     ------------------------------
                                      Weighted Average
  Range of              Number           Remaining        Weighted Average       Number       Weighted Average
Exercise Prices      Outstanding      Contractual Life     Exercise Price      Exercisable     Exercise Price
$ 0.00 to $ 1.75         308,000            1.40               $ 1.00            145,500           $ 1.00
  1.75 to   3.50         640,000            1.70                 2.08            330,000             2.20
  3.50 to   5.25         251,000            0.30                 3.63            251,000             3.63
----------------         -------            ----                 ----            -------             ----
$ 1.00 to $ 5.25       1,199,000            1.30 years         $ 2.13            726,500           $ 2.45
================       =========            ==========         ======            =======           ======
</TABLE>
     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 on 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:
<PAGE>
                      ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements (Continued)

                                                                Weighted average
                                          Number of shares       exercise price
        Balance at December 31, 2000          60,000                 $ 6.76
          Granted...................          36,000                   3.26
          Exercised.................               -                      -
          Expired...................         (24,000)                  5.37
                                             --------                  ----
        Balance at December 31, 2001          72,000                 $ 5.48
          Granted...................          36,000                   1.17
          Exercised.................               -                      -
          Expired...................         (36,000)                  7.69
                                             --------                  ----
        Balance at December 31, 2002          72,000                 $ 2.21
          Granted...................          54,000                   0.95
          Exercised.................         (36,000)                  1.18
          Expired...................         (36,000)                  3.26
                                             --------                  ----
        Balance at December 31, 2003          54,000                 $ 0.94
                                             ========                  ====

     The  following table summarizes information about fixed stock options under
          the Directors Plan on December 31, 2003:
<TABLE>
<S>                  <C>              <C>                 <C>                  <C>            <C>
                                     Options Outstanding                             Options Exercisable
                     -----------------------------------------------------     -------------------------------
                                      Weighted Average
  Range of              Number           Remaining        Weighted Average       Number       Weighted Average
Exercise Prices      Outstanding      Contractual Life     Exercise Price      Exercisable     Exercise Price
$ 0.65 to $ 1.75       54,000               1.3                $ 0.94            18,000           $ 0.72
----------------      -------               ---------          ------            ------           ------
$ 0.65 to $ 1.75       54,000               1.3 years          $ 0.94            18,000           $ 0.72
================      =======               =========          ======            ======           ======
</TABLE>
     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 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:

                                                                Weighted average
                                          Number of shares       exercise price
        Balance at December 31, 2000          650,375                $ 5.74
          Granted...................          248,825                  2.45
          Exercised.................                -                     -
          Expired...................         (199,300)                 5.82
                                              -------                  ----
        Balance at December 31, 2001          699,900                $ 4.55
          Granted...................          363,600                  1.00
          Exercised.................                -                     -
          Expired...................         (283,000)                 3.55
                                              -------                  ----
        Balance at December 31, 2002          780,500                $ 3.16
          Granted...................          240,000                  1.85
          Exercised.................         (150,750)                 1.54
          Expired...................         (287,700)                 5.77
                                              -------                  ----
        Balance at December 31, 2003          582,050                $ 1.76
                                              =======                  ====

     The  following table summarizes information about fixed stock options under
          the 1998 Plan outstanding on December 31, 2003:
<PAGE>
                     ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements (Continued)
<TABLE>
<S>                  <C>              <C>                 <C>                  <C>            <C>
                                     Options Outstanding                             Options Exercisable
                     -----------------------------------------------------     ------------------------------
                                      Weighted Average
  Range of              Number           Remaining        Weighted Average       Number       Weighted Average
Exercise Prices      Outstanding      Contractual Life     Exercise Price      Exercisable     Exercise Price

$ 0.00 to $ 1.75      202,100               1.4               $  1.01            57,450          $ 1.02
  1.75 to   3.50      367,950               2.0                  2.11           127,950            2.59
  3.50 to   5.25       12,000               0.3                  3.63            12,000            3.63
----------------      -------               ---------           -----            ------           -----
$ 1.00 to $ 5.25      582,050               1.8 years         $  1.76           197,400          $ 2.20
================      =======               =========           =====           =======           =====
</TABLE>
     On   December 31, 2003 there were 1,139,146 additional shares available for
          issuance  under all three stock option plans.  The per share  weighted
          -average fair value of stock options  granted  during 2001,  2002, and
          2003 was $1.47,  $0.54 and $1.14,  respectively,  on the date of grant
          using the Black Scholes option-pricing model.

(12) INCOME TAXES
     Income tax expense (benefit) consists of the following:
<TABLE>
<S>                                        <C>          <C>               <C>
                                             Current        Deferred           Total
                                             -------        --------           -----
        Year ending December 31, 2001:
          US federal..................     $       -    $  3,337,900    $  3,337,900
          State and local.............             -         462,100         462,100
          Foreign.....................             -               -               -
                                              ------     -----------     -----------
                                           $       -    $  3,800,000    $  3,800,000
                                              ======     ===========     ===========
        Year ending December 31, 2002:
          US federal..................     $       -    $  1,612,634    $  1,612,634
          State and local.............             -         400,210         400,210
          Foreign.....................         1,695               -           1,695
                                              ------     -----------     -----------
                                           $   1,695    $  2,012,844    $  2,014,539
                                              ======     ===========     ===========
        Year ending December 31, 2003:
          US federal..................     $       -    $          -    $          -
          State and local.............             -               -               -
          Foreign.....................             -               -               -
                                             -------     -----------     -----------
                                           $       -    $          -    $          -
                                             =======     ===========     ===========
</TABLE>
     Income tax expense  (benefit) was  $3,800,000,  $2,014,539 and zero dollars
          for the years ending December 31, 2001,  2002 and 2003,  respectively,
          and differed from the amounts as computed by applying the US statutory
          tax rate of 34% to pretax loss as a result of the following:
<TABLE>
<S>                                                              <C>            <C>            <C>
                                                                      2001          2002           2003
                                                                      ----          ----           ----
        Computed "expected" US tax expense (benefit)..........   $(4,939,834)   $(1,147,954)   $ (227,139)
        Increase (reduction) in income taxes resulting from:
          State and local income taxes, net of federal
            income tax benefit................................        304,986        264,139            -
          Increase (reduction) in federal valuation allowance.      8,427,351      2,885,398      219,215
          Other, net..........................................          7,497         12,956        7,924
                                                                  -----------     -----------   ---------
        Income tax expense (benefit)                             $  3,800,000    $ 2,014,539   $        -
                                                                  ===========     ===========   =========

     Total income tax expense (benefit) was allocated as follows:

                                                                      2001          2002           2003
                                                                      ----          ----           ----
        Loss from operations..................................   $  3,800,000    $ 2,014,539   $         -
        Stockholders' equity, for compensation expense
          for tax purposes in excess of amounts
          recognized for financial statement purposes.........              -              -             -
                                                                  -----------     ----------    ----------
                                                                 $  3,800,000    $ 2,014,539   $         -
                                                                  ===========     ==========    ==========
</TABLE>
     The  tax effects of  temporary  differences  that give rise to  significant
          portions of the deferred tax assets and  deferred tax  liabilities  at
          December 31, 2001, 2002, and 2003 are presented below:
<PAGE>
                     ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements (Continued)
<TABLE>
<S>                                                              <C>             <C>           <C>
                                                                      2001           2002          2003
                                                                      ----           ----          ----
        Deferred tax assets:
        Inventories, primarily non-deductible reserves........   $ 2,862,364     $ 2,688,239   $ 2,409,923
        Accounts receivable,
          primarily returns and allowances....................       497,510         340,213       483,057
        Accrued expenses, principally provisions
          not currently deductible............................       345,249         228,992       141,157
        Net operating loss carryforwards and credits..........     8,307,793       9,768,697     9,132,219
        Depreciation and amortization.........................     1,126,117       1,455,958     1,340,233
        Other.................................................        98,835          88,933       102,594
                                                                  ----------       ---------     ---------
        Total gross deferred tax assets                           13,237,868      14,571,030    13,609,183
        Less valuation allowance                                 (11,225,024)    (14,571,030)  (13,609,183)
                                                                  ----------      ----------    ----------
        Net deferred tax assets                                  $ 2,012,844     $         -   $         -
                                                                  ==========      ==========    ==========
</TABLE>
     On   December  31,  2003,  the  Company  had  federal  net  operating  loss
          carryforwards   of  approximately   $22,531,000.   These  federal  net
          operating  losses are available to offset future taxable  income,  and
          are due to expire  beginning 2018. The Company had state net operating
          loss  carryforwards  in various states of  approximately  $20,259,000.
          These  federal net  operating  losses are  available to offset  future
          taxable  income,  and are due to  expire  in years  ranging  from 2004
          through  2023.  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.

     The  income  tax  benefits  derived  from  the  exercise  of  non-qualified
          employee stock options amounting to $109,872,  $0, and $0 in the years
          ended  December  31,  2003,  2002  and  2001,  respectively,  were not
          included in the statements of operations. These tax benefits have been
          fully reserved with a variation allowance.

(13) SIGNIFICANT CUSTOMERS
     Three customers  each comprised  over 10% of net sales for the years ending
          December 31, 2003 and 2002.  Four customers each comprised over 10% of
          net sales for the year ending December 31, 2001. On December 31, 2003,
          three   customers   comprised   approximately   49%  of  net  accounts
          receivable.   On  December  31,  2002,   three   customers   comprised
          approximately 79% of net accounts receivable.

(14) INVESTMENT IN AFFILIATES
     In   September 1999, the Company made an investment in a limited  liability
          Company ("LLC").  The Company granted the LLC the rights to a software
          license in exchange for 300,000 Class A shares of the LLC,  which were
          valued by the  Company  at  $300,000.  The value at which the  outside
          investors  paid cash for shares  received  as part of the same  equity
          infusion  was used by the Company to value their shares  received.  In
          May 2000, the LLC converted to a "C"  corporation.  In March 2001, and
          December  2001,  the  Company  made  additional   investments  in  the
          affiliate  for a total of  $141,665,  maintaining  the same percent of
          ownership.  As a result of the  recognition of the Company's  share of
          equity  in losses  of the  affiliate,  the  investment  balance  as of
          December 31, 2002 has been reduced to zero.

(15)  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

                                                   2001       2002         2003
                                                   ----       ----         ----
       Cash paid during year for interest      $ 426,803   $ 306,237   $ 215,571
                                                  ======   =========   =========
       Cash paid during year for income taxes  $      -    $  66,624   $      -
                                                  ======   =========   =========
<PAGE>
                     ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements (Continued)

     The  tax benefit of the exercise of stock options  resulted in no increases
          to common stock in 2003,  since the Company  believes  that it is more
          likely than not that these  deferred  tax assets will not be realized.
          No options were exercised in 2001 or 2002.

(16) DEPENDENCE ON KEY SUPPLIERS AND CONTRACT MANUFACTURERS
     The  Company  produces  its  products  using  components  or  subassemblies
          purchased  from  third-party  suppliers.  An  important  factor in the
          Company's  liquidity  has  been  the  receipt  and  use of  "no-charge
          components".   The  Company  entered  into  supply  arrangements  with
          suppliers of some components that include price and other concessions,
          including   no-charge   components,   for  meeting  certain   purchase
          requirements or commitments.  Under these arrangements, the Company is
          committed to purchase  approximately $8.0 million of components over a
          period of  approximately  30-months that commenced on January 1, 2002,
          provided that those  components were offered at competitive  terms and
          prices. The Company believes that at December 31, 2003, it is on track
          to meet the $8.0 million  commitment.  The Company is also required to
          purchase either a minimum percentage, as measured by unit purchases or
          dollar  amount of  components  over a two-year  period  commencing  on
          January  1,  2002,  and  the  Company  is  currently   exceeding  that
          percentage. 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  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  favorable   impact  to  the  statement  of  operations  is  being
          calculated as a purchase  discount over the estimated  total number of
          components   acquired  through  the  30  month  supply  agreement  and
          recognized on a delayed  basis as the products  employing the acquired
          components involved in the supply arrangement are sold.

     Currently, a  substantial  percentage  of the  Company's  manufacturing  is
          performed by SameTime Electronics ("SameTime"). The loss of SameTime's
          services or a material adverse change in SameTime's business or in the
          Company's  relationship  with SameTime could  materially and adversely
          harm the Company's business.  To lessen the risk associated with using
          one manufacturer of a substantial  portion of the Company's  products,
          the Company is also using Mac  Systems,  Lite-On,  Vtech,  Billionton,
          Taicom,  Abocom,  Behaviour  Tech,  Well and  Billion  to  manufacture
          various of our products.

(17) 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 to
          North America and net sales to international locations for 2001, 2002,
          and 2003 were comprised as follows:
<TABLE>
<S>               <C>            <C>          <C>             <C>         <C>             <C>
                        2001     % of Total          2002     % of Total       2003       % of Total
                        ----     ----------          ----     ----------       ----       ----------
North America     $  25,828,176      62%      $  22,342,890       60%     $  18,212,110       55%
International        15,742,100      38%         14,931,397       40%        15,123,099       45%
                     ----------     ----         ----------      ----        ----------      ----
Total             $  41,570,276     100%      $  37,274,287      100%     $  33,335,209      100%
                     ==========     ====         ==========      ====        ==========      ====
</TABLE>
(18) 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 in 2001, 2002 and 2003
          were $46,749, $34,531 and $29,587 respectively.
<PAGE>
                     ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements (Continued)

(19) SELECTED QUARTERLY  FINANCIAL  INFORMATION (IN THOUSANDS,  EXCEPT PER SHARE
     DATA, UNAUDITED)
     The  following table sets forth selected quarterly  financial for the years
          ended December 31, 2002 and 2003. The operating  results for any given
          quarter  are not  necessarily  indicative  of  results  for any future
          period.
<TABLE>
<S>                                  <C>      <C>      <C>       <C>          <C>      <C>      <C>      <C>
                                            2002 Quarter Ending                       2003 Quarter Ending
                                     Mar. 31  June 30 Sept. 30  Dec. 31       Mar. 31  June 30  Sept.30  Dec. 31
                                     -------  ------- --------  -------       -------  -------  -------  -------
Net sales.........................   $ 8,973  $ 9,207  $10,879  $ 8,215       $ 7,538  $ 7,537  $ 9,104  $ 9,156
Costs of goods sold...............     7,183    7,225    7,708    5,822         5,393    5,777    6,146    5,804
                                      ------   ------   ------   ------        ------   ------   ------   ------
  Gross profit (loss).............     1,790    1,982    3,171    2,393         2,145    1,760    2,958    3,352
                                      ------   ------   ------   ------        ------   ------   ------   ------
Operating expenses:
  Selling.........................     1,572    1,492    1,423    1,361         1,362    1,227    1,376    1,306
  General and administrative......       911      852      825      817           958      843      612      705
  Research and development........     1,076      856      879      716           752      743      660      612
                                      ------    -----    -----    -----         -----    -----    -----    -----
   Total operating expenses.......     3,559    3,200    3,127    2,894         3,072    2,813    2,648    2,623
                                      ------    -----    -----    -----         -----    -----    -----    -----
   Operating profit (loss)........    (1,769)  (1,218)      44     (501)         (927)  (1,053)     310      729

Other income (expense), net.......        35       11       48      (25)           87       62       96       27
                                         ---      ---       --       --            --       --       --       --
   Income (loss) before income
    taxes and extraordinary item..    (1,734)  (1,207)      92     (526)         (840)    (991)     406      756
Income tax expense (benefit)......     2,013        -        -        2             -        -        -        -
                                      ------   ------   ------    -----         -----    -----    -----    -----
   Income (loss) before
    extraordinary item............    (3,747)  (1,207)      92     (528)         (840)    (991)     406      756
   Extraordinary gain on
    elimination of goodwill.......       255        -        -        -             -        -        -        -
                                      ------   ------   ------    -----         -----    -----    -----    -----
   Net income (loss)..............   $(3,492) $(1,207) $    92  $  (528)       $ (840) $  (991) $   406  $   756
                                       =====    =====    =====    =====         =====    =====    =====    =====
Net loss per common share:
   Basic..........................   $ (0.44) $ (0.15) $  0.01  $ (0.07)      $ (0.11) $ (0.13) $  0.05  $  0.09
   Diluted........................   $ (0.44) $ (0.15) $  0.01  $ (0.07)      $ (0.11) $ (0.13) $  0.05  $  0.09

Weighted average common and common equivalent Shares:
   Basic..........................     7,861    7,861    7,861    7,861         7,853    7,852    7,857    7,970
   Diluted........................     7,861    7,861    7,861    7,861         7,853    7,852    8,081    8,593
</TABLE>
<PAGE>
                                  EXHIBIT INDEX

        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 10.1 to the
              Company's  Quarterly Report  on Form  10-Q for  the fiscal quarter
              ended June 30, 1998. *

     **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   Operating Agreement, Zoom  Group LLC dated  as of  March 29, 2002,
              filed  as Exhibit 10.1  to the Company's Quarterly  Report on Form
              10-Q for the fiscal quarter ended March 2002. *

       10.10  Agreement  between Zoom  Telephonics, Inc  and Members of the Zoom
              Group  dated as of  March 22, 2002, filed as  Exhibit 10.2  to the
              March 2002 Form 10-Q. *

       10.11  Reinstatement Agreement, Assignment Agreement and Second amendment
              of Purchase and Sale dated as  of March 29, 2002, filed as Exhibit
              10.3 to the March 2002 Form 10-Q. *

       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.

       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.


<PAGE>

                                  EXHIBIT INDEX (CONTINUED)


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

       **     Compensation Plan or Arrangement.
<PAGE>


                                   EXHIBIT 23.

                          INDEPENDENT AUDITORS' CONSENT



The Board of Directors
Zoom Technologies, Inc.:



We consent to the incorporation by reference in the registration  statements No.
33-42834,  No.  33-90930,  No.  333-60565,  No.  333-75575,  No.  33-90191,  No.
333-47188,  No. 333-97573 and No.  333-107923 on Form S-8 of Zoom  Technologies,
Inc. of our reports dated  February 11, 2004,  with respect to the  consolidated
balance sheets of Zoom Technologies, Inc. and subsidiary as of December 31, 2002
and 2003, 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,  2003,  and  the  related  consolidated
financial  statement  schedule,  which  reports  appear in the December 31, 2003
annual report on Form 10-K of Zoom Technologies, Inc.



                                        /s/ KPMG LLP

Boston, Massachusetts
March 29, 2004

<PAGE>
                              INDEPENDENT AUDITORS'
                     REPORT ON FINANCIAL STATEMENT SCHEDULE



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



Under date of February 11, 2004, we reported on the consolidated  balance sheets
of Zoom Technologies,  Inc. and subsidiary as of December 31, 2002 and 2003, 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,  2003,  which are  included  in the Form  10-K.  In
connection  with  our  audits  of  the  aforementioned   consolidated  financial
statements,  we  also  audited  the  related  consolidated  financial  statement
schedule  in  the  Form  10-K.   This  financial   statement   schedule  is  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on this financial statement schedule based on our audits.

In our opinion,  such financial statement schedule,  when considered in relation
to the  basic  consolidated  financial  statements  taken as a  whole,  presents
fairly, in all material respects, the information set forth therein.


                                        /s/ KPMG LLP


Boston, Massachusetts
February 11, 2004


<PAGE>
SCHEDULE II

                     ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
                        VALUATION AND QUALIFYING ACCOUNTS
                  Years ending December 31, 2001, 2002 and 2003

<TABLE>
<S>                              <C>            <C>            <C>           <C>



                                  Balance at       Charged        Amount        Balance
                                   Beginning   (Credited) to   written off      at end
        Description                 of year        Expense     (Recoveries)     of year
                                    --------       -------     ------------     --------
Reserve for doubtful accounts..  $   354,206    $   162,416    $   284,351   $   232,271
Reserve for price protection...      198,749        943,820        403,456       739,113
Reserve for sales returns......    1,065,415      5,628,163      6,013,536       680,042
COOP advertising and other
allowances.....................    1,509,085      4,332,751      4,676,813     1,165,023
                                   ---------      ---------     ----------     ---------
Year ending December 31, 2001    $ 3,127,455    $11,067,150    $11,378,156   $ 2,816,449
                                   =========     ==========     ==========     =========
Reserve for doubtful accounts..  $   232,271    $    36,944    $   209,809   $    59,406
Reserve for price protection...      739,113        699,482        774,263       664,332
Reserve for sales returns......      680,042        756,012        522,040       914,014
COOP advertising and other
allowances.....................    1,165,023      3,960,531      4,116,898     1,008,656
                                   ---------      ---------     ----------     ---------
Year ending December 31, 2002    $ 2,816,449    $ 5,452,969    $ 5,623,010   $ 2,646,408
                                   =========     ==========     ==========     =========
Reserve for doubtful accounts..  $    59,406    $   (42,713)   $ ( 105,221)  $   121,914
Reserve for price protection...      664,332        168,095        722,866       109,561
Reserve for sales returns......      914,014      3,260,578      3,404,030       770,562
COOP advertising and other
allowances.....................    1,008,656      2,648,885      2,869,373       788,168
                                   ---------      ---------     ----------     ---------
Year ending December 31, 2003    $ 2,646,408    $ 6,034,845    $ 6,891,048   $ 1,790,205
                                   =========     ==========     ==========     =========

</TABLE>