**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, 2007**





or





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





**For
      the transition period from ______to ______**


**Commission
      File Number 0-18672**





**ZOOM
      TECHNOLOGIES, INC.**


(Exact
      Name of Registrant as Specified in Its Charter)





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





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


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


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


**Common
      Stock, $0.01 Par Value**


(Title
      of
      Class)





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





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





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





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


Yes x  No o





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


Large
      Accelerated Filer o      Accelerated
      Filer o


Non-Accelerated
      Filer (do not check if a smaller reporting company) o  Smaller
      Reporting Company x





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





The
      aggregate market value of the common stock, $0.01 par value, of the registrant
      held by non-affiliates of the registrant as of June 29, 2007 (computed by
      reference to the closing price of such stock on The Nasdaq Capital Market on
      such date) was approximately $10,085,080.32.





The
      number of shares outstanding of the registrant's common stock, $0.01 par value,
      as of February 15, 2008 was 9,346,966 shares.


**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the registrant's proxy statement for the registrant's 2008 annual meeting
      of
      shareholders to be filed with the SEC in April 2008 are incorporated by
      reference into Part III, Items 10-14 of this Form 10-K.














**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**


**_______________________________________**





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





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


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


·
            **the
                delisting of our common stock on the Nasdaq Capital
                Market**


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


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


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


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


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


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


·
            **production
                schedules for our
                products;**


·
            **business
                strategies;**


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


·
            **general
                economic conditions; and**


·
            **trends
                relating to our 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.***




2




**PART
      I**





**ITEM
      1 - BUSINESS**





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





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





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





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





Cable
      modems provide a high-bandwidth connection to the Internet through a cable-TV
      cable that connects to compatible equipment that is typically at or near the
      cable service provider. We began shipping cable modems during 2000. Our cable
      modem customers in the U.S., and other countries are primarily focused on
      retail.





We
      are
      currently shipping VoIP products which enable broadband users to make phone
      calls through the Internet, potentially lowering the cost of the call and
      providing other benefits such as the ability to manage and track calls using
      a
      Web browser. 2005 shipments included a multi-function DSL gateway with VoIP,
      and
      we also shipped a router with VoIP for use with either a DSL modem or cable
      modem. In February 2006 we began shipping the first products in a line of analog
      telephone adapters (ATAs), which connect to a router and one or more phones,
      and
      provide VoIP capabilities to the connected phones. Some of our VoIP products
      are
      targeted for sale to service providers, and some others are targeted for sale
      through our sales channels to end-users. Some of Zoom’s VoIP products benefit
      from Zoom's Global VillageTM VoIP service. Global Village's VoIP service enables
      an end-user to make free VoIP phone calls to end-users of several VoIP service
      providers, including Global Village, and also allows a user to pay to call
      almost any phone in the world.   Zoom also has a private-label VoIP
      service called VoIP ASAP, which enables a service provider to offer VoIP service
      using that service provider’s name and logo.





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





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





*Available
      Information*





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




3




**Products**





*General*





The
      vast
      majority of our products facilitate communication of data through the Internet.
      Our dial-up modems can also link computers, point-of-purchase terminals, or
      other modem-equipped devices to each other through the traditional telephone
      network without using the Internet. Our cable modems use the cable-TV cable
      and
      our DSL modems use the local telephone line to provide a high-speed link to
      the
      Internet. Our wireless-G network products typically communicate with a broadband
      modem for access to the Internet. Some of our Bluetooth wireless products,
      such
      as our Bluetooth modem, are designed for Internet access. Our dialers can be
      used to route voice calls to a VoIP network that may include the Internet.
      Our
      modems and dialers typically connect to a single phone line in a home, office,
      or other location. We do have some products, however, that do not facilitate
      communication of data through the Internet. The most important of these are
      some
      Bluetooth products, including our iHiFi ® line
      of
      Bluetooth audio products.





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





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





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





In
      2006
      and 2007 our dial-up modems and related products accounted for approximately
      48%
      and 40% of our net sales, respectively.





*DSL
      Modems*





Our
      DSL
      modems incorporate the ADSL standards that are currently most popular worldwide,
      including ADSL2/2+, G.dmt, G.Lite, and ANSI T1.413 issue 2. In 2000 we designed
      and shipped our first DSL modems, an external USB model and an internal PCI
      model. In 2002 we introduced new USB and PCI models, and also introduced an
      Ethernet model and a USB/Ethernet model with router features. In 2003 we
      introduced a DSL modem with a built-in router, a USB port, and four switched
      Ethernet ports. In September 2004 Zoom began shipping its first DSL modem with
      built-in VoIP, which also included a router, a 4-port switch, and a firewall.
      During the fourth quarter of 2004 Zoom introduced new modem hardware designs
      for
      its USB, Ethernet, Ethernet/USB, and 4-port router models, shifting to newer
      modem chipsets and lowering Zoom's cost of goods. In March 2005 Zoom introduced
      a DSL modem with wireless networking using the 802.11b and 802.11g standards,
      a
      4-port switching hub, router, and firewall. In 2006 Zoom began shipping a
      software Install Assistant with most of its DSL modems to simplify end-user
      installation. In January 2007 Zoom began shipping user-friendly upstream (that
      is, to the Internet) QOS Quality-of-Service capability with some of its DSL
      modems, to provide a “fast lane” for bandwidth-sensitive applications such as
      VoIP, gaming, and video. In 2008 Zoom expects to expand its user-friendly QOS
      to
      include downstream (that is, from the Internet) QOS, to add QOS to more of
      Zoom’s DSL products, to add other features to some of its DSL products. Zoom
      will also introduce a DSL modem with a built-in wireless-G router and
      VoIP.





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





4




In
      2006
      and 2007 our DSL modems and related products accounted for approximately 44%
      and
      50% of our net sales.





*Bluetooth®
      Modems and Adapters*





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





*Cable
      Modems*





Each
      cable service provider has its own approval process, in which the cable service
      provider may require CableLabs® certification and may also require the service
      provider’s own company test and approval. We have obtained CableLabs®
certification for our currently marketed cable modems. They have also received
      a
      number of cable service provider company approvals **.** The
      approval process has been and continues to be a significant barrier to entry,
      as
      are the strong relationships with cable service providers enjoyed by incumbent
      cable equipment providers like Motorola and Cisco Systems.





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





Zoom’s
      cable modems currently support DOCSIS standards 1.0, 1.1, and 2.0, the popular
      standards in the US and many other countries. The DOCSIS 3.0 standard supports
      higher speeds and other features, and Comcast hopes to begin shipping some
      DOCSIS 3.0 cable modems in 2008. Though DOCSIS 3.0 cable modems will represent
      a
      small percentage of the total cable modems shipped in 2008, they represent
      an
      important product area; and Zoom hopes to be shipping DOCSIS 3.0 cable modems
      in
      volume at some point this year or next.





*Voice
      over Internet Protocol*





In
      2004
      we introduced a line of products that support VoIP or "Voice over Internet
      Protocol". Our first VoIP products used the standards-based Session Initiation
      Protocol, or SIP protocol, and are thus compatible with a wide range of other
      SIP-compatible VoIP products and services. SIP allows devices to establish
      and
      manage voice calls on the Internet. Zoom’s VoIP product line includes the X5v,
      the V3, and a line of Analog Telephone Adapters. The X5v includes a DSL modem,
      a
      router, a firewall, a 4-port switching hub, Zoom’s TelePort, and other features.
      The V3 has the same features as the X5v, except instead of having a built-in
      DSL
      modem, the V3 has an Ethernet port for connecting to the Ethernet port of an
      external DSL modem or cable modem. Zoom’s Analog Telephone Adapters connect to a
      router’s Ethernet port and to one or more telephones to provide those phones
      with VoIP capabilities. Zoom expects to introduce a DSL modem with a built-in
      wireless-G router and VOIP in 2008. Some of Zoom’s Analog Telephone Adapters
      include TelePort.





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





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





5




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





Zoom
      devoted significant resources to the VoIP product area in 2004 through 2007,
      and
      we continue to devote considerable resources to VoIP hardware, firmware, and
      test, and to Zoom's Global Village phone service.





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





*Wireless
      Local Area Networking*





In
      2005
      Zoom began shipping DSL modems with Wireless-G local area network capability
      and
      introduced other Wireless-G products, including USB and PC Card clients, a
      wireless access point, and a wireless gaming adapter. In late 2006 Zoom
      introduced a Wireless-G router and a Wireless-G PCI client. Zoom is considering
      extensions of its wireless local area network product line, including the ADSL
      modem with wireless-G router and VoIP mentioned above, and also including
      wireless products with extended range. Zoom also plans to ship products that
      incorporate the extended range and higher data rate associated with the
      multiple-input multiple-output wireless standard, 802.11n, which is expected
      to
      be finalized in late 2008.





*Dialers
      and Related Telephony Products*





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





*Products
      for Markets outside North America*





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





*ROHS
      Restriction on Hazardous Substances*





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





*CEC
      Appliance Efficiency Regulations*





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





6




**Sales
      Channels**





*General*





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





During
      2007 three customers each accounted for 10% or more of our total net sales.
      Together these three customers accounted for 44% of our total net
      sales.





*Distributors
      and Retailers outside North America*





In
      markets outside North America we sell and ship our products primarily to
      independent distributors and retailers. Our European high-volume retailers
      include Dixons Store Group, a major customer, and many others. Our revenues
      from
      sales outside North America were $14.0 million in 2005, $8.0 million in 2006,
      and $6.7 million in 2007. Approximately 46% and 61% of our net sales outside
      North America in 2006 and 2007, respectively, were to customers in the United
      Kingdom. Sales to Turkey accounted for 17% and 1% of our net sales outside
      North
      America in 2006 and 2007, respectively. We believe sales growth outside North
      America will continue to require substantial additional investments of resources
      for product design and testing, regulatory approvals, native-language
      instruction manuals and software, packaging, sales support, and technical
      support. We have made this investment in the past for many countries, and we
      expect to make this investment for many countries and products in the future.
      Areas of focus include Western Europe, the Middle East, and Latin
      America.





*North
      American High-volume Retailers and Distributors*





In
      North
      America we reach the modem retail market primarily through high-volume
      retailers. Our North American retailers include Best Buy, Fry’s, Micro Center,
      Staples, and many others. Our revenues from sales in North America were $10.3
      million in 2006 and $11.8 million in 2007. Retailers typically carry an
      assortment of our dial-up modems, cable modems, and DSL modems; and some also
      carry an assortment of our wireless products.





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





*Internet
      and Telephone Service Providers*





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





*System
      Integrators and Original Equipment Manufacturers*





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




7


**Sales,
      Marketing and Support**





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





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





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





**Research
      and Development**





Our
      research and development efforts are focused on developing new communications
      products and VoIP services, further enhancing the capabilities of existing
      products, and reducing production costs. We have developed close collaborative
      relationships with certain of our ODM suppliers and component suppliers. We
      work
      with these partners and other sources to identify and respond to emerging
      technologies and market trends by developing products that address these trends.
      In addition, we purchase modems and other chipsets that incorporate
      sophisticated technology from third parties, thereby eliminating the need for
      us
      to develop this technology in-house. As of December 31, 2007 we had 14 employees
      engaged primarily in research and development. Our research and development
      team
      performs electronics hardware design and layout, mechanical design, prototype
      construction and testing, component specification, firmware and software
      development, VoIP service development, product testing, foreign and domestic
      regulatory approval efforts, end-user and internal documentation, and
      third-party software selection and testing.





During
      2006 and 2007 we expended $2.2 million and $1.8 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. Our contract
      manufacturers and original design manufacturers typically obtain some or all
      of
      the material required to assemble the products based upon a Zoom Technologies
      Approved Vendor List and Parts List. Our manufacturers typically insert parts
      onto the printed circuit board, with most parts automatically inserted by
      machine, solder the circuit board, and in-circuit test the completed assemblies.
      Functional test and packaging are sometimes performed by the contract
      manufacturer. For the United States and many other markets, functional test
      and
      packaging are more commonly performed at our manufacturing facilities in North
      America, allowing us to tailor the packaging and its contents for our customers
      immediately before shipping. We also perform circuit design, circuit board
      layout, and strategic component sourcing at our North American facility.
      Wherever the product is built, our quality systems are used to help assure
      that
      the product meets our specifications.





In
      late
      2006 we moved our North American manufacturing facility from Boston,
      Massachusetts to Tijuana, Mexico. This was a highly challenging move, since
      it
      dramatically changed our personnel, facilities, infrastructure, and logistics.
      The reason we made the move was to reduce our personnel cost, facilities cost,
      and the costs associated with shipping from Asia to North America. While we
      continue to experience challenges associated with the Tijuana facility,
      including challenges relating to bringing products across the border between
      the
      U.S. and Mexico, the Tijuana facility is running fairly smoothly now. We believe
      that this facility assists us in cost-effectively providing rapid response
      to
      the needs of our U.S. customers.





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





8




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





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, lead-times stretch out, or fuel costs continue
      to rise.





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





**Competition**





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





·
            successfully
                and accurately anticipate customer
                demand;


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


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


·
            differentiate
                our products from those of our competitors;
                or


·
            otherwise
                compete successfully in the markets for our
                products.





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





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


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


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


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


·
            **Bluetooth
                competitors:**Anycom, Belkin, D-Link, IOGear, Jabra, Kensington, Linksys, Logitech,
                Sitecom, SMC, Targus, Trendnet, and
                Trust.





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





The
      principal competitive factors in our industry include the
      following:





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


·
            price;


·
            brand
                image;


·
            product
                availability and lead times;


·
            size
                and stability of operations;


·
            breadth
                of product line and shelf space;


·
            sales
                and distribution capability;






9




·
            technical
                support and service;


·
            product
                documentation and product
                warranties;


·
            relationships
                with providers of broadband access services;
                and


·
            compliance
                with industry standards.





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





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





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





·
            The
                current limited retail market for broadband
                modems;


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


·
            The
                significant bargaining power of these large volume
                purchasers;


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


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





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





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





**Intellectual
      Property Rights**





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





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





10




**Government
      Regulation**





*Regulatory
      Approvals, Certifications and Other Industry Standards*





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





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





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





*Internet
      Telephony Services*





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





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





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





11




*Regulation
      of the Internet*





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





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





**Backlog**





Our
      backlog as of March 5, 2008 was $0.6 million, and on March 7, 2007 was $0.7
      million. Many orders included in backlog may be canceled or rescheduled by
      customers without significant penalty. Backlog as of any particular date should
      not be relied upon as indicative of our net sales for any future
      period.





**Employees**





On
      December 31, 2007 we had 64 full-time employees compared to 69 as of December
      31, 2006. Of the 2007 total, 14 were engaged in research and development, 18
      were involved in purchasing, assembly, packaging, shipping and quality control,
      21 were engaged in sales, marketing and technical support, and the remaining
      11
      performed accounting, administrative, management information systems, and
      executive functions. None of our employees is represented by a labor
      union.




12





**Our
      Executive Officers**





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





**Name**
            
            **Age**
            
            **Position
                with Zoom**Frank
                B. Manning
            
            59
            
            Chief
                Executive Officer, President and Chairman of the BoardPeter
                R. Kramer
            
            56
            
            Executive
                Vice President and DirectorRobert
                A. Crist
            
            64
            
            Vice
                President of Finance and Chief Financial OfficerTerry
                J. Manning
            
            56
            
            Vice
                President of Sales and MarketingDean
                N. Panagopoulos
            
            50
            
            Vice
                President of Network ProductsDeena
                Randall
            
            54
            
            Vice
                President of Operations





***Frank
      B. Manning*** is a
      co-founder of our company. Mr. Manning has been our president, chief executive
      officer, and a director since May 1977. He has served as our chairman of the
      board since 1986. He earned his BS, MS and PhD degrees in Electrical Engineering
      from the Massachusetts Institute of Technology, where he was a National Science
      Foundation Fellow. From 1998 through late 2006 Mr. Manning was also a director
      of the Massachusetts Technology Development Corporation, a public purpose
      venture capital firm that invests in seed and early-stage technology companies
      in Massachusetts. Mr. Manning is the brother of Terry Manning, our vice
      president of sales and marketing. From 1999 to 2005 Mr. Manning was a Director
      of Intermute, a company that Zoom co-founded and that was sold to Trend Micro
      Inc., a subsidiary of Trend Micro Japan. Mr. Manning has been a Director of
      Unity Business Networks, a hosted VoIP service provider, since Zoom’s investment
      in July 2007.





***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 and director of
      mergers and acquisitions. Prior to 1992 Mr. Crist served in various capacities
      at Unisys Corporation, including corporate controller, corporate director of
      business planning and analysis, corporate manufacturing and engineering
      controller, and CFO for several business units. Mr. Crist earned his BS degree
      from Pennsylvania State University and he earned his MBA from the University
      of
      Rochester in 1971.





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





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





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





**ITEM
      1A. - RISK FACTORS**





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





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





Not
      applicable.





**ITEM
      2 – PROPERTIES**





Our
      corporate headquarters are located at 201 and 207 South Street, Boston,
      Massachusetts. In December 2006 we sold our headquarters buildings to a third
      party, with a two-year lease-back of approximately 25,000 square feet of the
      62,000 square foot facility. Our net sale proceeds were approximately $7.7
      million of which approximately $3.6 million was repaid to our mortgage holder,
      eliminating the mortgage debt on our balance sheet ended December 31, 2006.
      Our
      lease expires in December 2008. A renewal of our current lease may require
      an
      increase in our monthly rent. We would likely move our headquarters to a new
      location in the same general area of Boston to avoid a material increase in
      our
      monthly rent. In the event this lease is not further extended, we believe we
      will be able to find alternative space that is suitable and adequate for our
      headquarters operation.





13




In
      August
      1996 we entered into a five-year lease for a 77,428 square foot manufacturing
      and warehousing facility at 645 Summer Street, Boston, MA. On February 28,
      2001
      we exercised our option to extend this lease for an additional five years.
      The
      term of this lease expired in August 2006 and we began the planned move of
      our
      manufacturing and warehousing facility to Tijuana, Mexico. In August 2006 we
      signed a lease for a 35,575 square foot manufacturing and warehousing facility
      in Tijuana, Mexico with an initial lease term from October 2006 to May 2007,
      with five two-year options thereafter. In February, 2007 we renegotiated the
      first renewal term and signed a one-year extension starting in May 2007, with
      five two-year options thereafter. We received verbal approval from the landlord
      and expect to sign another one-year extension starting in May 2008. In the
      event
      this lease is not further extended, we believe we will be able to find
      alternative space that is suitable and adequate for our manufacturing and
      warehousing operations.





In
      September 2005 we entered into a two year office lease consisting of 2,400
      square feet at 2 Kings Road, Fleet, Hants, U.K for our U.K. sales office. In
      September 2007 the lease was continued on a month-to-month basis with a 3 month
      cancellation notice required by Zoom or the landlord. In the event this lease
      is
      not further extended, we believe we will be able to find alternative space
      that
      is suitable and adequate for our U.K. sales office.





In
      September 2002 we entered into a five-year lease, as a tenant, for approximately
      3,500 square feet at 950 Broken Sound Parkway NW, Boca Raton, Florida. We
      primarily use this facility as a technical support facility. In September
      2007 the term of the lease expired and we moved our Florida-based customer
      service organization to our headquarters location in Boston,
      Massachusetts.





**ITEM
      3 - LEGAL PROCEEDINGS**





No
      material litigation.





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





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





**PART
      II**





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





Our
      common stock trades on the Nasdaq Capital Market under the symbol "ZOOM". The
      following table sets forth, for the periods indicated, the high and low sale
      prices per share of common stock, as reported by the Nasdaq Capital
      Market.





**Fiscal
                Year Ended December 31, 2007**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            1.80
            
            $
            1.08Second
                Quarter
            
            $
            1.89
            
            $
            1.15Third
                Quarter
            
            $
            1.30
            
            $
            .72Fourth
                Quarter
            
            $
            1.30
            
            $
            .53




**Fiscal
                Year Ended December 31, 2006**
            
            
            **High**
            
            
            **Low**First
                Quarter
            
            $
            1.75
            
            $
            1.28Second
                Quarter
            
            $
            1.51
            
            $
            1.05Third
                Quarter
            
            $
            1.14
            
            $
            .91Fourth
                Quarter
            
            $
            2.80
            
            $
            1.00





As
      of
      February 15, 2008, there were 9,346,966 shares of our common stock outstanding
      and 209 holders of record of our common stock.





**Recent
      Sales of Unregistered Securities**





We
      did
      not sell any unregistered securities during the fourth quarter of
      2007.




14


**Dividend
      Policy**





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





**Repurchases
      by the Company**





During
      2007 we did not repurchase any shares of our common stock on our own behalf
      or
      for any affiliated purchaser.





**Equity
      Compensation Plan Information**





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





15





**ITEM
      6 - SELECTED FINANCIAL DATA**





Not
      required.





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





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




**Overview**




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




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





Since
      1983 our headquarters has been near South Station in downtown Boston. Zoom
      has
      owned two adjacent buildings which connect on most floors, and which house
      our
      entire Boston staff. In December 2006 we sold our headquarters buildings to
      a
      third party, with a two-year lease-back of approximately 25,000 square feet
      of
      the 62,000 square foot facility. Our net sale proceeds were approximately $7.7
      million of which approximately $3.6 million was repaid to our mortgage holder,
      eliminating the mortgage debt from our balance sheet. Our lease expires in
      December 2008. A renewal of our current lease may require an increase in our
      monthly rent. We would likely move our headquarters to a new location in the
      same general area of Boston to avoid a material increase in our monthly rent.
      In
      the event this lease is not further extended, we believe we will be able to
      find
      alternative space that is suitable and adequate for our headquarters
      operation.




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




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




16




Over
      the
      past several years our net sales have declined. In response to declining sales
      volume, we have cut costs by reducing staffing and some overhead costs. Our
      total headcount of full-time employees, including temporary workers, went from
      127 on December 31, 2005 to 64 on December 31, 2007. Of the decline of 63
      employees, 47 were related to the outsourcing of our final assembly
      manufacturing operation to Mexico. Our dedicated manufacturing personnel in
      Mexico are employees of our Mexican manufacturing service provider and not
      included in our 2007 headcount. Of the 64 employees on December 31, 2007, 14
      were engaged in research and development, 18 were involved in manufacturing
      oversight, purchasing, assembly, packaging, shipping and quality control, 21
      were engaged in sales, marketing and technical support, and the remaining 11
      performed accounting, administrative, management information systems, and
      executive functions.




Generally
      our gross margin for a given product depends on a number of factors including
      the type of customer to whom we are selling. The gross margin for retailers
      tends to be higher than for some of our other customers; but the sales, support,
      returns, and overhead costs associated with retailers also tend to be higher.
      Zoom’s sales to certain countries, including Turkey, Vietnam, and Saudi Arabia,
      are currently handled by a single master distributor for each country who
      handles the support and marketing costs within the country. Gross margin for
      sales to these master distributors tends to be low, since lower pricing to
      these
      distributors helps them to cover the support and marketing costs for their
      country.




In
      2007
      our net sales were up 0.8% compared to 2006. The sales increase was mainly
      the
      result of strong increases in DSL and Cable modem sales which were substantially
      offset by declines in dial-up modem and wireless product sales. In 2007 we
      made
      new placements of DSL modems in large retailers in the U.S. and the U.K. and
      new
      placements of Cable modems in large retailers in the U.S. Sales of DSL modems
      to
      a previously large customer in Turkey essentially stopped in 2007. We attribute
      this decline to a number of factors including increased competition and actions
      by Turkish Telecom to dramatically increase their bundling of DSL modems with
      their service. Because of our significant customer concentration our net sales
      and operating results have fluctuated and in the future could continue to
      fluctuate significantly due to changes in political or economic conditions
      or
      the loss, reduction of business, or less favorable terms for any of our
      significant customers.




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





Our
      cash
      and cash equivalents balance at December 31, 2007 was $3.6 million, down from
      $7.8 million at December 31, 2006. This reduction was due primarily to our
      $3.5
      million loss for the 2007 year and our June 2007 $1.2 million investment
      transaction with Unity Business Networks, LLC.





**Critical
      Accounting Policies and Estimates**





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




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




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





·
            computer
                peripherals retailers,




·
            computer
                product distributors,




·
            Internet
                service providers, and




17




·
            original
                equipment manufacturers (OEMs)




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




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




Our
      2007
      VoIP service revenues were recorded as the end-user-customer consumed billable
      VoIP services. The end-user-customer became a service customer by electing
      to
      sign up for the Global Village billable service on the Internet. Zoom recorded
      revenue either when billable services were consumed or when a monthly flat-fee
      service was billed.




**Product
      Returns** .
      Products are returned by retail stores and distributors for inventory balancing,
      contractual stock rotation privileges, and warranty repair or replacements.
      We
      estimate the sales and cost value of expected future product returns of
      previously sold products. Our estimates for product returns are based on recent
      historical trends plus estimates for returns prompted by, among other things,
      announced stock rotations and announced customer store closings. Management
      reviews historical returns, current economic trends, and changes in customer
      demand and acceptance of our products when estimating sales return allowances.
      The estimate for future returns is recorded as a reserve against accounts
      receivable, a reduction in our net sales, and the corresponding change to
      inventory reserves and cost of sales. Product returns as a percentage of total
      shipments were 11.7% and 8.9%, respectively, for 2007 and 2006. The 2006 figure
      does not include the impact of the start of the consignment arrangement in
      2006
      at a major retailer customer.




**Price
      Protection Refunds.** We have
      a policy of offering price protection to certain of our retailer and distributor
      customers for some or all their inventory. Under the price protection policies,
      when we reduce our prices for a product, the customer receives a credit for
      the
      difference between the original purchase price and our reduced price for their
      unsold inventory of that product. Our estimates for price protection refunds
      are
      based on a detailed understanding and tracking by customer and by sales program.
      Estimated price protection refunds are recorded in the same period as the
      announcement of a pricing change. Information from customer inventory-on-hand
      reports or from direct communications with the customers is used to estimate
      the
      refund, which is recorded as a reduction of net sales and a reserve against
      accounts receivable. Reductions in our net sales due to price protection were
      $0.1 million in 2006 and $0.1 million in 2007.




**Sales
      and Marketing Incentives** .
      Many of
      our retailer customers require sales and marketing support funding, usually
      set
      as a percentage of our sales in their stores. The incentives were reported
      as
      reductions in our net sales and were $0.8 million in 2006 and $1.2 million
      in
      2007.




**Consumer
      Mail-In and In-Store Rebates** .
      Our
      estimates for consumer mail-in and in-store rebates are based on a detailed
      understanding and tracking by customer and sales program, supported by actual
      rebate claims processed by the rebate redemption centers plus an accrual for
      an
      estimated lag in processing at the redemption centers. The estimate for mail-in
      and in-store rebates is recorded as a reserve against accounts receivable and
      a
      reduction of net sales in the same period that the rebate obligation was
      triggered. Reductions in our net sales due to the consumer rebates were $0.7
      million in 2006 and $0.3 million in 2007.




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





**Accounts
      Receivable Valuation** .
      We
      establish accounts receivable valuation allowances equal to the above-discussed
      net sales adjustments for estimates of product returns, price protection
      refunds, consumer rebates, and general bad debt reserves. These allowances
      are
      reduced as actual credits are issued to the customer's accounts. Our bad-debt
      write-offs were less than $0.1 million for 2007 and nominal for
      2006.




**Inventory
      Valuation and Cost of Goods Sold.** Inventory is valued at the lower of cost, determined by the first-in, first-out
      method, or market. We review inventories for obsolete slow moving products
      each
      quarter and make provisions based on our estimate of the probability that the
      material will not be consumed or that it will be sold below cost. We did not
      have significant charges to costs and expenses for obsolete or slow-moving
      products in 2007. In 2006 we recorded an additional charge of $0.6 million
      for
      inventory reserves related to obsolete and slow-moving products.





18




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





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





As
      of
      December 31, 2007 we had federal net operating loss carry forwards of
      approximately $36,777,000. These federal net operating losses are available
      to
      offset future taxable income, and are due to expire in years ranging from
      2018 to 2027. We also had state net operating loss carry forwards of
      approximately $11,447,000. These state net operating losses are available to
      offset future taxable income, and are primarily due to expire in years ranging
      from 2008 to 2012.





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




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




During
      the quarter ended September 30, 2007 the Company purchased all the Series A
      Preferred Shares (the Series A Shares) of Unity Business Networks, LLC (Unity)
      for cash of $1.2 million, including transaction costs. The Series A Shares
      are
      convertible at any time at the Company’s option into 15% of Unity’s common stock
      on a fully-diluted basis. The Series A Shares convert automatically if Unity
      consummates a public offering with gross proceeds in excess of $25 million
      or 30
      days after Unity delivers its 2009 audited financial statements to the Company.
      In addition, the Company has an option to purchase all the outstanding common
      stock of Unity based on a specified multiple of Unity’s revenues, as defined,
      for 2008. The option is exercisable for 30 days following the receipt of Unity’s
      2008 audited financial statements. The Company’s CEO is a member of Unity’s five
      member board of directors. Further, the Company is entitled to vote Series
      A
      Shares on an as-converted basis with Unity’s common stock. The Company is unable
      to exercise significant influence over Unity’s policies or operations. The
      Company accounts for its investment in Unity at cost. The investment will be
      reviewed periodically for potential impairment.




On
      January 22, 2008, Zoom Technologies, Inc. (the “Company”) and RedMoon, Inc., a
      provider of wireless networks headquartered in Plano, Texas (“RedMoon”), entered
      into a Convertible Note Purchase Agreement pursuant to which the Company made
      an
      initial investment of $300,000 in 6% convertible notes (the “Notes”) and agreed
      to purchase an additional $50,000 per month of 6% convertible notes beginning
      on
      May 1, 2008 and continuing until the earlier of (i) the Company’s election to
      exercise the option to purchase all outstanding stock of RedMoon contained
      in
      the Option Agreement described below or (ii) the Company’s election to terminate
      such Option Agreement, up to a maximum total investment of $500,000. The Notes
      are senior to all long term liabilities of RedMoon and all current liabilities
      of RedMoon in excess of $11,000 and are secured by certain equipment of RedMoon.
      The Notes have a term of three years, and, at the Company’s election, may be
      converted into shares of Series A Preferred Stock of RedMoon. If the Company
      purchases Notes with a total principal amount of $500,000, such Notes will
      be
      convertible into shares of Series A Preferred Stock representing 20% of the
      fully diluted capitalization of RedMoon. If the Company purchases Notes with
      a
      total principal amount of less than $500,000, the number of shares of Series
      A
      Preferred Stock issued upon conversion of the Notes will be pro-rated according
      to the amount of the actual investment.





19




On
      the
      same date, the Company, RedMoon and the holders of RedMoon’s outstanding capital
      stock entered into an Option Agreement pursuant to which the Company has the
      right to buy the balance of RedMoon any time prior to the close of business
      on
      August 31, 2008, unless the Company elects to terminate the Option Agreement
      prior to that date, at a price equal to 1,000,000 shares of the Company’s common
      stock plus up to 4,000,000 additional shares of the Company’s common stock, or
      cash or a combination of cash and stock of equivalent value, with any issuance
      of some or all of the 4,000,000 additional shares or share equivalents based
      on
      RedMoon’s performance during the five calendar quarters beginning with the
      quarter ending June 30, 2008.




Finally,
      on the same date the Company and RedMoon entered into a Security Agreement
      granting the Company a security interest in certain equipment of RedMoon, and
      the Company, RedMoon, and certain of RedMoon’s stockholders entered into a
      Voting Agreement whereby the Company and certain stockholders of RedMoon agreed
      to elect Frank Manning, Chief Executive Officer of the Company, and Bryan
      Thompson, Chief Executive Officer of RedMoon, to the Board of Directors of
      RedMoon.




**Results
      of Operations**





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





**Years
                  Ended December 31,****2006**
              
              **2007**Net
                  sales
              
              
              100.0
              %
              
              100.0
              %Cost
                  of goods sold
              
              
              85.8
              
              
              79.8Gross
                  profit
              
              
              14.2
              
              
              20.2Operating
                  expense:Selling
              
              
              19.8
              
              
              19.3General
                  and administration
              
              
              15.5
              
              
              13.1Research
                  and development
              
              
              11.8
              
              
              9.947.1
              
              
              42.3Operating
                  profit (loss) before sale of real estate
              
              
              (32.9
              )
              
              (22.1
              )Gain
                  on sale of real estate
              
              
              25.9
              
              
              2.1Operating
                  profit (loss)
              
              
              (
                  7.0
              )
              
              (
                  20.0
              )Other
                  income (expense):Gain
                  on sale of investment in Intermute, Inc.
              
              
              11.5
              
              
              -Other,
                  net
              
              
              0.8
              
              
              1.0Total
                  other income (expense)
              
              
              12.3
              
              
              1.0Loss
                  before income taxes
              
              
              5.3
              
              
              (19.0
              )Income
                  taxes (benefit)
              
              
              (
                  0.3
              )
              
              -Net
                  income (loss)
              
              
              5.6
              %
              
              (19.0)
              %





**Year
      Ended December 31, 2007 Compared to Year Ended December 31,
      2006**





The
      following is a discussion of the major categories of our consolidated statement
      of operations, comparing the financial results for the year ended December
      31,
      2007 with the year ended December 31, 2006.





**Net
      Sales.** Our
      total net sales increased year-over-year by $0.2 million or 0.8%. In 2007 we
      primarily generated our sales by selling dial-up and broadband modems via
      retailers, distributors, and Internet Service Providers. The dial-up modem
      market has continued to decline, and Zoom sales of dial-up modems declined
      $1.5
      million due primarily to the decline of the dial-up modem market. Our DSL
      broadband modem category increased $1.2 million primarily as a result of
      increased placements at large electronic retailers the U.S. and the U.K.,
      partially offset by a $1.3 million decline of DSL sales to our Turkish
      distributor due to actions by Turkish Telecom which dramatically increased
      their
      bundling of DSL modems with their service offerings. Net sales in our other
      product sales category, which included primarily cable modems, increased 33.3%
      from $1.5 million in 2006 to $2.0 million in 2007. The following table
      illustrates this change in net sales.




20




**Year
                2006**
              **Sales
                $000**
            
            **Year
                2007**
              **Sales
                $000**
            
            **Change**
              **$000**
            
            **Change**
              **%**Dial-up
            
            $
            8,851
            
            $
            7,337
            
            $
            (1,514
            )
            
            (17.1
            )%DSL
            
            
            7,981
            
            
            9,154
            
            
            1,173
            
            
            14.7
            %Cable
                and Other Products
            
            
            1,490
            
            
            1,987
            
            
            497
            
            
            33.3
            %Total
                Net Sales
            
            $
            18,322
            
            $
            18,478
            
            $
            156
            
            
            0.9
            %





As
      shown
      in the table below our net sales in North America increased $1.5 million or
      14.6% from $10.3 million in 2006 to $11.8 million in 2007. Our net sales in
      Turkey were negligible in 2007 compared to $1.4 million in 2006, a 96.4%
      decrease. The dramatic decline of our sales in Turkey resulted from decreased
      DSL sales to our Turkish distributor due to actions by Turkish Telecom which
      dramatically increased their bundling of DSL modems with their service
      offerings. This action significantly reduced the retail market for DSL modems
      in
      Turkey. Our net sales in the UK were $4.1 million in 2007 compared to $3.7
      million in 2006, a 9.4% increase. The sales increase in North America and the
      UK
      primarily reflect our increased sales of broadband modems in our retailer
      channel, which offset the continued decline of dial-up modem sales in all
      channels. Our net sales in all other countries were $2.6 million in 2007
      compared to $3.0 million in 2006, a 12.8% decline. The sales decline in all
      other countries was primarily due to declining sales of dial-up modems and
      DSL
      modems.





**Year
                2006**
              **Sales
                $000**
            
            **Year
                2007**
              **Sales
                $000**
            
            **Change**
              **$000**
            
            **Change**
              **%**North
                America
            
            $
            10,279
            
            $
            11,776
            
            $
            1,498
            
            
            14.6
            %Turkey
            
            
            1,359
            
            
            49
            
            
            (1,310
            )
            
            (96.4
            )%UK
            
            
            3,717
            
            
            4,065
            
            
            348
            
            
            9.4
            %All
                Other
            
            
            2,967
            
            
            2,588
            
            
            (379
            )
            
            (12.8
            )%Total
                Net Sales
            
            $
            18,322
            
            $
            18,478
            
            
            156
            
            
            0.8
            %





During
      2007 three customers each accounted for 10% or more of our total net sales.
      Together these three customers accounted for 44% of our total net sales. During
      2006, a single customer accounted for more than 10% of our total net
      sales.





Because
      of our customer concentration, our net sales and operating income could
      fluctuate significantly due to changes in political or economic conditions
      or
      the loss, reduction of business, or less favorable terms for any of our
      significant customers.





**Gross
      Profit.** Our
      gross profit was $3.7 million in 2007 compared to $2.6 million in 2006. Our
      gross profit percentage of net sales increased to 20.2% in 2007 from 14.2%
      in
      2006. The primary reason for this increase was lower obsolescence expense and
      lower manufacturing expense.  Both our fixed and variable manufacturing
      costs were lower in 2007 compared to 2006 as a result of the third quarter
      2006
      transition of production to Mexico.





**Operating
      Expense.** Total
      operating expense excluding the gain on sale of real estate decreased by $0.8
      million from $8.6 million in 2006 to $7.8 million in 2007. Total operating
      expense excluding the gain on sale of real estate as a percentage of net sales
      decreased from 47.1% in 2006 to 42.3% in 2007. The table below illustrates
      the
      change in operating expense.


**Operating
                Expense**
            
            **Year
                2006**
              **Sales
                $000**
            
            **%
                Net**
              **Sales**
            
            **Year
                2007**
              **Sales
                $000**
            
            **%
                Net**
              **Sales**
            
            **Change**
              **$000**
            
            **%**
              **Change**Selling
                Expense
            
            $
            3,631
            
            
            19.8
            %
            $
            3,558
            
            
            19.3
            %
            $
            (73
            )
            
            (2.0
            )%General
                and Administrative Expense
            
            
            2,847
            
            
            15.5
            %
            
            2,424
            
            
            13.1
            %
            
            (423
            )
            
            (14.9
            )%Research
                and Development Expense
            
            
            2,158
            
            
            11.8
            %
            
            1,825
            
            
            9.9
            %
            
            (333
            )
            
            (15.4
            )%Total
                Operating Expense excluding the gain on sale of real
                estate
            
            $
            8,636
            
            
            47.1
            %
            $
            7,807
            
            
            42.3
            %
            
            (829
            )
            
            (9.5
            )%








21




**Selling
      Expense.** Selling
      expense decreased from $3.6 million in 2006 to $3.56 million in 2007. Selling
      expense as a percentage of net sales was 19.8% in 2006 and 19.3% in 2007. The
      $0.1 million reduction in selling expense was primarily due to reduced personnel
      costs due to lower employee headcount.





**General
      and Administrative Expense.** General
      and administrative expense was $2.8 million in 2006 and $2.4 million in 2007.
      General and administrative expense as a percentage of net sales was 15.5% in
      2006 and 13.1% in 2007. In 2006 compared to 2007, general and administrative
      expense decreased $0.4 million primarily due to a reduction in personnel costs
      ($0.4 million) and legal, audit and consulting fees ($0.2 million), partially
      offset by the increase in facility expenses as a result of the sale and
      leaseback of our headquarters facility in late 2006 ($0.1 million).




**Research
      and Development Expense.** Research
      and development expense decreased from $2.2 million in 2006 to $1.8 million
      in
      2007. Research and development expense as a percentage of net sales decreased
      from 11.8% in 2006 to 9.9% in 2007. The $0.3 million decrease in research and
      development expense was primarily due to reduced personnel costs ($0.3
      million).





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




**Other
      Income (Expense).** Other
      income, net decreased to $0.2 million in 2007 from $2.3 million in 2006. The
      $2.3 million other income in 2006 included $2.1 million gain under an earn-out
      provision from the sale of our investment in Intermute in a prior year. We
      will
      not receive any additional similar payments.





I **ncome
      Tax Expense (Benefit).** We
      recorded a favorable $0.05 million net income tax benefit in 2006 resulting
      solely from changes in prior years’ estimates. We have not recognized any income
      tax benefits on our operating losses in 2007 and 2006 because we are in a net
      operating loss carry forward position and realization of such benefits is
      unlikely.




**Liquidity
      and Capital Resources**





On
      December 31, 2007 we had working capital of $7.7 million including $3.6 million
      in cash and cash equivalents. On December 31, 2006 we had working capital of
      $12.4 million including $7.8 million in cash and cash equivalents. Our current
      ratio at December 31, 2007 was 3.7 compared to 4.5 at December 31, 2006. A
      significant portion in the reduction of the current ratio was due to our 2007
      net loss of $3.5 million and the cash expenditure of $1.2 million for our June
      2007 investment in Unity Business Networks, LLC.





In
      2007
      operating activities used $3.0 million in cash. Our net loss in 2007 was $3.5
      million. Sources of cash from operations included a decrease in accounts
      receivable of $1.3 million, non-cash stock-based compensation of $0.2 million,
      non-cash depreciation and amortization expense of $0.1 million, and a decrease
      in inventories of $0.1 million. Uses of cash from operations included a decrease
      in accounts payable and accrued expense of $0.7 million and a non-cash gain
      on
      sale of real estate of $0.4 million.





In
      2007
      our net cash used by investing activities was $1.2 million, which included
      our
      investment in Unity Business Networks, LLC of $1.2 million





In
      2007
      there was no significant cash provided by or used in financing activities.





To
      conserve cash and manage our liquidity, we have implemented cost-cutting
      initiatives including the reduction of employee headcount and overhead costs.
      As
      of December 31, 2007 we had 64 full-time employees compared to 69 as of December
      31, 2006. We plan to continue to assess our cost structure as it relates to
      our
      revenues and cash position, and we may make further reductions if the actions
      are deemed necessary.





Management
      believes we have sufficient resources to fund our normal operations over the
      next 12 months, through at least December 31, 2008. However, if we are unable
      to
      increase our revenues, reduce or otherwise adequately control our expenses,
      or
      raise capital, our longer-term ability to continue as a going concern and
      achieve our intended business objectives could be adversely affected. See “Risk
      Factors” below, for further information with respect to events and uncertainties
      that could harm our business, operating results, and financial
      condition .





22




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




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





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





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





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





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




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




·
            DSL
                modems;




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




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




·
            other
                approaches, including wireless links to the
                Internet.




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




**We
      may not be able to maintain our listing on the Nasdaq Capital Market if we
      are
      unable to satisfy the minimum bid price requirements.**




Our
      stock
      is currently trading below $1.00 per share, which is below the Nasdaq $1.00
      minimum bid price requirement. Because our stock traded below $1.00 per share
      for 30 consecutive business days, on November 16, 2007 the Nasdaq Stock Market
      notified us that we are no longer in compliance with Marketplace Rule
      4310(c)(4). We were provided until May 14, 2008 to regain compliance. In order
      to regain compliance, the bid price of our common stock must meet or exceed
      $1.00 per share for a minimum of ten consecutive business days before that
      date.
      If we cannot demonstrate compliance with Rule 4310(c)(4) by May 14, 2008, the
      Nasdaq staff will determine whether we meet the Nasdaq Capital Market initial
      listing criteria set forth in Nasdaq Marketplace Rule 4310(c), except for the
      bid price requirement. If the Nasdaq determines that we meet the initial listing
      criteria, the Nasdaq staff will grant us an additional 180 calendar day
      compliance period. If we are not eligible for an additional compliance period,
      the Nasdaq staff will provide written notice that our securities will be
      delisted. At that time, we may appeal the determination to delist our securities
      to a Listing Qualifications Panel. A delisting of our shares could have a
      negative effect on the market price for our shares.




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





Relatively
      few customers have accounted for a substantial portion of our net sales. In
      2007, our net sales to three companies constituted 44% of our total net sales.
      Our customers generally do not enter into long-term agreements obligating them
      to purchase our products. We may not continue to receive significant revenues
      from any of these or from other large customers. Because of our significant
      customer concentration, our net sales and operating income could fluctuate
      significantly due to changes in political or economic conditions or the loss
      of,
      reduction of business with, or less favorable terms for any of our significant
      customers. For example, in 2006, DSL sales to our Turkish distributor, one
      of
      our large customers, declined significantly from $5.6 million in 2005 to $1.3
      million in 2006. We attribute this decline due to a number of factors including
      increased competition and plans by Turkish Telecom to dramatically increase
      their bundling of DSL modems with their service. We cannot guarantee that we
      will increase our sales to our Turkish distributor. A reduction or delay in
      orders from any of our significant customers, or a delay or default in payment
      by any significant customer could materially harm our business, results of
      operation and liquidity.





23




**Our
      reliance on a single manufacturer for a substantial percentage of our products
      could have an adverse effect on our business.**





We
      currently rely on a single manufacturer to manufacture a substantial portion
      of
      our products. The loss of the services of this manufacturer or an adverse change
      in the manufacturer’s business or our relationship could have a material adverse
      effect on our ability to manufacture our products and on our
      business.





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





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





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





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





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





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





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





We
      entered into a consignment arrangement with a significant retailer customer
      in
      October 2006. In connection with this arrangement ownership of all unsold
      products previously purchased from Zoom reverted to us in November 2006. Under
      the consignment arrangement we do not recognize revenue from the sale of a
      product until the retailer actually sells such product to its customer. The
      consignment arrangement also results in a delay in the dating of invoices,
      the
      recognition of accounts receivable, and the due dates for payment by the
      retailer for goods sold. If additional significant customers adopt similar
      arrangements or otherwise change the terms of sale, our business, results of
      operation and liquidity will be harmed.





24




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




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




·
            the
                current limited retail market for broadband modems;




·
            the
                relatively small number of cable, telecommunications and Internet
                service
                provider customers that make up the bulk of the market for broadband
                modems in certain countries, including the United States;




·
            the
                significant bargaining power of these large volume purchasers;




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




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





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





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




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




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




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




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




·
            bring
                products to market on a timely basis;




·
            introduce
                products that have competitive prices;




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




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




·
            meet
                changing industry standards.




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





25




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




Currently
      our business is significantly dependent on our operations outside the United
      States, particularly sales of our products and the production of most of our
      products. All of our manufacturing operations except our rework operations
      are
      now located outside of the United States. In 2006, sales outside North America
      were 44% of our net sales. In 2007, sales outside North America were 60% of
      our
      net sales. The inherent risks of international operations could harm our
      business, results of operation, and liquidity. Specifically, our manufacturing
      operations in Mexico are subject to the challenges and risks associated with
      international operations, including those related to integration of operations
      across different cultures and languages, currency risk, and economic, legal,
      political and regulatory risks. The types of risks faced in connection with
      international operations and sales include, among others:




·
                regulatory
                    and communications requirements and policy changes;




·
            favoritism
                toward local suppliers;




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




·
            local
                language and technical support requirements;




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




·
            cultural
                  differences;




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




·
            reduced
                protection for intellectual property rights in some
                countries;




·
            political
                and economic changes and disruptions;




·
            governmental
                currency controls;




·
            shipping
                costs;




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




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




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




·
            delays
                in the development of our products;




·
            numerous
                product returns; and




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





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




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




Due
      to
      rapid technological change and changing markets we are required to manage our
      inventory levels carefully to both meet customer expectations regarding delivery
      times and to limit our excess inventory exposure. In the event we fail to
      effectively manage our inventory our liquidity may be adversely affected and
      we
      may face increased risk of inventory obsolescence, a decline in market value
      of
      the inventory, or losses from theft, fire, or other casualty. We did not incur
      a
      significant inventory obsolescence charge in 2007 for inventory reserves related
      to obsolete and slow-moving products.





26




**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 and original design manufacturers for electronics
      manufacturing of most of 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
      electronics manufacturers for the bulk of our purchases, in some cases a given
      product is only provided by one of these companies. The loss of the services
      of
      any of our significant third party manufacturers or a material adverse change
      in
      the business of or our relationships with any of these manufacturers could
      harm
      our business. Since third parties manufacture our products and we expect this
      to
      continue in the future, our success will depend, in part, on the ability of
      third parties to manufacture our products cost effectively and in sufficient
      quantities to meet our customer demand.




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




·
            reduced
                management and control of component purchases;




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




·
            lack
                of adequate capacity during periods of excess demand;




·
            limited
                warranties on products supplied to us;




·
            potential
                increases in prices;




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




·
            misappropriation
                of our intellectual property.





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




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




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




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.





**New
      environmental regulations may increase our manufacturing costs and harm our
      business.**





The State
      of
      California and other states have implemented regulations requiring the use of highly efficient power cubes.
      These
      new requirements will affect many of
      our products and will
      typically result
      in an increase of
      $0.20
      to $0.70 in our cost to produce those products that use U.S. power cubes. This
      is expected to reduce our gross margin for those products .




27


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




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




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





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




VoIP
      services currently have different regulations from traditional telephony in
      most
      countries including the US. The US, various states and other countries may
      impose surcharges, taxes or new regulations upon providers of VoIP services.
      The
      imposition of any such surcharges, taxes and regulations on VoIP services could
      materially increase our costs, may limit or eliminate our competitive pricing
      and may require us to restructure the VoIP services we currently offer. For
      example, regulations requiring compliance with the Communications Assistance
      for
      Law Enforcement Act (CALEA) or provision of the same type of 911 services as
      required for traditional telecommunications providers could place a significant
      financial burden on us depending on the technical changes required to
      accommodate the requirements.




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




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




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




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




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




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




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





28




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





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





29


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





**ZOOM
      TECHNOLOGIES, INC.**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES**





PageIndex
                to Consolidated Financial Statements
            35Report
                of Independent Registered Public Accounting Firm
            36Consolidated
                Balance Sheets as of December 31, 2006 and 2007
            37Consolidated
                Statements of Operations for the years ended December 31, 2006 and
                2007
            38Consolidated
                Statements of Stockholders' Equity and Comprehensive Income (Loss)
                for the
                years ended December 31, 2006, and 2007
            39Consolidated
                Statements of Cash Flows for the years ended December 31, 2006 and
                2007
            40Notes
                to Consolidated Financial Statements
            41-51Schedule
                II: Valuation and Qualifying Accounts for the years ended December
                31,
                2006 and 2007
            52





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





None





**ITEM
      9A - CONTROLS AND PROCEDURES**





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





As
      of
      December 31, 2007 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.





Our
      management is responsible for establishing and maintaining adequate internal
      controls over financial reporting, as such term is defined in Rules 13a-15(f)
      and 15d-15(f) under the Securities Act of 1934. Under the supervision and with
      the participation of our management, including our Chief Executive Officer
      and
      Chief Financial Officer, we conducted an evaluation of the effectiveness of
      our
      internal control over financial reporting. In making its assessment of internal
      control over financial reporting, management used criteria issued by the
      Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
      Internal Control-Integrated Framework. Based on our evaluation under such
      framework, our management concluded that our internal control over financial
      reporting was effective as of December 31, 2007





This
      annual report does not include an attestation report of our independent
      registered public accounting firm regarding internal control over financial
      reporting pursuant to temporary rules of the Securities and Exchange Commission
      that permit us to provide only management's report in this annual
      report.





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





**PART
      III**





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





Information
      required by this item appears under the caption "Our Executive Officers" in
      Part
      1, Item 1 — Business, and under the captions "Election of Directors",
      "Board of Directors”, "Code of Ethics" and "Section 16(a) Beneficial Ownership
      Compliance " in our definitive proxy statement for our 2008 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.





30




**ITEM
      11 - EXECUTIVE COMPENSATION**





Information
      required by this item appears under the captions "Executive Compensation,"
      and
      "Directors' Compensation", in our definitive proxy statement for our 2008 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, 2007
      regarding the shares of our common stock available for grant or granted under
      stock option plans that (i) were approved by our stockholders, and (ii) were
      not
      approved by our stockholders.





**Equity
      Compensation Plan Information** .





**Number Of Securities****To Be Issued Upon****Exercise Of****Outstanding Options**
            
            **Weighted-AverageExercise****Price Of Outstanding****Options**
            
            **Number Of Securities****Remaining Available For****Future Issuance Under Equity****Compensation Plans(excluding****securities reflected incolumn (a))****Plan Category**
            
            **(a)**
            
            **(****b)**
            
            **(c)****Equity
                compensation plans approved by security
                holders(1)**
            
            
            **874,000**
            
            **$**
            **1.72**
            
            
            **2,145,646****Equity
                compensation plans not approved by security
                holders(2)**
            
            
            **510,750**
            
            **$**
            **1.90**
            
            
            **1,673,050****Total:**
            
            
            **1,384,750**
            
            **$**
            **1.79**
            
            
            **3,818,696**





(1)
            Includes
                the following plans: 1990 Employee Stock Option Plan and 1991 Directors
                Stock Option Plan, each as amended. Please see note 9 to our consolidated
                financial statements for a description of these
                plans.





(2)
            Includes
                the 1998 Employee Equity Incentive Plan, as amended. The purposes
                of the
                1998 Employee Equity Incentive Plan (the "1998 Plan"), adopted by
                the
                Board of Directors in 1998, are to attract and retain employees and
                provide an incentive for them to assist us in achieving our long-range
                performance goals, and to enable such employees to participate in
                our
                long-term growth. In general, under the 1998 Plan, all employees
                who are
                not officers or directors are eligible to participate in the 1998
                Plan.
                The 1998 Plan is currently administered by the Compensation Committee
                of
                the Board of Directors. Participants in the 1998 Plan are eligible
                to
                receive non-qualified stock options at an option price determined
                by the
                Stock Option Committee. All stock options granted under the 1998
                Plan have
                been granted for at least the fair market value on the date of grant.
                A
                total of 2,700,000 shares of our common stock have been authorized
                for
                issuance under the 1998 Plan.





The
      additional information required by this item is incorporated by reference to
      the
      section entitled "Security Ownership of Certain Beneficial Owners and Management
      " in our definitive proxy statement for our 2008 annual meeting of stockholders
      to be filed with the SEC within 120 days after the close of our fiscal
      year.





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





Any
      information required by this item may appear under the caption "Certain
      Relationships and Related Transactions" and “Board of Directors” in our
      Definitive Proxy Statement for our 2008 annual meeting of Stockholders to be
      filed with the SEC within 120 days after the close of our fiscal year and is
      incorporated herein by reference.




31




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





Information
      required by this item appears under the caption “Principal Accountant Fees and
      Services” in our Definitive Proxy Statement for our 2008 annual meeting of
      stockholders to be filed with the SEC within 120 days after the close of our
      fiscal year and is incorporated herein by reference.





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





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





**PART
      IV**





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





(a)
            
            Financial
                Statements, Schedules and Exhibits:(1),(2)
            The
                consolidated financial statements and required schedules are indexed
                on
                page F-1.(3)
            Exhibits
                required by the Exhibit Table of Item 601 of SEC Regulation S-K.
                (Exhibit
                numbers refer to numbers in the Exhibit Table of Item
                601.)3.1
            Certificate
                of Incorporation, filed as Exhibit 3.1 to Zoom Technologies, Inc.
                Current
                Report on Form 8-K dated February 28, 2002, filed with the Commission
                on
                March 4, 2002 (the "March 2002 Form 8-K"). *3.2
            By-Laws
                of Zoom Technologies, Inc., filed as Exhibit 3.2 to the March 2002
                Form
                8-K. ***10.1
            1990
                Stock Option Plan, as amended******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 amended10.4
            Form
                of Indemnification Agreement, filed as Exhibit 10.6 to the June 1996
                Form
                10-Q. ***10.5
            Form
                of Non-Qualified Stock Option Agreement for Executive Officers, filed
                as
                Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal
                year ended December 31, 2004..***10.6
            Summary
                of Directors' Compensation, filed as Exhibit 10.10 to the Company’s Annual
                Report on Form 10-K for the fiscal year ended December 31,
                2004.*10.7
            Letter
                agreement dated August 4, 2006, filed as Exhibit 10.1 to the Company’s
                Quarterly Report on Form 10-Q for the quarter ended June 30,
                2006.*10.8
            Purchase
                and Sale Agreement dated August 31, 2006, filed as Exhibit 10.1 to
                the
                Company’s Current Report on Form 8-K on September 20,
                2006.***10.9
            Form
                of Non-Qualified Stock Option Agreement for Named Executive Officers,
                filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on
                December 12, 2006.*10.10
            Standard
                lease by and between 201-207 South Street LLC and Zoom Technologies,
                Inc.
                on December 22, 2006 to lease space for 24 months for headquarters
                offices.**10.11
            Change
                of Control and Severance Agreement between the Company and Frank
                B.
                Manning dated as of 12/28/06, filed as Exhibit 10.1 to the Company’s
                Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.***10.12
            Change
                of Control and Severance Agreement between the Company and Peter
                R. Kramer
                dated as of 12/28/06, filed as Exhibit 10.2 to the Company’s Quarterly
                Report on Form 10-Q for the quarter ended March 31,
                2007.***10.13
            Change
                of Control and Severance Agreement between the Company and Robert
                A. Crist
                dated as of 4/27/07, filed as Exhibit 10.3 to the Company’s Quarterly
                Report on Form 10-Q for the quarter ended March 31,
                2007.*




32




**10.14
            Change
                of Control and Severance Agreement between the Company and Deena
                Randall
                dated as of 4/27/07, filed as Exhibit 10.4 to the Company’s Quarterly
                Report on Form 10-Q for the quarter ended March 31,
                2007.***10.15
            Change
                of Control and Severance Agreement between the Company and Terry
                Manning
                dated as of 4/27/07, filed as Exhibit 10.5 to the Company’s Quarterly
                Report on Form 10-Q for the quarter ended March 31,
                2007.*10.16
            Series
                A Preferred Share Purchase Agreement, dated July 25, 2007, by and
                between
                Unity Business Networks, L.L.C. and Zoom Technologies, Inc., filed
                as
                Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
                quarter ended June 30, 2007.*10.17
            Option
                Agreement, dated July 25, 2007, by and among Unity Business Networks,
                L.L.C., Zoom Technologies, Inc., and each of the members of Unity
                listed
                on the signature page thereto., filed as Exhibit 10.2 to the Company’s
                Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.*10.18
            Investor
                Rights Agreement, dated July 25, 2007, by and among Unity Business
                Networks, L.L.C., Zoom Technologies, Inc., and each of the holders
                of
                Unity’s Common Interests listed on the signature page thereto, filed as
                Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the
                quarter ended June 30, 2007.*10.19
            Second
                Amended and Restated Operating Agreement of Unity Business Networks,
                L.L.C., dated July 25, 2007, filed as Exhibit 10.4 to the Company’s
                Quarterly Report on Form 10-Q for the quarter ended June 30,
                2007.*10.20
            Convertible
                Note Purchase Agreement, dated as of January 22, 2008, by and between
                Zoom
                Technologies, Inc. and RedMoon, Inc., filed as Exhibit 10.1 to the
                Company’s Current Report on Form 8-K on January 29, 2008.*10.21
            Form
                of 6% Convertible Note, filed as Exhibit 10.2 to the Company’s Current
                Report on Form 8-K on January 29, 2008.*10.22
            Option
                Agreement, dated as of January 22, 2008, by and among Zoom Technologies,
                Inc., RedMoon, Inc. and certain stockholders of RedMoon, Inc., filed
                as
                Exhibit 10.3 to the Company’s Current Report on Form 8-K on January 29,
                2008.*10.23
            Security
                Agreement, dated as of January 22, 2008, by and between Zoom Technologies,
                Inc. and RedMoon, Inc. , filed as Exhibit 10.4 to the Company’s Current
                Report on Form 8-K on January 29, 2008.*10.24
            Voting
                Agreement, dated as of January 22, 2008, by and among Zoom Technologies,
                Inc., RedMoon, Inc. and certain stockholders of RedMoon, Inc. , filed
                as
                Exhibit 10.5 to the Company’s Current Report on Form 8-K on January 29,
                2008.*21.
            Subsidiaries,
                filed as Exhibit 21 to the Company's Annual Report on Form 10-K for
                the
                fiscal year ended December 31, 2000. *23.1
            Consent
                of Independent Registered Public Accounting Firm.31.1
            CEO
                Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
                of
                2002.31.2
            CFO
                Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
                of
                2002.32.1
            CEO
                Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.32.2
            CFO
                Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.





*
            In
                accordance with Rule 12b-32 under the Securities Exchange Act of
                1934, as
                amended, reference is made to the documents previously filed with
                the
                Securities and Exchange Commission, which documents are hereby
                incorporated by reference.**
            Compensation
                Plan or Arrangement.(b)
            
            Exhibits
                - See Item 15 (a) (3) above for a list of Exhibits incorporated herein
                by
                reference or filed with this
                Report.




33




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





**SIGNATURES**





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





**ZOOM
                TECHNOLOGIES, INC.**
              **(Registrant)****Date:
                March 26, 2008**
            **By:**
            **/s/
                Frank B. Manning****Frank
                B. Manning, President**





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





**Signature**
            
            **Title**
            **Date****/s/
                Frank B. Manning**
            
            **Principal
                Executive Officer and Chairman of the Board**
            **March
                26, 2008****Frank
                B. Manning****/s/
                Robert A. Crist**
            
            **Principal
                Financial and Accounting Officer**
            **March
                26, 2008****Robert
                A. Crist****/s/
                Peter R. Kramer**
            
            **Director**
            **March
                26, 2008****Peter
                R. Kramer****/s/
                Bernard Furman**
            
            **Director**
            **March
                26, 2008****Bernard
                Furman****/s/
                J. Ronald Woods**
            
            **Director**
            **March
                26, 2008****J.
                Ronald Woods****/s/
                Joseph Donovan**
            
            **Director**
            **March
                26, 2008****Joseph
                Donovan**




34




**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES**





PageReport
                of Independent Registered Public Accounting Firm
            
            36Consolidated
                Balance Sheets as of December 31, 2006 and 2007
            
            37Consolidated
                Statements of Operations for the years ended December 31 2006, and
                2007
            
            38Consolidated
                Statements of Stockholders' Equity and Comprehensive Income (Loss)
                for the
                years ended December 31, 2006 and 2007
            
            39Consolidated
                Statements of Cash Flows for the years ended December 31, 2006 and
                2007
            
            40Notes
                to Consolidated Financial Statements
            
            41-51Schedule
                II: Valuation and Qualifying Accounts for the years ended December
                31,
                2006 and 2007
            
            52




35





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





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, 2007 and 2006, and the related consolidated
      statements of operations, stockholders' equity and comprehensive income (loss),
      and cash flows for the years then ended. Our audits also included the financial
      statement schedule. The Company's management is responsible for these
      consolidated financial statements and schedule. Our responsibility is to express
      an opinion on these consolidated financial statements and schedule based on
      our
      audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of the Company’s internal control
      over financial reporting. An audit includes consideration of internal control
      over financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, 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, 2007 and 2006, and the results of their operations
      and their cash flows for the years then ended in conformity with accounting
      principles generally accepted in the United States of America. Also, in our
      opinion, the related financial statement schedule, when considered in relation
      to the basic financial statements taken as a whole, presents fairly, in all
      material respects, the information set forth therein.





As
      discussed in Note 2 , effective January 1, 2007, the Company adopted FIN 48,
      “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB
      Statement No. 109.”




/s/
                UHY LLPBoston,
                Massachusetts
              March
                26, 2008




36




**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEETS**





**December
                31,****2006**
            
            
            **2007****ASSETS***Current
                assets*Cash
                and cash equivalents
            
            $
            7,833,046
            
            $
            3,647,654Accounts
                receivable, net of allowances of $915,969 in 2006and
                $1,400,803 in 2007
            
            
            3,385,280
            
            
            2,128,888Inventories
            
            
            4,511,814
            
            
            4,452,503Prepaid
                expense and other current assets
            
            
            269,301
            
            
            336,424Total
                current assets
            
            
            15,999,441
            
            
            10,565,469Equipment
                and leasehold improvements, net
            
            
            249,221
            
            
            172,070Investment
                in Unity Business Networks, LLC.
            
            
            -
            
            
            1,178,709Total
                assets
            
            $
            16,248,662
            
            $
            11,916,248**LIABILITIES
                AND STOCKHOLDERS' EQUITY***Current
                liabilities*Accounts
                payable
            
            $
            2,639,935
            
            $
            2,079,325Accrued
                expense
            
            
            562,349
            
            
            415,468Deferred
                gain on sale of real estate
            
            
            367,245
            
            
            340,913Total
                current liabilities
            
            
            3,569,529
            
            
            2,835,706Deferred
                gain on sale of real estate
            
            
            357,373
            
            
            -Total
                liabilities
            
            
            3,926,902
            
            
            2,835,706Commitments
                and Contingencies (note 7)*Stockholders'
                equity*Common
                stock, $0.01 par value:Authorized
                - 25,000,000 shares; issued – 9,355,366 shares, including shares held
                in treasury
            
            
            93,554
            
            
            93,554Additional
                paid-in capital
            
            
            31,275,169
            
            
            31,507,393Accumulated
                deficit
            
            
            (19,597,296
            )
            
            (23,100,390
            )Accumulated
                other comprehensive income –currency translation
                adjustment
            
            
            557,655
            
            
            587,307Treasury
                stock (8,400 shares), at cost
            
            
            (7,322
            )
            
            (7,322
            )Total
                stockholders' equity
            
            
            12,321,760
            
            
            9,080,542Total
                liabilities and stockholders' equity
            
            $
            16,248,662
            
            $
            11,916,248





See
      accompanying notes.





37




**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**Years
      Ended December 31, 2006 and 2007**








**2006**
            
            **2007**Net
                sales
            
            $
            18,322,301
            
            $
            18,477,532Cost
                of goods sold
            
            
            15,720,574
            
            
            14,746,978Gross
                profit
            
            
            2,601,727
            
            
            3,730,554Operating
                expenses:Selling
            
            
            3,631,340
            
            
            3,557,928General
                and administrative
            
            
            2,846,862
            
            
            2,423,829Research
                and development
            
            
            2,157,529
            
            
            1,825,0188,635,731
            
            
            7,806,776Operating
                profit (loss) before gain on sale of real estate
            
            
            (6,034,004
            )
            
            (4,076,221
            )Gain
                on sale of real estate
            
            
            4,752,625
            
            
            383,404Operating
                profit (loss)
            
            
            (1,281,379
            )
            
            (3,692,817
            )Other
                :Interest
                income
            
            
            226,015
            
            
            229,523Interest
                expense
            
            
            (306,867
            )
            
            -Gain
                on sale of investment in Intermute, Inc.
            
            
            2,105,433
            
            
            -Other,
                net
            
            
            233,515
            
            
            (39,800
            )Total
                other income, net
            
            
            2,258,096
            
            
            189,723Income
                (loss) before income taxes
            
            
            976,717
            
            
            (3,503,094
            )Income
                taxes (benefit)
            
            
            (53,405
            )
            
            -Net
                income (loss)
            
            $
            1,030,122
            
            $
            (3,503,094
            )Basic
                and diluted net income (loss) per share
            
            $
            0.11
            
            $
            (0.37
            )Weighted
                average common and common equivalent shares:Basic
            
            
            9,346,966
            
            
            9,346,966Diluted
            
            
            9,349,381
            
            
            9,346,966





See
      accompanying notes.




38




**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


**AND
      COMPREHENSIVE INCOME (LOSS)**




**Common Stock**
            
            **AdditionalPaid In**
              **Capital**
            
            **AccumulatedDeficit**
            
            **Accumulated OtherComprehensive****Income (A)**
            
            **Treasury Stock**
            
            **Total Stockholders'**
              **Equity****Shares**
            
            **Amount**
            
            
            
            
            
            
            
            **Shares**
            
            **Amount**Balance
                at December 31,2005
            
            
            9,355,366
            
            $
            93,554
            
            $
            31,015,977
            
            $
            (20,627,318
            )
            $
            393,245
            
            
            8,400
            
            $
            (7,322
            )
            $
            10,868,136Net
                income (loss)
            
            
            -
            
            
            -
            
            
            -
            
            
            1,030,022
            
            
            -
            
            
            -
            
            
            -
            
            
            1,030,022Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            164,410
            
            
            -
            
            
            -
            
            
            164,410Comprehensive
                income (loss)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,194,432Stock
                based compensation
            
            
            -
            
            
            -
            
            
            259,192
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            259,192Balance
                at December 31,2006
            
            
            9,355,366
            
            
            93,554
            
            
            31,275,169
            
            
            (19,597,296
            )
            
            557,655
            
            
            8,400
            
            
            (7,322
            )
            
            12,321,760Net
                income (loss)
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,503,094
            )
            
            -
            
            
            -
            
            
            -
            
            
            (3,503,094
            )Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            29,652
            
            
            -
            
            
            -
            
            
            29,652Comprehensive
                income (loss)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,473,442
            )Stock
                based compensation
            
            
            -
            
            
            -
            
            
            232,224
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            232,224Balance
                at December 31,2007
            
            
            9,355,366
            
            $
            93,554
            
            $
            31,507,393
            
            $
            (23,100,390
            )
            $
            587,307
            
            
            8,400
            
            $
            (7,322
            )
            $
            9,080,542





(A)
      Consists exclusively of foreign currency translation adjustments.





See
      accompanying notes.




39





**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Years
      Ended December 31, 2006 and 2007**





**2006**
            
            **2007**Operating
                activities:Net
                income (loss)
            
            $
            1,030,023
            
            $
            (3,503,094
            )Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:Gain
                on sale of investment in Intermute, Inc.
            
            
            (2,105,433
            )
            
            -Gain
                on sale of real estate
            
            
            (4,752,625
            )
            
            (383,704
            )Depreciation
                and amortization
            
            
            140,540
            
            
            85,432Stock
                based compensation
            
            
            259,192
            
            
            232,224Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (629,677
            )
            
            1,278,407Inventories
            
            
            573,902
            
            
            62,913Prepaid
                expense and other current assets
            
            
            37,084
            
            
            (65,789
            )Accounts
                payable and accrued expense
            
            
            (702,546
            )
            
            (705,522
            )Net
                cash provided by (used in) operating  activities
            
            
            (6,149,540
            )
            
            (2,999,133
            )Investing
                activities:Proceeds
                from sale of investment in Intermute, Inc.
            
            
            2,105,433
            
            
            -Proceeds
                from sale of real estate
            
            
            7,733,970
            
            
            -Investment
                in Unity Business Networks, LLC
            
            
            -
            
            
            (1,178,709
            )Purchases
                of property, plant and equipment
            
            
            (43,643
            )
            
            (7,927
            )Net
                cash provided by (used in) investing activities
            
            
            9,795,760
            
            
            (1,186,636
            )Financing
                activities:Repayment
                of long-term debt
            
            
            (4,889,929
            )
            
            -Net
                cash provided by (used in) financing activities
            
            
            (4,889,929
            )
            
            -Effect
                of exchange rate changes on cash
            
            
            (4,367
            )
            
            377Net
                change in cash
            
            
            (1,248,076
            )
            
            (4,185,392
            )Cash
                and cash equivalents at beginning of year
            
            
            9,081,122
            
            
            7,833,046Cash
                and cash equivalents at end of year
            
            $
            7,833,046
            
            $
            3,647,654





See
      accompanying notes.





40


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements**


**Years
      Ended December 31, 2006 and 2007**





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


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





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


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


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





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





*(b)
      Principles of Consolidation*


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





*(c)
      Cash and Cash Equivalents*


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





*(d)
      Inventories*


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





*(e)
      Equipment and Leasehold Improvements*


Equipment
      and leasehold improvements are stated at cost, less accumulated depreciation
      and
      amortization. Depreciation of equipment is provided using the straight-line
      method over the estimated useful lives of the assets. Amortization of leasehold
      improvements is provided using the straight-line method over the estimated
      useful lives of the improvement or lease term whichever is shorter.





*(f)
      Impairment of Long-Lived Assets*


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





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





*(g)
      Income Taxes*


Deferred
      income taxes are provided on the differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases and on net operating loss and tax credit carry forwards. Deferred income
      tax assets and liabilities are measured using enacted tax rates expected to
      apply to taxable income in the years in which those temporary differences are
      expected to be recovered or settled. The effect on deferred income tax assets
      and liabilities of a change in tax rates is recognized in income in the period
      that includes the enactment date. A valuation allowance is provided for that
      portion of deferred income tax assets not expected to be realized.




Effective
      January 1, 2007, the Company adopted FIN 48, “Accounting for Uncertainty in
      Income Taxes – an Interpretation of FASB Statement No. 109.” As of that
      date and as of December 31, 2007 the Company had no material unrecognized income
      tax benefits. Further, no significant changes in the unrecognized income tax
      benefits are expected to occur over the next year.





41




Historically
      the Company has not accrued or paid significant interest and penalties for
      underpayments of income taxes. Interest and penalties related to such
      underpayments would be classified as a component of income tax expense. No
      material amounts of interest or penalties for underpayments of income taxes
      were
      required to be accrued as of December 31, 2007.





The
      Company files income tax returns in the United States and the United Kingdom.
      Years subsequent to 2002 are open for U.S. Federal and state income tax
      reporting and years subsequent to 2004 are open in the United
      Kingdom.





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


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





**2006**
            
            **2007**Weighted
                average shares outstanding – used to compute basic earnings (loss)
                per share
            
            
            9,346,966
            
            
            9,346,966Net
                effect of dilutive potential common sharesoutstanding,
                based on the treasury stock method
            
            
            2,415
            
            
            -Weighted
                average shares outstanding – used to compute diluted earnings (loss)
                per share
            
            
            9,349,381
            
            
            9,346,966





Potential
      common shares for which inclusion would have the effect of increasing diluted
      earnings per share (i.e., anti-dilutive) are excluded from the computation.
      The
      dilutive effect of options to purchase 1,384,750 shares of common stock at
      December 31, 2007 were outstanding, but not included in the computation of
      diluted earnings per share as their effect would be anti-dilutive.





*(i)
      Revenue Recognition*


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





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





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





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





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





42




The
      Company accounts for point-of-sale taxes on a net basis.





*(j)
      Financial Instruments*


Financial
      instruments consist of cash and cash equivalents, accounts receivable, accounts
      payable, and accrued expenses. Due to the short term nature payment terms
      associated with these instruments, their carrying amounts approximate fair
      value. It is not practicable to estimate the fair value of the Company’s
      investment in Unity Business Networks, LLC.





*(k)
      Stock-Based Compensation*


Compensation
      cost for awards granted after January 1, 2006 is generally recognized over
      the
      required service period based on the estimated fair value of the awards on
      their
      grant date. Fair value is determined using the Black Scholes option-pricing
      model. Compensation cost for unvested awards granted prior to January 1, 2006
      is
      recognized using the modified-prospective method. Under this method, the same
      estimate of the grant date fair value and the same attribution method used
      to
      determine the pro forma disclosures under SFAS No. 123 (R) , “Accounting for
      Stock Based Compensation” are used to recognize compensation cost.




*(l)
      Advertising Costs*


Advertising
      costs are expensed as incurred and reported in selling expense in the
      accompanying consolidated statements of operations and include costs of
      advertising, production, trade shows, and other activities designed to enhance
      demand for the Company's products. There are no deferred advertising costs
      in
      the accompanying consolidated balance sheets.





*(m)
      Foreign Currencies*


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





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





*(n)
      Warranty Costs*


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





*(o)
      Shipping and Freight Costs*


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




**(3)
      LIQUIDITY**





As
                of December 31, 2007 the Company had working capital of $7.7 million
                including $3.6 million in cash equivalents. On December 31, 2006
                the
                Company had working capital of $12.4 million including $7.8 million
                in
                cash and cash equivalents. The Company’s current ratio at December 31,
                2007 was 3.7 compared to 4.5 at December 31, 2006. A significant
                portion
                in the reduction of working capital and the corresponding current
                ratio
                was due to our 2007 net loss of $3.5 million and the cash expenditure
                of
                $1.2 million for our June 2007 investment in Unity Business Networks,
                LLC.





In
      2007
      the Company’s operating activities used $3.0 million in cash. Its net loss in
      2007 was $3.5 million. Sources of cash from operations included a decrease
      in
      accounts receivable of $1.3 million, non-cash stock-based compensation of $0.2
      million, non-cash depreciation and amortization expense of $0.1 million, and
      a
      decrease in inventories of $0.1 million. Uses of cash from operations included
      a
      decrease in accounts payable and accrued expense of $0.7 million and a non-cash
      gain on sale of real estate of $0.4 million.





In
                2007 the Company’s net cash used by investing activities was $1.2 million,
                which included the cost of its investment in Unity Business Networks,
                LLC.
                of $1.2 million





In
      2007
      there was no significant cash provided by or used in the Company’s financing
      activities.





To
      conserve cash and manage liquidity, the Company has implemented cost cutting
      initiatives including the reduction of employee headcount and overhead costs.
      The Company’s total headcount of full-time employees, including temporary
      workers, went from 127 on December 31, 2005 to 64 on December 31, 2007. Of
      the
      decline of 63 employees, 47 were related to the outsourcing of our final
      assembly manufacturing operation to Mexico. The dedicated manufacturing
      personnel in Mexico are employees of the Company’s Mexican manufacturing service
      provider and not included in its 2007 headcount. Of the 64 employees on December
      31, 2007, 14 were engaged in research and development, 18 were involved in
      manufacturing oversight, purchasing, assembly, packaging, shipping and quality
      control, 21 were engaged in sales, marketing and technical support, and the
      remaining 11 performed accounting, administrative, management information
      systems, and executive functions. The Company plans to continue to assess its
      cost structure as it relates to revenues and cash position, and the Company
      may
      make further reductions if the actions are deemed necessary.





43




The
      Company's total current assets at December 31, 2007 were $10.6 million and
      current liabilities were $2.8 million. The Company did not have any long-term
      debt at December 31, 2007. Management believes it has sufficient resources
      to
      fund its planned operations through at least December 31, 2008. However, if
      the
      Company is unable to increase its revenues, reduce its expense, or raise capital
      the Company's longer-term ability to continue as a going concern and achieve
      its
      intended business objectives could be adversely affected.





**(4)
      NEW ACCOUNTING PRONOUNCEMENTS**





In
      September 2006, the Financial Accounting Standard Board ("FASB") issued SFAS
      No. 157, Fair Value Measurements ("SFAS 157") which defines fair
      value, establishes a framework and gives guidance regarding the method used
      for
      measuring fair value, and expands disclosures about fair value measurements.
      SFAS 157 requires companies to disclose the fair value of their financial
      instruments according to a fair value hierarchy, as defined, and may require
      companies to provide additional disclosures based on that hierarchy.
      SFAS 157 is effective for financial statements issued for fiscal years
      beginning after November 15, 2007, and interim periods within those fiscal
      years. The Company is currently assessing the effect that SFAS 157 may have
      on its consolidated financial statements.





In
      February 2007, the FASB issued SFAS 159, The Fair Value Option for
      Financial Assets and Liabilities—Including an amendment of FASB Statement
      No. 115 ("SFAS 159"). SFAS 159 expands the use of fair value
      accounting but does not affect existing standards which requires assets or
      liabilities to be carried at fair value. The objective of SFAS 159 is to
      improve financial reporting by providing companies with the opportunity to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions. Under SFAS 159, a company may elect to use fair value to
      measure eligible items at specified election dates and report unrealized gains
      and losses on items for which the fair value option has been elected in earnings
      at each subsequent reporting date. Eligible items include, but are limited
      to,
      accounts receivable, accounts payable, and issued debt. If elected,
      SFAS 159 is effective for fiscal years beginning after November 15,
      2007. The Company is currently evaluating the effect of adopting SFAS 159
      on its consolidated financial statements.





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
      Combinations ("SFAS 141(R)"). SFAS 141(R) establishes principles and
      requirements for how an acquirer recognizes and measures in its financial
      statements the identifiable assets acquired, the liabilities assumed, any
      non-controlling interest in the acquiree and the goodwill acquired.
      SFAS 141(R) also establishes disclosure requirements to enable the
      evaluation of the nature and financial effects of the business combination.
      SFAS 141(R) is effective for fiscal years beginning after December 15,
      2008. The Company will adopt SFAS 141(R) in the first quarter of 2009 and
      apply its provisions to any acquisition after the adoption date.





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


Inventories
      consist of the following at December 31:





**2006**
            
            **2007**Materials
            
            $
            2,969,375
            
            $
            2,913,556Work
                in process
            
            
            522,307
            
            
            189,295Finished
                goods (including $563,000 held by a customer at December 31, 2006)
            
            
            1,020,132
            
            
            1,349,652Total
            
            $
            4,511,814
            
            $
            4,452,503





44


**(6)**  **EQUIPMENT AND LEASEHOLD IMPROVEMENTS**


Equipment
      and leasehold improvements consist of the following at December 31:




**2006**
            
            **2007**
            
            **Estimated**
              **Useful
                lives in years**Leasehold
                improvements
            
            $
            6,100
            
            $
            6,216
            
            
            5Computer
                hardware and software
            
            
            3,706,110
            
            
            3,716,257
            
            
            3Machinery
                and equipment
            
            
            1,905,434
            
            
            1,906,949
            
            
            5Molds,
                tools and dies
            
            
            1,607,669
            
            
            1,624,899
            
            
            5Office
                furniture and fixtures
            
            
            277,337
            
            
            277,337
            
            
            5$
            7,502,650
            
            $
            7,531,658Accumulated
                depreciation and amortization
            
            
            (7,253,429
            )
            
            (7,359,588
            )Equipment
                and leasehold improvements, net
            
            $
            249,221
            
            $
            172,070








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


*(a)
      Lease Obligations*


The
      Company leases its headquarters’ offices in Boston, Massachusetts, a
      manufacturing facility in Tijuana, Mexico, and a sales office facility in Fleet,
      United Kingdom. In December 2006, the Company sold its owned headquarters
      buildings in Boston, Massachusetts and leased back 25,000 square feet for two
      years expiring December 2008 (see Note 8). In September 2006 the Company moved
      out of its leased manufacturing facility in Boston, Massachusetts and moved
      into
      a leased manufacturing facility in Tijuana, Mexico. In August 2006 the Company
      signed a lease for a 35,575 square foot manufacturing and warehousing facility
      in Tijuana, Mexico with an initial lease term from October 2006 to May 2007,
      with five two-year options thereafter. In February 2007 the Company renegotiated
      the first renewal term and signed a one-year extension starting in May 2007,
      with five two-year options thereafter. The Company received verbal approval
      from
      the landlord and expects to sign another one-year extension starting in May
      2008. In the event this lease is not further extended, the Company believes
      it
      will be able to find alternative space that is suitable and adequate for our
      manufacturing and warehousing operations.





In
      September 2005 the Company entered into a two year office lease consisting
      of
      2,400 square feet at 2 Kings Road, Fleet, Hants, U.K for its U.K. sales office.
      In September 2007 the lease was continued on a month-to-month basis with a
      3
      month cancellation notice required by the Company or the landlord. In the event
      this lease is not further extended, the Company believes it will be able to
      find
      alternative space that is suitable and adequate for its U.K. sales
      office.





In
      September 2002 the Company entered into a five-year lease, as a tenant, for
      approximately 3,500 square feet at 950 Broken Sound Parkway NW, Boca Raton,
      Florida, primarily for use as a technical support facility. In September 2007
      the term of the lease expired and the Company moved its Florida-based customer
      service organization to its headquarters location in Boston,
      Massachusetts.





Rent
      expense for all of the Company's leases was $711,637 in 2007 and $628,221 in
      2006.





As
      of
      December 31, 2007, the Company's estimated future minimum committed rental
      payments, excluding  executory
      costs, under the operating leases described above to their expiration are
      $608,530 for 2008 and  $75,575
      for 2009.





*(b)
      Contingencies*


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





*(c)
      Concentrations*


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





45




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





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





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





In
      December 2006, the Company sold real estate housing its corporate headquarters
      and concurrently entered  into a leaseback arrangement for a portion of the
      property. The leaseback arrangement is for two years. Net  proceeds from
      the sale were $7,733,970 of which a portion was used to retire related
      outstanding mortgage  debt. A gain of $5,477,243 was realized on the sale.
      However, a portion of the gain ($724,618) has been  deferred and is being
      recognized in operations over the term of the lease (2007 - $383,704 and 2008
      -
 $340,914). The gain initially deferred is the estimated present value of
      the minimum lease payments under  the leaseback arrangement. The gain
      recognized in operations in 2006 and 2007 was $4,752,625 and  $383,404,
      respectively. The Company’s lease expires in December 2008. A renewal of the
      Company’s  current lease may require an increase in the rent. The Company
      would likely move its headquarters  to a new location in the same general
      area of Boston to avoid a material increase in the rent. In the  event this
      lease is not further extended, the Company believes it will be able to find
      alternative space that is  suitable and adequate for its headquarters
      operation.





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


At
      December 31, 2007 the Company had three stock option plans as described
      below.





*1990
      Employee Stock Option Plan*


The
      1990
      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 4,800,000 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. Option activity under
      this plan follows:




**Number of shares**
            
            **Weighted average**
              **exercise
                price**Balance
                at December 31, 2005
            
            
            636,000
            
            $
            2.21Granted
            
            
            335,000
            
            $
            1.03Exercised
            
            
            -
            
            
            -Expired
            
            
            (301,000
            )
            $
            1.95Balance
                at December 31, 2006
            
            
            670,000
            
            $
            1.74Granted
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            -Balance
                at December 31, 2007
            
            
            670,000
            
            $
            1.74





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




46





The
                following table summarizes information about fixed stock options
                under the
                Employee Stock Option Plan outstanding on December 31,
                2007:





**Options
                Outstanding**
            
            **Options
                Exercisable****Exercise
                Prices**
            
            **Number****Outstanding**
            
            **WeightedAverageRemaining****Contractual Life**
            
            **WeightedAverage****Exercise Price**
            
            **Number****Exercisable**
            
            **WeightedAverage****Exercise Price**$1.03
            
            
            335,000
            
            
            1.9
            
            $
            1.03
            
            
            167,500
            
            $
            1.03$2.45
            
            
            335,000
            
            
            0.3
            
            $
            2.45
            
            
            335,000
            
            $
            2.45**$1.03
                to $2.45**
            
            
            **670,000**
            
            
            **1.1**
            
            **$**
            **1.74**
            
            
            **502,500**
            
            **$**
            **1.97**





*Director
      Stock Option Plan*


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




**Number of shares**
            
            **Weighted average****exercise price**Balance
                at December 31, 2005
            
            
            108,000
            
            $
            3.20Granted
            
            
            72,000
            
            $
            1.27Exercised
            
            
            -
            
            
            -Expired
            
            
            (48,00
            )
            $
            3.81Balance
                at December 31, 2006
            
            
            132,000
            
            $
            1.93Granted
            
            
            72,000
            
            $
            1.21Exercised
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            -Balance
                at December 31, 2007
            
            
            204,000
            
            $
            1.67





The
      weighted average grant date fair value of options granted was $1.27 in 2006
      and
      $1.21 in 2007.





The
      following table summarizes information about fixed stock options under the
      Directors Plan on December 31, 2007:





**Options
                Outstanding**
            
            **Options
                Exercisable****Exercise
                Prices**
            
            **Number****Outstanding**
            
            **WeightedAverageRemaining****Contractual Life**
            
            **WeightedAverage****Exercise
                Price**
            
            **Number****Exercisable**
            
            **WeightedAverage****Exercise
                Price**$0.00-$1.75
            
            
            144,000
            
            
            0.8
            
            $
            1.245
            
            
            108,000
            
            $
            1.24$1.75-$3.50
            
            
            60,000
            
            
            0.0
            
            $
            2.71
            
            
            60,000
            
            $
            2.71$1.24271
            
            
            204,000
            
            
            0.5
            
            $
            1.67
            
            
            168,000
            
            $
            1.77





*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 2,700,000 shares of common stock. Under this
      plan, stock options may be granted at the discretion of the Compensation
      Committee of the Board of Directors at an option price determined by the
      Compensation Committee. All options under this plan have been issued at fair
      market value on the date of the grant. The options are exercisable in accordance
      with terms specified by the Compensation Committee. Option activity under this
      plan follows:




47




**Number of shares**
            
            **Weighted average**
              **exercise price**Balance
                at December 31, 2005
            
            
            493,700
            
            $
            2.36Granted
            
            
            273,000
            
            $
            1.03Exercised
            
            
            -
            
            
            -Expired
            
            
            (215,700
            )
            $
            1.97Balance
                at December 31, 2006
            
            
            551,000
            
            $
            1.85Granted
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Expired
            
            
            (40,250
            )
            $
            1.28Balance
                at December 31, 2007
            
            
            510,750
            
            $
            1.90





The
      weighted average grant date fair value of options granted was $1.03 in 2006.
      The
      following table summarizes information about fixed stock options under the
      1998
      Plan outstanding on December 31, 2007:








**Options Outstanding**
            
            **Options Exercisable****Exercise Prices**
            
            **Number****Outstanding**
            
            **Weighted Average Remaining****Contractual Life**
            
            **WeightedAverage****Exercise Price**
            
            **Number****Exercisable**
            
            **WeightedAverage****Exercise Price**$0.00-$1.75
            
            
            240,000
            
            
            1.9
            
            $
            1.03
            
            
            120,000
            
            $
            1.03$1.75-$3.50
            
            
            218,750
            
            
            0.3
            
            $
            2.42
            
            
            218,750
            
            $
            2.43$3.50-$5.25
            
            
            52,000
            
            
            0.0
            
            $
            3.70
            
            
            52,000
            
            $
            3.70$1.03-$4.83
            
            
            510,750
            
            
            1.0
            
            $
            1.90
            
            
            390,750
            
            $
            2.16





As
      of
      December 31, 2007 both the fair value of options outstanding and the fair value
      of options exercisable were less than the exercise price.





As
      of
      December 31, 2007 there were 3,818,696 additional shares available for issuance
      under all three stock option plans. The per share weighted-average fair value
      of
      stock options granted during 2006 and 2007 was $0.3928 and $0.42065,
      respectively.





The
      unrecognized stock-based compensation cost related to non-vested stock awards
      was less than $50,000 as of December 31, 2007. Such amount will be recognized
      in
      operations ratably through 2009.





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


Income
      tax expense (benefit) consists of:




**Current**
            
            **Deferred**
            
            **Total**Year
                Ended December 31, 2006:US
                federal
            
            $
            47,483
            
            $
            -
            
            $
            47,483State
                and local
            
            
            (100,006
            )
            
            -
            
            
            (100,006
            )Foreign
            
            
            882
            )
            
            -
            
            
            (882
            )$
            (53,405
            )
            $
            -
            
            $
            (53,405
            )Year
                Ended December 31, 2007:US
                federal
            
            $
            -
            
            $
            -
            
            $
            -State
                and local
            
            
            -
            
            
            -
            
            
            -Foreign
            
            
            -
            
            
            -
            
            
            -$
            -
            
            $
            -
            
            $
            -




48





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




**2006**
            
            **2007**Computed
                "expected" US tax (benefit)
            
            $
            333,455
            
            $
            (1,191,052
            )Change
                resulting from:State
                and local income taxes, net of federal income tax benefit
            
            
            (66,004
            )
            
            -Federal
                valuation allowance
            
            
            406,594
            
            
            1,175,308Non-deductible
                items
            
            
            38,251
            
            
            5,031Change
                in estimate for prior years’ provisions
            
            
            46,601
            
            
            10,713Other,
                net
            
            
            887
            
            
            -Income
                tax expense (benefit)
            
            $
            (53,405
            )
            $
            -




Temporary
      differences at December 31 follow:





**2006**
            
            **2007**Deferred
                income tax assets:Inventories
            
            $
            1,511,389
            
            $
            1,344,792Accounts
                receivable
            
            
            242,647
            
            
            378,714Accrued
                expenses
            
            
            97,565
            
            
            68,866Net
                operating loss and tax credit carry forwards
            
            
            12,410,482
            
            
            14,482,300Plant
                and equipment
            
            
            656,327
            
            
            669,929Stock
                compensation
            
            
            -
            
            
            183,246Other
            
            
            2,056
            
            
            -Total
                deferred income tax assets
            
            
            14,920,466
            
            
            17,127,847Valuation
                allowance
            
            
            (14,920,466
            )
            
            (17,127,847
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -





As
                of December 31, 2007 the Company had federal net operating loss carry
                forwards of approximately $36,777,000 which are available to offset
                future
                taxable income. They are due to expire in varying amounts
                from 2018 to 2027. The Company had state net operating loss carry
                forwards of approximately $11,447,000 which are available to offset
                future
                taxable income. They are due to expire in varying amounts from 2008
                through 2012.





Subsequently
      recognized tax benefits relating to valuation allowances for deferred income
      tax
      assets, if any, will be allocated as follows: $16,348,000 to continuing
      operations and $765,000 to additional paid-in capital which is attributable
      to
      the exercise of employee stock options.





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


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





Relatively
      few customers have accounted for a substantial portion of the Company’s net
      sales. During 2007 three customers each accounted for 10% or more of our total
      net sales. Together these three customers accounted for 44% of our total net
      sales and 74% of our net accounts receivable. During 2006 three customers
      accounted for 10% or more of its total net sales. Together these three customers
      accounted for 30% of the Company’s total net sales and 56% of net accounts
      receivable.





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





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


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





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




49




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





**2006**
            
            **2007**Cash
                paid during year for interest
            
            $
            306,867
            
            $
            -Cash
                paid during year for income taxes
            
            $
            -
            
            $
            -




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


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





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




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


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





**2006**
            
            **Percent**
            
            **2007**
            
            **Percent**North
                America
            
            $
            10,278,545
            
            
            56
            %
            $
            11,776,442
            
            
            65
            %Outside North America
            
            
            8,043,756
            
            
            44
            %
            
            6,701,090
            
            
            36
            %Total
            
            $
            18,322,301
            
            
            100
            %
            $
            18,477,532
            
            
            100
            %





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


The
      Company has a 401(k) retirement savings plan for employees. Under the plan,
      the
      Company matches 25% of an employee's contribution, up to a maximum of $350
      per
      employee per year. Company matching contributions charged to expense in 2006
      and
      2007 were $16,750 and $12,635, respectively.





**(17)**  **INVESTMENT
      IN UNITY BUSINESS NETWORKS, LLC**


During
      2007 the Company purchased all the Series A Preferred Shares (the Series A
      Shares) of Unity Business Networks, LLC (Unity) for cash of $1.2 million,
      including transaction costs. The Series A Shares are convertible at any time
      at
      the Company’s option into 15% of Unity’s common stock on a fully-diluted basis.
      The Series A Shares convert automatically if Unity consummates a public offering
      with gross proceeds in excess of $25 million or 30 days after Unity delivers
      its
      2009 audited financial statements to the Company. In addition, the Company
      has
      an option to purchase all the outstanding common stock of Unity based on a
      specified multiple of Unity’s revenues, as defined, for 2008. The option is
      exercisable for 30 days following the receipt of Unity’s 2008 audited financial
      statements. The Company’s CEO is a member of Unity’s five member board of
      directors. Further, the Company is entitled to vote Series A Shares on an as-if
      converted basis with Unity’s common stock. The Company is unable to exercise
      significant influence over Unity’s policies or operations. The Company accounts
      for its investment in Unity at cost. The investment is reviewed periodically
      for
      potential impairment.




50




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


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


**2006
                  Quarter Ended (1,2)**
              
              **2007
                  Quarter Ended********Mar.
                  31**
              
              **Jun.
                  30**
              
              **Sept.
                  30**
              
              **Dec.
                  31**
              
              ******Mar.
                  31**
              
              **Jun.
                  30**
              
              **Sept.
                  30**
              
              **Dec.
                  31**Net
                  sales
              
              $
              5,281
              
              $
              4,518
              
              $
              3,579
              
              $
              4,944
              
              $
              4,754
              
              $
              4,342
              
              $
              5,580
              
              $
              3,801Costs
                  of goods sold
              
              
              4,315
              
              
              4,295
              
              
              3,338
              
              
              3,772
              
              
              3,634
              
              
              3,871
              
              
              4,287
              
              
              2,954Gross
                  profit
              
              
              966
              
              
              223
              
              
              241
              
              
              1,172
              
              
              1,120
              
              
              471
              
              
              1,293
              
              
              847Operating
                  expenses:Selling
              
              
              904
              
              
              878
              
              
              782
              
              
              1,067
              
              
              894
              
              
              878
              
              
              979
              
              
              807General
                  and administrative
              
              
              849
              
              
              698
              
              
              689
              
              
              610
              
              
              639
              
              
              607
              
              
              617
              
              
              561Research
                  and development
              
              
              632
              
              
              557
              
              
              521
              
              
              448
              
              
              491
              
              
              491
              
              
              434
              
              
              4092,385
              
              
              2,133
              
              
              1,992
              
              
              2,125
              
              
              2,024
              
              
              1,976
              
              
              2,030
              
              
              1,777Operating
                  loss before gain of saleof
                  real estate
              
              
              (
                  1,419
              )
              
              (1,910
              )
              
              (1,751
              )
              
              (953
              )
              
              (
                  904
              )
              
              (1,505
              )
              
              (737
              )
              
              (930
              )Gain
                  on sale of real estate
              
              
              -
              
              
              -
              
              
              -
              
              
              4,752
              
              
              96
              
              
              96
              
              
              96
              
              
              96Operating
                  profit (loss)
              
              
              (1,419
              )
              
              (1,910
              )
              
              (1,751
              )
              
              3,799
              
              
              (808
              )
              
              (1,409
              )
              
              (641
              )
              
              (834
              )Other
                  income (expense), net (1)
              
              
              44
              
              
              53
              
              
              919
              
              
              1,243
              
              
              58
              
              
              70
              
              
              28
              
              
              33Income
                  (loss) before income taxes
              
              
              (
                  1,375
              )
              
              (
                  1,857
              )
              
              (832
              )
              
              5,042
              
              
              (
                  750
              )
              
              (
                  1,339
              )
              
              (613
              )
              
              (801
              )Income
                  tax expense (benefit)
              
              
              -
              
              
              -
              
              
              -
              
              
              (
                  53
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss)
              
              $
              (1,375
              )
              $
              (1,857
              )
              $
              (832
              )
              $
              5,095
              
              $
              (750
              )
              $
              (1,339
              )
              $
              (613
              )
              $
              (801
              )Net
                  loss per common share:Basic
              
              $
              (0.15
              )
              $
              (0.20
              )
              $
              (0.09
              )
              $
              0.55
              
              $
              (0.08
              )
              $
              (0.14
              )
              $
              (0.07
              )
              $
              (0.09
              )Diluted
              
              $
              (0.15
              )
              $
              (0.20
              )
              $
              (0.09
              )
              $
              0.54
              
              $
              (0.08
              )
              $
              (0.14
              )
              $
              (0.07
              )
              $
              (0.09
              )Weighted
                  average common and common equivalent shares:Basic
              
              
              9,347
              
              
              9,347
              
              
              9,347
              
              
              9,347
              
              
              9,347
              
              
              9,347
              
              
              9,347
              
              
              9,347Diluted
              
              
              9,347
              
              
              9,347
              
              
              9,347
              
              
              9,357
              
              
              9,347
              
              
              9,347
              
              
              9,347
              
              
              9,347





(1)
      Includes gain on sale of investment in Intermute, Inc. of $870 thousand and
      $1,236 thousand during the quarters ended September 30, 2006 and December 31,
      2006, respectively.





51





**Schedule
      II**





**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**VALUATION
      AND QUALIFYING ACCOUNTS**


**Years
      Ended December 31, 2006 and 2007**


**Description**
                
                **Balance at**
                  **Beginning**
                  **of year**
                
                **Charged**
                  **to**
                  **Expense**
                
                **Deductions**
                
                **Balance**
                  **at end**
                  **of year**Allowance
                    for doubtful accounts
                
                $
                229,854
                
                $
                (49,828
                )
                $
                (2,794
                )
                $
                182,819Allowance
                    for price protection
                
                
                23,076
                
                
                63,909
                
                
                83,571
                
                
                3,415Allowance
                    for sales returns
                
                
                607,183
                
                
                2,871,120
                
                
                3,090,989
                
                
                387,314COOP
                    advertising and other allowances
                
                
                434,524
                
                
                1,826,128
                
                
                1,918,231
                
                
                342,421Year
                    ended December 31, 2006
                
                $
                1,294,637
                
                $
                4,711,329
                
                $
                5,089,996
                
                $
                915,969Allowance
                    for doubtful accounts
                
                $
                182,819
                
                $
                71,265
                
                $
                81,633
                
                $
                172,451Allowance
                    for price protection
                
                
                3,415
                
                
                91,468
                
                
                90,989
                
                
                3,894Allowance
                    for sales returns
                
                
                387,314
                
                
                2,421,901
                
                
                1,981,163
                
                
                828,052COOP
                    advertising and other allowances
                
                
                342,421
                
                
                1,793,741
                
                
                1,739,756
                
                
                396,406Year
                    ended December 31, 2007
                
                $
                915,969
                
                $
                4,378,375
                
                $
                3,893,541
                
                $
                1,400,803




52


**EXHIBIT
      INDEX**





(a)
            
            Financial
                Statements, Schedules and Exhibits:(1),(2)
            The
                consolidated financial statements and required schedules are indexed
                on
                page F-1.**
            10.1
            1990
                Stock Option Plan, as amended.**
            10.3
            1998
                Employee Equity Incentive Plan, as amended.21.
            Subsidiaries,
                filed as Exhibit 21 to the Company's Annual Report on Form 10-K for
                the
                fiscal year ended December 31, 2000. *23.1
            Consent
                of Independent Registered Public Accounting Firm.31.1
            CEO
                Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
                of
                2002.




53