**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 **______________**
  **FORM
        10-Q**
 **______________**
  (Mark
          One)
  **x**
                **QUARTERLY
                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                    ACT OF
                    1934**
 **For
          the quarterly period ended September 30, 2005**
  or
 **o**
                  **TRANSITION
                      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
                      ACT OF
                      1934**
 **For
            the transition period from________ to ________**
 **Commission
        File Number 0-18672**
  **ZOOM
        TECHNOLOGIES, INC.**
 **(Exact
        Name of Registrant as Specified in its Charter)**
 
 **Delaware**
              **51-0448969**____________________________
              ____________________________(State
                  or Other Jurisdiction of Incorporation or Organization)
              (I.R.S.
                  Employer 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**
  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 check mark whether the registrant is an accelerated filer (as defined
        in
        Exchange Act Rule 12b-2). YES o NO x
  Indicate
        by check mark whether the registrant is a shell company (as defined in Exchange
        Act Rule 12b-2). Yes o No x
  The
        number of shares outstanding of the registrant’s Common Stock, $.01 Par Value,
        as of November 7, 2005, was 9,346,966 shares.
  
 1
  **ZOOM
        TECHNOLOGIES, INC. AND SUBSIDIARY**
 **INDEX**
  **Part
                  I.**
              **Financial
                  Information**
              **Page**Item
                  1.
              Financial
                  Statements:Consolidated
                  Balance Sheets as of September 30, 2005 and December 31, 2004
                  (unaudited)
              3Consolidated
                  Statements of Operations for the three and nine months ended September
                  30,
                  2005 and 2004 (unaudited)
              4Consolidated
                  Statements of Cash Flows for the nine months ended September 30,
                  2005 and
                  2004 (unaudited)
              5Notes
                  to Consolidated Financial Statements
              6-11Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              11-27Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              27Item
                  4.
              Controls
                  and Procedures
              27**Part
                  II.**
              **Other
                  Information**Item
                  5.
              Other
                Information
              27Item
                  6.
              Exhibits
              28Signatures
              29Exhibit
                  Index
              30
 
 
 2
  **PART
        I - FINANCIAL INFORMATION**
 
 **ZOOM
        TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Consolidated
        Balance Sheets**
 **(unaudited)**
 
 **September
                  30, 2005**
              
              **December
                  31, 2004****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              8,272,148
              
              $
              9,438,596Accounts
                  receivable, net of reserves for doubtful accounts,returns,
                  and allowances of $1,487,881 at September 30, 2005 and $1,359,455
                  at
                  December 31, 2004
              
              
              2,863,717
              
              
              3,349,781Inventories
              
              
              5,132,213
              
              
              5,030,478Prepaid
                  expense and other current assets
              
              
              208,231
              
              
              529,989Total
                  current assets
              
              
              16,476,309
              
              
              18,348,844Property,
                  plant and equipment, net
              
              
              2,549,499
              
              
              2,703,208Total
                  assets
              
              $
              19,025,808
              
              $
              21,052,052**Liabilities
                  and Stockholders’ Equity**Current
                  liabilities:Current
                  portion of long-term debt
              
              $
              4,943,424
              
              $
              229,555Accounts
                  payable
              
              
              1,297,487
              
              
              2,006,819Accrued
                  expense
              
              
              1,034,746
              
              
              1,275,088Total
                  current liabilities
              
              
              7,275,657
              
              
              3,511,462Long-term
                  debt, less current portion
              
              
              —
              
              
              4,872,298Total
                  liabilities
              
              $
              7,275,657
              
              $
              8,383,760Stockholders’
                  equity:Common
                  stock, $0.01 par value. Authorized 25,000,000shares;
                  issued 9,355,366 shares, outstanding 9,346,966 shares at September
                  30,
                  2005 and issued 8,935,516 shares, outstanding 8,927,116 shares
                  at December
                  31, 2004
              
              
              93,554
              
              
              89,355Additional
                  paid-in capital
              
              
              31,015,978
              
              
              30,572,727Retained
                  earnings (accumulated deficit)
              
              
              (19,768,579
              )
              
              (18,510,181
              )Accumulated
                  other comprehensive income (loss)
              
              
              416,520
              
              
              523,713Treasury
                  stock, at cost
              
              
              (7,322
              )
              
              (7,322
              )Total
                  stockholders’ equity
              
              
              11,750,151
              
              
              12,668,292Total
                  liabilities and stockholders’ equity
              
              $
              19,025,808
              
              $
              21,052,052
 
 See
        accompanying notes to unaudited consolidated financial statements.
 
 3
  **ZOOM
        TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Consolidated
        Statements of Operations**
 **(Unaudited)**
 
  **Three
                  Months Ended September 30,**
              
              **Nine
                  Months Ended September 30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Net
                  sales
              
              $
              5,308,380
              
              $
              7,142,608
              
              $
              18,269,296
              
              $
              23,025,683Costs
                  of goods sold
              
              
              4,789,732
              
              
              5,645,772
              
              
              14,836,965
              
              
              16,966,396Gross
                  profit
              
              
              518,648
              
              
              1,496,836
              
              
              3,432,331
              
              
              6,059,287Operating
                  expense:Selling
              
              
              977,718
              
              
              1,114,928
              
              
              3,172,332
              
              
              3,511,959General
                  and administrative
              
              
              314,188
              
              
              780,681
              
              
              2,867,694
              
              
              2,797,396Research
                  and development
              
              
              664,641
              
              
              721,942
              
              
              2,109,347
              
              
              2,065,603Total
                  operating expense
              
              
              1,956,547
              
              
              2,617,551
              
              
              8,149,373
              
              
              8,374,958Operating
                  income (loss)
              
              
              (1,437,899
              )
              
              (1,120,715
              )
              
              (4,717,042
              )
              
              (2,315,671
              )Other
                  income (expense):Interest
                  income
              
              
              69,984
              
              
              40,241
              
              
              151,508
              
              
              89,848Interest
                  (expense)
              
              
              (63,596
              )
              
              (52,950
              )
              
              (190,511
              )
              
              (159,109
              )Gain
                  on sale of investment inInterMute
              
              
              —
              
              
              —
              
              
              3,495,516
              
              
              —Other,
                  net
              
              
              56,251
              
              
              105,035
              
              
              2,131
              
              
              219,116Total
                  other income(expense),
                  net
              
              
              62,639
              
              
              92,326
              
              
              3,458,644
              
              
              149,855Income
                  (loss) before incometax
                  expense
              
              
              (1,375,260
              )
              
              (1,028,389
              )
              
              (1,258,398
              )
              
              (2,165,816
              )Income
                  tax expense (benefit)
              
              
              —
              
              
              —
              
              
              —
              
              
              —Net
                  income (loss)
              
              $
              (1,375,260
              )
              $
              (1,028,389
              )
              $
              (1,258,398
              )
              $
              (2,165,816
              )Earnings
                  (loss) per commonshare:Basic
              
              $
              (0.15
              )
              $
              (0.12
              )
              $
              (0.14
              )
              $
              (0.26
              )Diluted
              
              $
              (0.15
              )
              $
              (0.12
              )
              $
              (0.14
              )
              $
              (0.26
              )Weighted
                  average commonand
                  common equivalentshares:Basic
              
              
              9,341,124
              
              
              8,791,016
              
              
              9,158,734
              
              
              8,486,167Diluted
              
              
              9,341,124
              
              
              8,791,016
              
              
              9,158,734
              
              
              8,486,167
 
 See
        accompanying notes to unaudited consolidated financial statements.
 
 4
 
 **ZOOM
        TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Consolidated
        Statements of Cash Flows**
 **(Unaudited)**
 **Nine
                  Months Ended September 30,****2005**
              
              **2004****Cash
                  flows from operating activities**:Net
                  income (loss)
              
              $
              (1,258,398
              )
              $
              (2,165,816
              )Adjustments
                  to reconcile net income (loss) to net cash provided by(used
                  in) operating activities:Gain
                  on sale of investment in InterMute
              
              
              (3,495,516
              )
              
              —Depreciation
              
              
              200,605
              
              
              330,794Changes
                  in operating assets and liabilities:Accounts
                  receivable, net
              
              
              381,433
              
              
              1,331,756Inventories
              
              
              (101,735
              )
              
              (598,394
              )Prepaid
                  expense and other assets
              
              
              321,758
              
              
              76,626Accounts
                  payable and accrued expense
              
              
              (949,674
              )
              
              (250,203
              )Net
                  cash provided by (used in) operating activities
              
              
              (4,901,527
              )
              
              (1,275,237
              )**Cash
                  flows from investing activities:**Proceeds
                  from sale of investment in InterMute
              
              
              3,495,516
              
              
              —Additions
                  to property, plant and equipment
              
              
              (46,896
              )
              
              (145,231
              )Net
                  cash provided by (used in) investing activities
              
              
              3,448,620
              
              
              (145,231
              )**Cash
                  flows from financing activities:**Principal
                  payments on long-term debt
              
              
              (158,429
              )
              
              (162,560
              )Proceeds
                  from exercise of stock options
              
              
              447,450
              
              
              2,021,031Net
                  cash provided by (used in) financing activities
              
              
              289,021
              
              
              1,858,471Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              (2,562
              )
              
              (2,571
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              (1,166,448
              )
              
              435,432Cash
                  and cash equivalents beginning of period
              
              
              9,438,596
              
              
              9,904,384Cash
                  and cash equivalents end of period
              
              $
              8,272,148
              
              $
              10,339,816**Supplemental
                  disclosures of cash flow information:**Cash
                  paid during the period for:Interest
              
              $
              190,511
              
              $
              159,109Income
                  taxes
              
              $
              —
              
              $
              —
 
 See
        accompanying notes to unaudited consolidated financial statements. ****
  5
 
 **ZOOM
        TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Notes
        to Consolidated Financial Statements**
 **(Unaudited)**
 
 **(1)**
              **Summary
                  of Significant Accounting
                  Policies**
  *(a)*
              *Basis
                  of Presentation and Principles of
                  Consolidation*
  The
        consolidated financial statements of Zoom Technologies, Inc. (the “Company”)
        presented herein have been prepared pursuant to the rules of the Securities
        and
        Exchange Commission for quarterly reports on Form 10-Q and do not include
        all of
        the information and footnote disclosures required by accounting principles
        generally accepted in the United States of America. These financial statements
        should be read in conjunction with the audited consolidated financial statements
        and notes thereto for the year ended December 31, 2004 included in the Company’s
        2004 Annual Report on Form 10-K.
  The
        consolidated balance sheet as of September 30, 2005, the consolidated statements
        of operations for the three and nine months ended September 30, 2005 and
        2004,
        and the consolidated statements of cash flows for the nine months ended
        September 30, 2005 and 2004 are unaudited, but, in the opinion of management,
        include all adjustments (consisting of normal, recurring adjustments) necessary
        for a fair presentation of results for these interim periods.
  The
        consolidated financial statements include the accounts and operations of
        the
        Company’s wholly owned subsidiary, Zoom Telephonics, Inc., a Delaware
        corporation. All significant intercompany accounts and transactions have
        been
        eliminated in consolidation.
  The
        results of operations for the periods presented are not necessarily indicative
        of the results to be expected for the entire year ending December 31,
        2005.
  *(b)*
              *Stock-Based
                  Compensation*
  The
        Company accounts for its stock option plans under the recognition and
        measurement principles of Accounting Principles Board (APB) Opinion No. 25,
        “Accounting for Stock Issued to Employees, and Related Interpretations." No
        stock-based compensation expense is reflected in net income (loss) for these
        plans, as all options granted under these plans had an exercise price equal
        to
        the market value of the underlying common stock on the date of grant. The
        following table illustrates the effect on net income (loss) and earnings
        (loss)
        per share if the Company had applied the fair value recognition provisions
        of
        Financial Accounting Standards Board (FASB) Statement No. 123, “Accounting for
        Stock Based Compensation” to stock-based compensation (See note 11).
  **Three
                  Months Ended September 30,**
              
              **Nine
                  Months Ended September 30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Net
                  income (loss), as reported
              
              $
              (1,375,260
              )
              $
              (1,028,389
              )
              $
              (1,258,398
              )
              $
              (2,165,816
              )Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  value based method for all awards, net of related tax
                  effects
              
              
              (214,657
              )
              
              (139,829
              )
              
              (473,398
              )
              
              (486,421
              )Pro
                  forma net income (loss)
              
              $
              (1,589,917
              )
              $
              (1,168,218
              )
              $
              (1,731,796
              )
              $
              (2,652,237
              )Earnings
                  (loss) per share:Basic
                  - as reported
              
              $
              (0.15
              )
              $
              (0.12
              )
              $
              (0.14
              )
              $
              (0.26
              )Diluted
                  - as reported
              
              $
              (0.15
              )
              $
              (0.12
              )
              $
              (0.14
              )
              $
              (0.26
              )Basic
                  - pro forma
              
              $
              (0.17
              )
              $
              (0.13
              )
              $
              (0.19
              )
              $
              (0.31
              )Diluted
                  - pro forma
              
              $
              (0.17
              )
              $
              (0.13
              )
              $
              (0.19
              )
              $
              (0.31
              )
  6
 
  
  *(c)*
              *Recently
                  Issued or Proposed Accounting
                  Pronouncements*
 
 In
        June
        2005, the FASB’s Emerging Issues Task Force reached a consensus on Issue No.
        05-6, “Determining the Amortization Period for Leasehold Improvements” (“EITF
        05-6”). The guidance requires that leasehold improvements acquired in a business
        combination or purchased subsequent to the inception of a lease be amortized
        over the lesser of the useful life of the assets or a term that includes
        renewals that are reasonably assured at the date of the business combination
        or
        purchase. The guidance is effective for periods beginning after June 29,
        2005.
        The adoption of EITF 05-6 did not have an effect on the Company’s consolidated
        financial position or results of operations.
 
 In
        May
        2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—A
        Replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154
        applies to all voluntary changes in accounting principles and requires
        retrospective application to prior periods’ financial statements of changes in
        accounting principles, unless it is impracticable. SFAS No. 154 requires
        that a
        change in depreciation, amortization, or depletion method for long-lived,
        nonfinancial assets be accounted for as a change of estimate affected by
        a
        change in accounting principles. SFAS No. 154 also carries forward without
        change the guidance in APB Opinion No. 20 with respect to accounting for
        changes
        in accounting estimates, changes in the reporting unit and correction of
        an
        error in previously issued financial statements. The Company is required
        to
        adopt SFAS No. 154 for accounting changes and corrections of errors made
        in
        fiscal years beginning after December 15, 2005. The adoption of SFAS No.
        154 is
        not expected to have a material effect on the Company’s consolidated financial
        position or results of operations.
 
 On
        December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
        Payment” (“SFAS No. 123R"), which is a revision of SFAS No. 123, “Accounting for
        Stock-Based Compensation.” SFAS No. 123R supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement
        of Cash Flows.” Generally, the approach in SFAS No. 123R is similar to the
        approach described in SFAS No. 123. However, SFAS No. 123R requires all
        share-based payments to employees, including grants of employee stock options,
        to be recognized in the income statement based on their fair values. Pro
        forma
        disclosure is no longer an alternative. SFAS No. 123R must be adopted no
        later
        than the first annual period beginning after June 15, 2005. Early adoption
        will
        be permitted in periods in which financial statements have not yet been issued.
        SFAS No. 123R allows companies to choose between the modified-prospective
        and
        modified-retrospective transition alternatives in adopting SFAS No. 123R.
        Under
        the modified-prospective transition method, compensation cost will be recognized
        in financial statements issued subsequent to the date of adoption for all
        shared-based payments granted, modified or settled after the date of adoption,
        as well as for any unvested awards that were granted prior to the date of
        adoption. Under the modified-retrospective transition method, compensation
        cost
        will be recognized in a manner consistent with the modified-prospective
        transition method, however, prior period financial statements will also be
        restated by recognizing compensation cost as previously reported in the pro
        forma disclosures under SFAS No. 123. The restatement provisions can be applied
        to either a) all periods presented or b) to the beginning of the fiscal year
        in
        which SFAS No. 123R is adopted. The Company expects to adopt SFAS No. 123R
        on
        January 1, 2006 using the modified-prospective method. As the Company previously
        adopted only the pro forma disclosure provisions of SFAS No. 123, the Company
        will recognize compensation cost relating to the unvested portion of awards
        granted prior to the date of adoption using the same estimate of the grant-date
        fair value and the same attribution method used to determine the pro forma
        disclosures under SFAS No. 123. As permitted by SFAS No. 123, the Company
        currently accounts for share-based payments to employees using APB Opinion
        No.
        25’s intrinsic value method and, as such, generally recognizes no compensation
        cost for employee stock options. Accordingly, the adoption of SFAS No. 123R’s
        fair value method will have an impact on the Company’s results of operations,
        although it will have no impact on the overall financial position. The impact
        of
        the adoption of SFAS No. 123R cannot be determined at this time because it
        will
        depend upon levels of share-based payments granted in the future. However,
        had
        the Company adopted SFAS No. 123R in prior periods, the impact of that standard
        would have approximated the impact as described in the disclosure of pro
        forma
        net income (loss) and net income (loss) per share pursuant to SFAS No. 123
        (see
        note 1(b) and note 11).
  In
        November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
        Accounting Research Bulletin No. 43, Chapter 4”. The amendments made by SFAS No.
        151 clarify that abnormal amounts of idle facility expense, freight, handling
        costs, and wasted materials (spoilage) should be recognized as current-period
        charges and require the allocation of fixed production overheads to inventory
        based on the normal capacity of the production facilities. SFAS No. 151 is
        the
        result of a broader effort by the FASB to improve the comparability of
        cross-border financial reporting by working with the International Accounting
        Standards Board toward development of a single set of high-quality accounting
        standards. The guidance is effective for inventory costs incurred during
        fiscal
        years beginning after June 15, 2005. The adoption of SFAS No. 151 is not
        expected to have a material effect on the Company’s consolidated financial
        position or results of operations.
 
 7
 
  **(2)  
        L** **iquidity;
        Revolving Line of Credit**
  On
        September 30, 2005 the Company had working capital of $9.2 million, including
        $8.3 million in cash and cash equivalents.
  On
        March
        16, 2005 Zoom Telephonics, Inc., a wholly owned subsidiary of the Company,
        entered into a Loan and Security Agreement with Silicon Valley Bank that
        provides for a revolving line of credit of up to $2 million. The revolving
        line
        of credit can be used to (i) borrow under revolving loans for working capital
        and general corporate purposes, (ii) issue letters of credit, (iii) enter
        into
        foreign exchange forward contracts, and (iv) support certain cash management
        services. Revolving loans bear interest at a floating rate of interest equal
        to
        Silicon Valley Bank’s prime rate plus 0.5%. The loan rate at September 30, 2005
        was 7.25%. This interest rate will be increased to Silicon Valley Bank’s prime
        rate plus 1.0% if the Company records two consecutive quarters of combined
        losses. The revolving line of credit terminates, and all outstanding obligations
        under the Loan and Security Agreement become due on March 15, 2006.
  The
        revolving loans under the Loan and Security Agreement are secured by a first
        priority lien on substantially all of the assets of the Company and Zoom
        Telephonics, Inc., excluding intellectual property and real estate. The Company
        guaranteed the obligations of Zoom Telephonics under the revolving line of
        credit and pledged all of the stock of Zoom Telephonics in support of its
        guarantee. The Loan and Security Agreement requires that the Company maintain
        a
        minimum adjusted quick ratio and a minimum net worth. In addition, Zoom
        Telephonics is required to obtain Silicon Valley Bank’s prior written consent to
        among other things, dispose of assets, make acquisitions, be acquired, incur
        indebtedness, grant liens, make investments, pay dividends, or repurchase
        stock.
        This consent may not be unreasonably withheld.
  The
        Loan
        and Security Agreement contains events of default that include, among other
        things, non-payment of principal, interest or fees, violation of covenants,
        inaccuracy of representations and warranties, cross default to certain other
        indebtedness, bankruptcy and insolvency events, change of control, and material
        judgments. Upon occurrence of an event of default, Silicon Valley Bank is
        entitled to, among other things, accelerate all of Zoom Telephonics’ obligations
        and sell its assets to satisfy obligations under the Loan and Security
        Agreement. As of September 30, 2005 the Company’s availability under the line is
        $1.7 million. As of September 30, 2005 no amounts were outstanding under
        the
        revolving line of credit and the Company was in compliance with all covenants.
  To
        conserve cash and manage liquidity during the past few years, the Company
        has
        implemented expense reductions including the reduction of employee headcount
        and
        overhead costs. The employee headcount was 185 at December 31, 2002 and 125
        at
        September 30, 2005. The Company will continue to assess its cost structure
        as it
        relates to its revenues and cash position and the Company may make further
        cost
        reductions if the actions are deemed necessary.
  Management
        believes the Company has sufficient resources to fund its normal operations
        over
        the next twelve months. However, if the Company is unable to increase its
        revenues, reduce or otherwise adequately control its expenses, or raise capital,
        the Company’s longer-term ability to continue as a going concern and achieve its
        intended business objectives could be adversely affected. Moreover, the
        Company’s liquidity could be significantly impaired if it repays its mortgage
        through current sources of cash on or before the maturity date in January
        2006
        and is not able to refinance all or a significant portion of the mortgage
        and is
        not able to sell its owned buildings for adequate consideration. See “Risk
        Factors” below for further information with respect to events and uncertainties
        that could harm the Company’s business, operating results, and financial
        conditions.
  **(3)** **Earnings
        (loss) per share**
  The
        reconciliation of the numerators and denominators of the basic and diluted
        net
        earnings (loss) per share computations for the Company’s reported net income
        (loss) is as follows:
  8
  **Three
                  Months Ended September 30,**
              
              **Nine
                  Months Ended September 30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Basic:Net
                  income (loss)
              
              $
              (1,375,260
              )
              $
              (1,028,389
              )
              $
              (1,258,398
              )
              $
              (2,165,816
              )Weighted
                  average shares outstanding
              
              
              9,341,124
              
              
              8,791,016
              
              
              9,158,734
              
              
              8,486,167Earnings
                  (loss) per share
              
              $
              (0.15
              )
              $
              (0.12
              )
              $
              (0.14
              )
              $
              (0.26
              )Diluted:Net
                  income (loss)
              
              $
              (1,375,260
              )
              $
              (1,028,389
              )
              $
              (1,258,398
              )
              $
              (2,165,816
              )Weighted
                  average shares outstanding
              
              
              9,341,124
              
              
              8,791,016
              
              
              9,158,734
              
              
              8,486,167Net
                  effect of dilutive stock options based on the Treasury stock method
                  using
                  average market price
              
              
              —
              
              
              —
              
              
              —
              
              
              —Weighted
                  average shares outstanding
              
              
              9,341,124
              
              
              8,791,016
              
              
              9,158,734
              
              
              8,486,167Earnings
                  (loss) per share
              
              $
              (0.15
              )
              $
              (0.12
              )
              $
              (0.14
              )
              $
              (0.26
              )
  Potential
        common shares for which inclusion would have the effect of increasing diluted
        earnings per share (i.e., antidilutive) are excluded from the computation
        for
        the three and nine months ended September 30, 2005 and 2004. Options to purchase
        1,264,900 and 1,054,050 shares of common stock at September 30, 2005 and
        2004,
        respectively, were outstanding, but not included in the computation of diluted
        earnings per share for the three and nine months ended September 30, 2005
        and
        2004 as their effect would be antidilutive.
  **(4)** **Inventories**
  Inventories
                  consist of the following:
              
              **September
                  30, 2005**
              
              **December
                  31, 2004**Raw
                  materials
              
              $
              2,216,947
              
              $
              2,595,730Work
                  in process
              
              
              1,502,688
              
              
              1,177,602Finished
                  goods
              
              
              1,412,578
              
              
              1,257,146Total
                  Inventories
              
              $
              5,132,213
              
              $
              5,030,478
  During
        the three months ended September 30, 2005 the company recorded obsolescence
        charges of $279,700.
  **(5)** **Comprehensive
        Income (Loss)**
  Statement
        of Financial Accounting Standards (“SFAS”) No. 130, “Reporting Comprehensive
        Income” establishes rules for the reporting and display of comprehensive income
        (loss) and its components; however, it has no impact on the Company’s net income
        (loss). SFAS No. 130 requires all changes in equity from non-owner sources
        to be
        included in the determination of comprehensive income (loss).
  The
        components of comprehensive income (loss), net of tax, are as
        follows:
  **Three
                      Months Ended September 30,**
                  
                  
                  **Nine
                      Months Ended September 30,****2005**
                  
                  
                  **2004**
                  
                  
                  **2005**
                  
                  
                  **2004**Net
                      income (loss)
                  
                  $
                  (1,375,260
                  )
                  $
                  (1,028,389
                  )
                  $
                  (1,258,398
                  )
                  $
                  (2,165,816
                  )Foreign
                      currency translation adjustment
                  
                  
                  (10,356
                  )
                  
                  (12,779
                  )
                  
                  (107,193
                  )
                  
                  83,278Comprehensive
                      income (loss)
                  
                  $
                  (1,385,616
                  )
                  $
                  (1,041,168
                  )
                  $
                  (1,365,591
                  )
                  $
                  (2,082,538
                  )
  At
        September 30, 2005 and December 31, 2004, accumulated other comprehensive
        income
        (loss) as reported on the Company’s balance sheet is comprised solely of foreign
        currency translation adjustments.
  **(6)** **Long-Term
        Debt**
  On
        January 10, 2001 the Company obtained a mortgage loan for $6 million secured
        by
        the real estate property located at 201 and 207 South Street, Boston,
        Massachusetts. This is a 20-year direct reduction mortgage with a five-year
        balloon due January 10, 2006. The interest rate is fixed for one year, based
        on
        the one-year Federal Home Loan Bank rate plus 2.5 % per annum. In 2004 the
        interest rate was 3.99%. As of January 10, 2005 the rate of interest changed
        to
        5.80%. The Company renegotiated the rate to 5.0% effective February 10, 2005.
        As
        of September 30, 2005 $4.9 million was outstanding on this loan, which is
        due
        and payable on January 10, 2006. Because the mortgage loan is due within
        twelve
        months, the obligation is classified as a current liability at September
        30,
        2005.
 
 9
  **(7)**
              **Gain
                  on sale of investment in
                  InterMute**
   Since
        1999 the Company had a minority interest in a privately held software company,
        InterMute, Inc., which the Company had been accounting for under the equity
        method of accounting. The Company made its original investment in 1999, at
        the
        time of the company’s formation, and subsequently made additional investments.
        Under the equity method of accounting, the Company's investment was increased
        or
        decreased, not below zero, based upon the Company's proportionate share of
        the
        net earnings or losses of InterMute. As a result of the losses incurred by
        InterMute subsequent to the Company's investments, the Company's investment
        balance was reduced to zero during 2002. The Company discontinued applying
        the
        equity method when the investment was reduced to zero and did not provide
        for
        additional losses, as the Company did not guarantee obligations of the investee
        and was not committed to provide further financial support.
  In
        June
        2005 InterMute was acquired by Trend Micro Inc., a U.S. subsidiary of Trend
        Micro Japan. In connection with the acquisition of InterMute in June 2005,
        the
        Company received a payment in exchange for its investment of approximately
        $3.5
        million, also in June 2005. The Company recorded a non-operating, after-tax
        gain
        of $3.5 million in its second quarter ended June 30, 2005. The Company may
        also
        receive up to $3.0 million in additional payments in 2006 if certain conditions
        and performance targets are met. The recording of gains from these additional
        payments will not be made until and unless they are fully earned.
  **(8)** **Commitments**
  During
        the nine months ended September 30, 2005, other than the line of credit
        discussed in Note 2 above, there were no material changes to the capital
        commitments and contractual obligations of the Company from those disclosed
        in
        the Form 10-K for the year ended December 31, 2004.
  **(9)** **Segment
        and Geographic Information**
  The
        Company’s operations are classified into one reportable segment. The Company’s
        United States and international net sales for the three and nine months ended
        September 30, 2005 and 2004, respectively, were comprised as
        follows:
  **Three
                  Months**
              
              
              
              **Three
                  Months**
              
              
              
              **Nine****months**
              
              
              
              **Nine****months****Ended**
              
              
              
              **Ended**
              
              
              
              **Ended**
              
              
              
              **Ended****September
                  30,**
                **2005**
              
              **%
                  ofTotal**
              
              **September
                  30,**
                **2004**
              
              **%
                    ofTotal**
              
              **September
                  30,**
                **2005**
              
              **%
                    ofTotal**
              
              **September
                  30,**
                **2****004**
              
              **%
                    ofTotal**North
                  America
              
              $
              2,668,030
              
              
              50%
              
              $
              3,321,564
              
              
              46%
              
              $
              8,701,050
              
              
              48%
              
              $
              10,938,878
              
              
              48%Turkey
              
              
              973,349
              
              
              18%
              
              
              1,135,603
              
              
              16%
              
              
              3,113,560
              
              
              17%
              
              
              3,197,954
              
              
              14%UK
              
              
              1,108,810
              
              
              21%
              
              
              1,835,555
              
              
              26%
              
              
              4,057,410
              
              
              22%
              
              
              6,219,888
              
              
              27%All
                  Other
              
              
              558,191
              
              
              11%
              
              
              849,886
              
              
              12%
              
              
              2,397,276
              
              
              13%
              
              
              2,668,963
              
              
              11%Total
              
              $
              5,308,380
              
              
              100%
              
              $
              7,142,608
              
              
              100%
              
              $
              18,269,296
              
              
              100%
              
              $
              23,025,683
              
              
              100%
  **(10)** **Customer
        Concentrations**
  Relatively
        few customers have accounted for a substantial portion of the Company’s net
        sales. In the third quarter of 2005 the Company’s net sales to its top three
        customers accounted for 38% of its total net sales, with the Company’s sales to
        a large Turkish distributor accounting for 18% of the total net sales. The
        remaining 20% was divided fairly equally between the other two customers,
        both
        with a 10% share. In the first nine months of 2005 the Company's net sales
        to
        its top three customers accounted for 39% of its total net sales. Zoom’s fourth
        largest customer in the second quarter of 2005 and sixth largest customer
        in the
        first nine months of 2005 was Granville Technologies, Ltd., which in late
        July
        2005 went into “administration,” a U.K. form of receivership. No sales to
        Granville were recorded in the third quarter of 2005. The administrators
        have
        decided to discontinue the company as a going concern and sell the business
        assets to help satisfy creditors. The Company had a receivable of $.8 million
        and $.3 million of consigned inventory with Granville Technologies at the
        time
        that Granville was placed into “administration.” Because of our assessment of
        the improbability of the collection of the receivables and the recovery of
        the
        inventory at that time, the Company's results of operations for the second
        quarter of 2005 included a $1.1 million reserve for these receivables and
        inventory. The expenses associated with these reserves were recorded as a
        general and administrative expense in the second quarter of 2005. In the
        third
        quarter of 2005 the Company recovered the entire $.3 million of consigned
        inventory from the administrators and confirmed that the VAT portion of the
        receivable is recoverable from the U.K. government Customs agency, HM Customs.
        These recoveries resulted in a $.4 million reversal in the third quarter
        of 2005
        of the general and administrative expenses associated with the $1.1 million
        reserve established in the second quarter of 2005. Additional recoveries
        are
        highly unlikely.
 
 10
  The
        Company’s customers generally do not enter into long-term agreements obligating
        them to purchase our products. The Company may not continue to receive
        significant revenues from any of these or from other large customers. A
        reduction or delay in orders from any of the Company’s significant customers, or
        a delay or default in payment by any significant customer could materially
        harm
        the Company’s business and prospects. Because of the Company’s significant
        customer concentration, its net sales and operating income could fluctuate
        significantly due to changes in political or economic conditions, or the
        loss,
        reduction of business, or less favorable terms for any of the Company's
        significant customers.
 
 **(11)
        Subsequent Event**
 
 On
        October 26, 2005 the Company accelerated the vesting of all stock options
        previously awarded to employees and officers that were scheduled to vest
        on or
        before May 6, 2006. These stock options had exercise prices in excess of
        $1.76,
        the closing price of the Company’s Common Stock on October 26, 2005, the
        effective date of the acceleration. As a result of the acceleration, stock
        options to purchase 317,500 shares became exercisable immediately. These
        accelerated stock options represent 33% of the total outstanding unvested
        stock
        options and approximately 25% of the total outstanding stock options. The
        weighted average exercise price of the accelerated stock options is $2.44
        per
        share.
 
 The
        primary purpose of the acceleration of the vesting of these stock options
        is to
        reduce the Company’s future reported compensation expense upon the planned
        adoption of Statement of Financial Accounting Standards (SFAS) No. 123R,
“Share
        Based Payment” effective January 1, 2006. As a result of the acceleration, the
        Company expects to reduce the stock option expense, a non-cash charge, it
        otherwise would be required to record by **** approximately
        $130,000 total for the first two quarters of 2006.
 
 The
        pro-forma compensation expense reported in footnote 1(b), Stock-Based
        Compensation, in this document is not impacted by the vesting acceleration.
        The
        impact will be reflected in the Stock-Based Compensation footnote in the
        2005
        10-K.
 
 **ITEM
        2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
  *The
        following discussion and analysis should be read in conjunction with the
        safe
        harbor statement and the risk factors contained herein and set forth in our
        Annual Report on Form 10-K for the year ended December 31, 2004. 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 hardware products,
        principally broadband and dial-up modems and related products, to retailers,
        distributors, Internet Service Providers and Original Equipment Manufacturers.
        We sell our products through a direct sales force and through independent
        sales
        agents. Our employees are primarily located at our headquarters in Boston,
        Massachusetts, our support office in Boca Raton, Florida, and our sales office
        in the United Kingdom. We typically design our hardware products, though
        we do
        sometimes use another company’s design if it meets our requirements. Electronic
        assembly and testing of our products in accordance with our specifications
        is
        typically done in China. We perform most of the packaging and distribution
        effort at our production and warehouse facility in Boston, Massachusetts,
        which
        also engages in firmware programming and in testing.
 
 11
  Historically
        we derived a majority of our net sales from the retail after-market sale
        of
        dial-up modems to customers seeking to add or upgrade a modem for their personal
        computers. In recent years the size of this market and our sales to this
        market
        have declined, as personal computer manufacturers have incorporated a modem
        as a
        built-in component in most consumer personal computers and as increasing
        numbers
        of consumers world-wide have switched to broadband Internet access. The general
        consensus of communications industry analysts is that after-market sales
        of
        dial-up modems will continue to decline. There is also consensus among industry
        analysts that the market for broadband Internet connection devices, such
        as
        cable modems and DSL modems, will grow rapidly during the decade. In response
        to
        increased and forecasted demand for faster connection speeds and increased
        modem
        functionality, we have invested and continue to invest resources to advance
        our
        product line of broadband modems, especially DSL modems.
  We
        continually seek to improve our product designs and manufacturing approach
        in
        order to reduce our costs. We pursue a strategy of outsourcing rather than
        internally developing our modem chipsets, which are application-specific
        integrated circuits that form the technology base for our modems. By outsourcing
        the chipset technology, we are able to concentrate our research and development
        resources on modem system design, leverage the extensive research and
        development capabilities of our chipset suppliers, and reduce our development
        time and associated costs and risks. As a result of this approach, we are
        able
        to quickly develop new and innovative products while maintaining a relatively
        low level of research and development expense as a percentage of net sales.
        We
        also outsource aspects of our manufacturing to contract manufacturers as
        a means
        of reducing our costs of production, and to provide us with greater flexibility
        in our production capacity.
  Over
        the
        past several years our net sales have declined. In response to the declining
        sales volume, we have cut costs by reducing staffing and some overhead costs.
        On
        December 31, 2002, our total headcount of full-time employees, including
        temporary workers, was 185, which was reduced to 154 at year-end 2004. On
        September 30, 2005, our full-time employee headcount was 125.
  Generally
        our gross margin for a given product depends on a number of factors including
        the type of customer to whom we are selling. The gross margin for retailers
        tends to be higher than for some of our other customers; but the sales, support,
        and overhead costs associated with retailers also tend to be higher. All
        of
        Zoom’s sales to certain countries, including Turkey, Vietnam, and Saudi Arabia,
        are currently handled by a single distributor who handles the support and
        marketing costs within the country. Gross margin for sales to these distributors
        tends to be low, since lower pricing to these distributors helps them to
        cover
        the support and marketing costs that they cover. Our gross margin for broadband
        modems tends to be lower than for dial-up modems for a number of reasons,
        including the fact that retailers are currently a more significant channel
        for
        our dial-up modems than for our broadband modems; the fact that a higher
        percentage of our DSL sales come from low-margin countries; and the fact
        that
        there is stronger competition in the DSL market than in the dial-up
        market.
  In
        the
        first nine months of 2005 our net sales were down 20.7% over the same nine-month
        period in the prior year. The main reason for the decrease was the decline
        in
        dial-up modem sales, more than offsetting a growth in DSL modem sales. While
        we
        have generally experienced growth in our DSL modem sales, these sales are
        currently concentrated with a small number of customers, and this reduces
        the
        predictability of our results. In fact, as described below, one of our larger
        DSL customers, Granville Technologies Ltd., went into receivership in July
        2005,
        and this is one important reason that our total DSL sales were only up 5%
        from
        the third quarter of 2004 to the third quarter of 2005. In Turkey Zoom has
        had a
        relatively high share of the small DSL market that is one of the fastest
        growing
        in the world in percentage terms; and in the future we will compete to try
        to
        maintain or grow our share in what is expected to be a high-growth market.
        We
        are also continuing our efforts to expand our DSL customer base and product
        line, and to enter new markets. Because of our significant customer
        concentration, however, our net sales and operating 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.
  Zoom’s
        fourth largest customer in the second quarter of 2005 and sixth largest customer
        in the first nine months of 2005 was Granville Technologies, Ltd., which
        was
        reported in late July 2005 to have gone into “administration,” a U.K. form of
        receivership. No sales to Granville were recorded in the third quarter of
        2005.
        The administrators have decided to discontinue the company as a going concern
        and sell the business assets to help satisfy creditors. The Company had a
        receivable of $.8 million and $.3 million of consigned inventory with Granville
        Technologies at the time that Granville was placed into “administration.”
        Because of our assessment of the improbability of the collection of the
        receivables and the recovery of the inventory at that time, the Company's
        results of operations for the second quarter of 2005 included a $1.1 million
        reserve for these receivables and inventory. The expenses associated with
        these
        reserves were recorded as a general and administrative expense in the second
        quarter of 2005. In the third quarter of 2005 the Company recovered the entire
        $.3 million of consigned inventory from the administrators and confirmed
        that
        the VAT portion of the receivable is recoverable from the U.K. government
        Customs agency, HM Customs. These recoveries resulted in a $.4 million reversal
        in the third quarter of 2005 of the general and administrative expenses
        associated with the $1.1 million reserve established in the second quarter
        of
        2005. Additional recoveries are highly unlikely.
 
 12
  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 in exchange for our investment of approximately $3.5 million.
        We recorded a non-operating gain of $3.5 million in our second quarter of
        2005
        in connection with this sale. We may also receive up to $3.0 million in
        additional payments in 2006 if certain conditions and performance targets
        are
        met. We will not record gains from these additional payments, if any, until
        and
        unless they are fully earned.
  Our
        cash
        and cash equivalents balance at September 30, 2005 was $8.3 million, down
        from
        $9.4 million at December 31, 2004. This was due primarily to our operating
        losses for the nine months and a reduction of accounts payable and accrued
        expenses, partially offset by the receipt of $3.5 million from the sale of
        the
        Company's investment in InterMute.
  **Critical
        Accounting Policies and Estimates**
  The
        following is a discussion of what we view as our more significant accounting
        policies and estimates. As described below, management judgments and estimates
        must be made and used in connection with the preparation of our consolidated
        financial statements. Where noted, material differences could result in the
        amount and timing of our net sales, costs, and expense for any period if
        we made
        different judgments or used different estimates.
  **Revenue
        (Net Sales) Recognition.** We
        primarily sell hardware products to our customers. The hardware products
        include
        dial-up modems, DSL modems, cable modems, embedded modems, ISDN modems,
        telephone dialers, and wireless and wired networking equipment. We earn a
        small
        amount of royalty revenue that is included in our net sales, primarily from
        Internet service providers. We generally do not sell software. We began selling
        services in 2004. We introduced our Global Village VoIP service in late 2004,
        but sales of those services to date have not been material.
  We
        derive
        our net sales primarily from the sales of hardware products to four types
        of
        customers:
  ·
              computer
                  peripherals retailers;
  ·
              Internet
                  service providers;
  ·
              computer
                  product distributors; and
  ·
              original
                  equipment manufacturers (OEMs).
  We
        recognize hardware net sales for all three types of customers at the point
        when
        the customers take legal ownership of the delivered products. Legal ownership
        passes from Zoom to the customer based on the contractual FOB point specified
        in
        signed contracts and purchase orders, which are both used extensively. Many
        of
        our customer contracts or purchase orders specify FOB destination. We verify
        the
        delivery date on all significant FOB destination shipments made during the
        last
        10 business days of each quarter.
  Our
        net
        sales of hardware include reductions resulting from certain events which
        are
        characteristic of the sales of hardware to retailers of computer peripherals.
        These events are product returns, certain sales and marketing incentives,
        price
        protection refunds, and consumer and in-store mail-in rebates. Each of these
        is
        accounted for as a reduction of net sales based on detailed management
        estimates, which are reconciled to actual customer or end-consumer credits
        on a
        monthly or quarterly basis.
  Our
        VoIP
        service revenues to date were recorded as the end-user-customer consumed
        billable VoIP services. The end-user-customer became a service customer by
        electing to sign up for the Global Village billable service on the Internet.
        Zoom recorded revenue either as billable services were consumed or as a monthly
        flat-fee service was billed.
 
 13
  *Product
        Returns.* Products
        are returned by retail stores and distributors for inventory balancing,
        contractual stock rotation privileges, and warranty repair or replacements.
        We
        estimate the sales and cost value of expected future product returns of
        previously sold products. Our estimates for product returns are based on
        recent
        historical trends plus estimates for returns prompted by, among other things,
        new product introductions, announced stock rotations and announced customer
        store closings, etc. Management reviews historical returns, current economic
        trends, and changes in customer demand and acceptance of our products when
        estimating sales return allowances. The estimate for future returns is recorded
        as a reserve against accounts receivable, a reduction of net sales, and the
        corresponding change to inventory and cost of sales. The relationship of
        quarterly physical product returns to quarterly product sales remained
        relatively stable for many years, but has been declining from a high of 10.6%
        to
        a low of 5.4% in the past two years as retail sales as a percent of total
        sales
        have declined.
  *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
        $.7 million in 2002, $.2 million in 2003, and $.1 million in 2004. In the
        three
        and nine months ended September 30, 2005, Zoom’s recorded price protection was
        $.1 million and $.2 million, respectively.
  *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 primarily
        reported as reductions in our net sales and were $1.7 million in 2002, $1.5
        million in 2003, and $1.3 million in 2004. In the three and nine months ended
        September 30, 2005, Zoom’s net sales were reduced by $.2 million and $.9
        million, respectively, due to sales and marketing support funding. The declining
        trend was primarily due to lower retailer sales.
  *Consumer
        Mail-In and In-Store Rebates and Store Rebates* .
        Our
        estimates for consumer mail-in rebates are based on a detailed understanding
        and
        tracking by customer and sales program, supported by actual rebate claims
        processed by the rebate redemption centers plus an accrual for an estimated
        lag
        in processing at the redemption centers. Our estimates for store rebates
        are
        comprised of actual credit requests from the eligible customers. The estimate
        for mail-in and store rebates is recorded as a reserve against accounts
        receivable and a reduction of net sales in the same period that the rebate
        obligation was triggered. Reductions in our net sales due to the consumer
        rebates were $1.6 million in 2002, $2.1 million in 2003, and $1.4 million
        in
        2004. In the three and nine months ended September 30, 2005, Zoom’s recorded
        consumer and store rebates were $.2 million and $.9 million respectively.
        The
        declining trend was primarily due to lower retailer sales.
  To
        ensure
        that the sales, discounts, and marketing incentives are recorded in the proper
        period, we perform extensive tracking and documenting by customer, by period,
        and by type of marketing event. This tracking includes reconciliation to
        the
        accounts receivable records for deductions taken by our customers for these
        discounts and incentives.
  **Accounts
        Receivable Valuation.** We
        establish accounts receivable reserves equal to the above-discussed net sales
        adjustments for estimates of product returns, price protection refunds, and
        consumer and store rebates. These reserves are drawn down as actual credits
        are
        issued to the customer’s accounts. Other than the $.7 million reserve recorded
        against the Granville Technologies receivable in the nine months ended September
        30, 2005 in connection with the reported administration status of that company,
        over the past several years our bad-debt write-offs have not been significant.
        The Granville accounts receivable charge was recorded to general and
        administrative expense.
  **Inventory
        Valuation and Cost of Goods Sold.** Inventory
        is valued on a standard cost basis where the material standards are periodically
        updated for current material pricing. Reserves for obsolete inventory are
        established by management based on usability reviews performed each quarter.
        Our
        reserves against the inventory of a particular product range from 0% to 100%,
        based on management’s estimate of the probability that the material will not be
        consumed or that it will be sold below cost. Our valuation process is to
        compare
        our cost to the selling prices each quarter, and if the selling price of
        a
        product is less than the “if completed” cost of our inventory, we write-down the
        inventory on a “lower of cost or market” basis. In 2002 and 2003, we recorded
        charges against inventory of $.7 million and $.3 million respectively as
        a
        result of lower of cost or market valuation issues. No lower of cost or market
        charges against inventory were recorded in 2004 or the nine months ended
        September 30, 2005. In the third quarter ended September 30, 2005 we recorded
        increased obsolescence reserves of $.3 million for older models of ADSL modems
        and VOIP hardware.
 
 14
  Along
        with the expected loss of receivables from the aforementioned Granville
        Technologies, Ltd. business failure, we also had $.3 million of consigned
        inventory at one of Granville's facilities. We believed that recovery of
        this
        inventory was uncertain and we recorded an inventory reserve of $.3 million
        in
        the second quarter of 2005. We recovered the entire inventory from the Granville
        administrators and reversed the $.3 million inventory reserve in the third
        quarter of 2005.
  During
        the last three years we benefited from various component supply arrangements
        that provided us with free products based on the amount of goods we purchased
        from the supplier. The favorable impact to our statement of operations was
        recognized as the products employing the acquired components were sold. A
        new
        supply arrangement for 2005, with free products to be earned on purchases,
        received similar accounting treatment in the quarter and nine months ended
        September 30, 2005.
  **Valuation
        and Impairment of Deferred Tax Assets.** As
        part
        of the process of preparing our consolidated financial statements we are
        required to estimate our income tax expense and deferred income tax position.
        This process involves the estimation of our actual current tax exposure together
        with assessing temporary differences resulting from differing treatment of
        items
        for tax and accounting purposes. These differences result in deferred tax
        assets
        and liabilities, which are included in our consolidated balance sheet. We
        must
        then assess the likelihood that our deferred tax assets will be recovered
        from
        future taxable income and to the extent we believe that recovery is not likely,
        we must establish a valuation allowance. To the extent we establish a valuation
        allowance or increase this allowance in a period, we must include an expense
        within the tax provision in the statement of operations.
  Significant
        management judgment is required in determining our provision for income taxes
        and any valuation allowance recorded against our net deferred tax assets.
        We
        have recorded a 100% valuation allowance against our deferred tax assets.
        It is
        management’s estimate that, after considering all the available objective
        evidence, historical and prospective, with greater weight given to historical
        evidence, it is more likely than not that these assets will not be realized.
        If
        we establish a record of continuing profitability, at some point we will
        be
        required to reverse the valuation allowance and restore the deferred asset
        value
        to the balance sheet, recording an equal income tax benefit which will increase
        net income in that period(s).
 
 **Results
        of Operations**
  **Summary** .
        Net
        sales were $5.3 million for our third quarter ended September 30, 2005, down
        25.7% from $7.1 million in the third quarter of 2004. We had a net loss of
        $1.4
        million for the third quarter of 2005, compared to a net loss of $1.0 million
        in
        the third quarter of 2004. We had a loss per diluted share of $.15 for the
        third
        quarter of 2005 compared to a net loss per diluted share of $.12 for the
        third
        quarter of 2004.
  Net
        sales
        were $18.3 million for the nine months ended September 30, 2005, down 20.7%
        from
        $23.0 million in the first nine months of 2004. We had a net loss of $1.3
        million for the first nine months of 2005, compared to a net loss of $2.2
        million in the first nine months of 2004. We recorded a net loss per diluted
        share of $.14 for the first nine months of 2005 compared to a net loss per
        diluted share of $.26 for the first nine months of 2004.
  **Net
        Sales** .
        Our net
        sales for the third quarter of 2005 decreased 25.7% from the third quarter
        of
        2004, primarily due to a 43% decrease in dial-up modem sales partially offset
        by
        a 5.4% increase in DSL modem sales. Dial-up modem net sales declined to $2.2
        million in the third quarter of 2005 compared to $3.9 million in the third
        quarter of 2004, primarily due to a decrease of both dial-up modem unit sales,
        primarily resulting from the continued decline of the dial-up modem
        after-market, and to a lesser extent, lower dial-up modem average selling
        prices. DSL modem net sales were $2.6 million in the third quarter of 2005
        compared to $2.5 million in the third quarter of 2004. The modest growth
        was
        primarily due to numerous new and repeat customer sales, at retailers,
        distributors, value-added resellers, and internet service providers worldwide,
        partially offset by by a slight decrease in DSL modem sales to our large
        distributor customer in Turkey.
  Net
        sales
        in our other product sales categories, which include cable modems, cameras,
        ISDN
        modems, telephone dialers, and wireless networking equipment declined $.4
        million, or 42% from $.8 million from the third quarter of 2004 to $.4 million
        in the third quarter of 2005, primarily due to decreased sales emphasis on
        many
        of these products. During the third quarter of 2005 we did not realize any
        significant revenue from our Global Village phone services.
 
 15
  Our
        net
        sales for the first nine months of 2005 decreased 20.7% from the first nine
        months of 2004, primarily due to a 38% decrease in dial-up modem sales,
        partially offset by a 16% increase in DSL modem sales. Dial-up modem net
        sales
        declined to $8.1 million in the first nine months of 2005 compared to $13.0
        million in the first nine months of 2004, primarily due to a decrease of
        both
        dial-up modem unit sales, primarily resulting from the continued decline
        of the
        dial-up modem after-market, and to a lesser extent, lower dial-up modem average
        selling prices. DSL modem net sales increased to $8.9 million in the first
        nine
        months of 2005 compared to $7.6 million in the first nine months of 2004,
        primarily due to increased unit net sales of DSL modems in Turkey and other
        countries. Net sales in our other product sales categories, which include
        cable
        modems, cameras, ISDN modems, telephone dialers, and wireless networking
        equipment declined $1.1 million, or 46% from $2.4 million for the first nine
        months of 2004 to $1.3 million in the first nine months of 2005, primarily
        due
        to decreased sales emphasis on many of these products.
  Our
        net
        sales in North America were $2.7 million in the third quarter of 2005, a
        decrease from $3.3 million in the third quarter of 2004. Our net sales in
        Turkey
        were $1.0 million in the third quarter of 2005, a decrease from $1.1 million
        in
        the third quarter of 2004. Our net sales in the U.K. were $1.1 million in
        the
        third quarter of 2005, a decrease from $1.8 million in the third quarter
        of
        2004. Our net sales other than North America, Turkey and the U.K. were $.6
        million in the third quarter of 2005, a decrease from $.9 million in the
        third
        quarter of 2004. We attribute the declining sales in Turkey in part to
        customer's overstock of inventory. However, we cannot assure that our sales
        to
        Turkey will recover. The changes in the other market areas reflect our declining
        sales of dial-up modems, particularly in North America and the U.K.
  Our
        net
        sales in North America were $8.7 million in the first nine months of 2005,
        a
        decline from $10.9 million in the first nine months of 2004. Our net sales
        in
        Turkey were $3.1 million in the first nine months of 2005 and $3.2 million
        in
        the first nine months of 2004. Our net sales in the U.K. were $4.1 million
        in
        the first nine months of 2005, a decline from $6.2 million in the first nine
        months of 2004. The sales decline in North America and the U.K. reflect our
        declining sales of dial-up modems. Our net sales other than North America,
        Turkey and the U.K. were $2.4 million in the first nine months of 2005 and
        $2.7
        million in the first nine months of 2004, also reflective of our declining
        sales
        of dial-up modems. In the third quarter ended September 30, 2005 the Company’s
        largest customer, accounting for 18% of total net sales, was a large distributor
        in Turkey. In the first nine months ended September 30, 2005 the Company's
        two
        largest customers were our Turkish Distributor and a large North American
        retailer, accounting for 17% and 14% of total net sales, respectively. Because
        of our significant customer concentration, our net sales and operating income
        could fluctuate significantly due to changes in political or economic conditions
        or the loss, reduction of business, or less favorable terms for any of our
        significant customers. For example, we expect our ongoing net sales to be
        adversely affected by the administration status of Granville Technologies
        in
        July 2005. Granville Technologies accounted for 0% and 6% of our net sales
        in
        the third quarter and first nine months of 2005, respectively, compared to
        6%
        and 5% of our net sales in the third quarter and first nine months of 2004,
        respectively.
  **Gross
        Profit.** Our
        total
        gross profit was $.5 million or 9.8% of net sales in the third quarter of
        2005,
        down from $1.5 million or 21% of net sales in the third quarter of 2004.
        The
        reduced gross profit resulted primarily from the reduction in sales and from
        lower gross margin on those sales. Gross margin was lower due to obsolescence
        charges for slow-moving models, the negative effect of manufacturing overhead
        spread over lower sales, and the shift of Zoom’s product mix away from dial-up
        modems, Zoom’s highest margin product category.
  Our
        total
        gross profit was $3.4 million in the first nine months of 2005, a decline
        from
        $6.1 million in the first nine months of 2004. Our gross margin percent of
        net
        sales decreased to 18.8% in the first nine months of 2005 from 26.3% in the
        first nine months of 2004. Gross margins were lower primarily because of
        the
        negative effect of manufacturing overhead spread over lower sales and the
        shift
        of Zoom’s product mix away from dial-up modems, Zoom’s highest margin product
        category.
  **Selling
        Expense.** Selling
        expense decreased $.1 million to $1.0 million or 18.4% of net sales in the
        third
        quarter of 2005 from $1.1 million or 15.6% of net sales in the third quarter
        of
        2004. Selling expense was lower primarily due to Zoom’s moving most European
        customer support from the U.K. to the U.S., which resulted in a net reduction
        in
        headcount.
 
 16
  Selling
        expense decreased $.3 million to $3.2 million or 17.4% of net sales in the
        first
        nine months of 2005 from $3.5 million or 15.3% of net sales in the first
        nine
        months of 2004. Selling expense was lower primarily because of lower personnel
        and related costs resulting from employee headcount reductions, including
        the
        impact of moving most European customer support from the U.K. to the U.S.,
        partially offset by higher distribution and outbound product delivery
        expense.
  **General
        and Administrative Expense.** General
        and administrative expense decreased $.5 million to $.3 million, or 5.9%
        of net
        sales in the third quarter of 2005 from $.8 million, or 10.9% of net sales
        in
        the third quarter of 2004. The decrease of $.5 million was primarily due
        to the
        reversal of $.4 million of the $1.1 million reserve established last quarter
        when a customer in the U.K., Granville Technology Group, went into
“administration,” a U.K. form of receivership. The $.4 million favorable
        adjustment was primarily due to the successful recovery of $.3 million of
        the
        consigned inventories and the confirmation that $.1 million of the Value
        Added
        Tax (VAT) we paid on certain uncollectable sales was refundable by HM Customs,
        the U.K. government VAT agency.
  General
        and administrative expense increased $.1 million to $2.9 million, or 15.7%
        of
        net sales in the first nine months of 2005 from $2.8 million, or 12.1% of
        net
        sales, in the first nine months of 2004. The increase of $.1 million was
        primarily due to a $.7 million charge to general and administrative expense
        for
        the reserve against receivables for Granville Technologies, the U.K customer
        now
        in administration, partially offset by lower legal and accounting expense
        due to
        acquisition-related expense in the second quarter of 2004, lower personnel
        costs, lower employee health expense, and other expense reductions.
  **Research
        and Development Expense.** Research
        and development expense was $.7 million or 12.5% of net sales in the third
        quarter of 2005 and $.7 million or 10.1% of net sales in the third quarter
        of
        2004. These costs reflected increases primarily in licenses and approvals
        and
        outside services that were offset by decreases primarily in employee
        compensation and depreciation expense.
  Research
        and development expense was $2.1 million or 11.5% of net sales in the first
        nine
        months of 2005 and $2.1 million or 9.0% of net sales in the first nine months
        of
        2004. These costs reflected increases primarily in outside services and licenses
        and approvals that were offset by decreases primarily in depreciation and
        employee compensation. Development and support continues on all of our major
        product lines with particular emphasis on VoIP hardware, the Global Village
        phone services, and DSL modems.
  **Other
        Income (Expense), Net.** Other
        income, net was $.1 million in the third quarter of 2005, compared to $.1
        million in the third quarter of 2004.
  Other
        income, net was $3.5 million in the first nine months of 2005, compared to
        $.1
        million in the first nine months of 2004. The reason for the $3.3 million
        increase in other income, net was the $3.5 million gain from the InterMute
        transaction, offset slightly by a decline of rental income received from
        leasing
        excess space at our headquarters facility.
  **Income
        Tax Expense (Benefit).** We
        did
        not record any income tax expense in the third quarter or the nine months
        ended
        September 30, 2005 or September 30, 2004. The net deferred tax asset balance
        at
        September 30, 2005 is zero. This accounting treatment is described in further
        detail under the caption **Critical
        Accounting Policies and Estimates** above.
 
 **Liquidity
        and Capital Resources**
  On
        September 30, 2005 we had working capital of $9.2 million, including $8.3
        million in cash and cash equivalents. In the first nine months of 2005 operating
        activities used $4.9 million in cash. Our net loss in the first nine months
        of
        2005 was $1.3 million. Adjustments to reconcile net loss to net cash used
        in
        operating activities included a $3.5 million gain on the sale of our investment
        in InterMute and depreciation of $.2 million. Net cash used in operating
        activities included an increase of inventory of $.1 million and a reduction
        of
        accounts payable and accrued expenses of $1.0 million. Net cash provided
        by
        operating activities included a $.4 million decrease in accounts receivable
        and
        a decrease of prepaid expense of $.3 million. The $.4 million decrease of
        accounts receivable was not a source of cash as it was primarily the result
        of
        the $.7 million reserve recorded against receivables for Granville Technologies,
        the U.K customer now in administration status.
  In
        the
        first nine months of 2005 investing activities provided $3.5 million of cash,
        due to the receipt of a $3.5 million cash payment in exchange for our investment
        in InterMute. In the first nine months of 2005 financing activities provided
        $.3
        million, primarily from $.4 million from the exercise of employee stock options,
        partially offset by $.2 million in cash for monthly principal payments on
        our
        $6.0 million mortgage, with a current outstanding balance of $4.9 million.
 
 17
  Zoom
        may
        also receive additional payments of up to approximately $3 million in 2006
        in
        connection with the InterMute sale if certain conditions and performance
        targets
        are met.
  Our
        mortgage is a 5-year balloon mortgage, payable in full in January 2006 that
        is
        amortized on a 20-year basis. The interest rate is adjusted annually in January
        of each year based on the Federal Home Loan Bank rate plus 2.5% per annum.
        In
        2004 the interest rate was 3.99%. As of January 10, 2005 the rate of interest
        changed to 5.80%. We renegotiated the rate to 5.0% effective February 10,
        2005.
        As of September 30, 2005 $4.9 million was outstanding on this loan, which
        will
        be due and payable on January 10, 2006. Because the mortgage is due within
        twelve months, the mortgage loan is reflected as a current liability. We
        believe
        that we have sufficient resources to repay the mortgage on or before the
        maturity date in January 2006. We also believe that we should be able to
        sell
        our owned buildings on favorable terms if we require additional liquidity.
        If we
        were to sell the portion of our owned buildings that includes our principal
        headquarters, we believe we would be able to lease back a portion of the
        sold
        property or otherwise find suitable space for our principal headquarters
        on
        satisfactory terms.
  On
        March
        16, 2005 we entered into a Loan and Security Agreement with Silicon Valley
        Bank
        that provides for a revolving line of credit of up to $2 million. The revolving
        line of credit can be used to (i) borrow under revolving loans for working
        capital and general corporate purposes, (ii) issue letters of credit, (iii)
        enter into foreign exchange forward contracts, and (iv) support certain cash
        management services. Revolving loans bear interest at a floating rate of
        interest equal to Silicon Valley Bank’s prime rate plus 0.5%. The rate at
        September 30, 2005 was 7.25%. This interest rate will be increased to Silicon
        Valley Bank’s prime rate plus 1.0% if we record two consecutive quarters of
        combined losses. The revolving line of credit terminates and all outstanding
        obligations under the Loan and Security agreement become due on March 15,
        2006.
  The
        revolving loans under the Loan and Security Agreement are secured by a first
        priority lien on substantially all of our assets, excluding intellectual
        property and real estate. We guaranteed the obligations of Zoom Telephonics
        under the revolving line of credit and pledged all of the stock of Zoom
        Telephonics in support of our guarantee. The Loan and Security Agreement
        requires that we maintain a minimum adjusted quick ratio and a minimum net
        worth. In addition, we are required to obtain Silicon Valley Bank’s prior
        written consent to among other things, dispose of assets, make acquisitions,
        be
        acquired, incur indebtedness, grant liens, make investments, pay dividends,
        or
        repurchase stock. This consent may not be unreasonably withheld.
  The
        Loan
        and Security Agreement contains events of default that include among other
        things, non-payment of principal, interest or fees, violation of covenants,
        inaccuracy of representations and warranties, cross default to certain other
        indebtedness, bankruptcy and insolvency events, change of control and material
        judgments. Upon occurrence of an event of default, Silicon Valley Bank is
        entitled to, among other things, accelerate all of our obligations under
        the
        Loan and Security Agreement and sell our assets to satisfy our obligations
        under
        the Loan and Security Agreement. As of September 30, 2005 our availability
        under
        the revolving line of credit is $1.7 million. We have no outstanding borrowings
        and are in compliance with the covenants under the revolving line of credit
        as
        of September 30, 2005.
  To
        conserve cash and manage our liquidity, we continue to implement cost cutting
        initiatives including the reduction of employee headcount and overhead costs.
        The employee headcount was 154 at December 31, 2004 and has been reduced
        to 125
        at September 30, 2005. We plan to continue to assess our cost structure as
        it
        relates to our revenues and cash position, and we may make further reductions
        if
        the actions are deemed necessary.
  Management
        believes we have sufficient resources to fund our normal operations over
        the
        next 12 months, through September 30, 2006. However, if we are unable to
        increase our revenues, reduce or otherwise adequately control our expenses,
        or
        raise capital, our longer-term ability to continue as a going concern and
        achieve our intended business objectives could be adversely affected. Moreover,
        our liquidity could be significantly impaired if we repay our mortgage with
        our
        current sources of cash on or before the maturity date in January 2006 and
        we
        are not able to refinance all or a significant portion of the mortgage and
        we
        are not otherwise able to sell our owned buildings for adequate consideration.
        See “Risk Factors” below, for further information with respect to events and
        uncertainties that could harm our business, operating results, and financial
        condition.
  18
 
 **Commitments**
  During
        the nine months ended September 30, 2005, there were no material changes
        to our
        capital commitments and contractual obligations from those disclosed in the
        Form
        10-K for the year ended December 31, 2004, other than the revolving line
        of
        credit we obtained in March 2005, which is described in Note 2 of the Notes
        to
        Consolidated Financial Statements.
 
 **“Safe
        Harbor” Statement under the Private Securities Litigation Reform Act of
        1995.**
  *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: Zoom’s plans, expectations and intentions,
        including statements relating to Zoom’s prospects and plans relating to sales of
        our dial-up, cable and DSL modems, wireless and VoIP products; the expected
        effects resulting from the failure of Granville Technologies; the anticipated
        development and timing of new product introductions; the decline of the dial-up
        modem market; the level of demand for Zoom’s products; Zoom’s ability to obtain
        debt or equity financing; Zoom’s sufficiency of capital resources; Zoom’s
        ability to obtain debt or equity financing; Zoom’s sufficiency of capital
        resources; Zoom’s ability to repay its mortgage with current cash resources
        and/or refinancing all or a portion of the mortgage; Zoom’s ability to sell its
        owned real property if it chooses to do so and Zoom’s ability to lease suitable
        space for its principal headquarters if it chooses to sell its owned real
        property; the anticipated impact of changes in the accounting treatment of
        stock
        options; and Zoom’s financial condition or results of
        operations.*
  *In
        some cases, you can identify forward-looking statements by terms such as
        “may,”“will,”  “should,”  “could,”  “would,” 
“expects,”  “plans,”  “anticipates,”  “believes,” 
“estimates,”  “projects,”  “predicts,”  “potential” and similar
        expressions intended to identify forward-looking statements. These statements
        are only predictions and involve known and unknown risks, uncertainties,
        and
        other factors that may cause our actual results, levels of activity,
        performance, or achievements to be materially different from any future results,
        levels of activity, performance, or achievements expressed or implied by
        such
        forward-looking statements. Given these uncertainties you should not place
        undue
        reliance on these forward-looking statements. Also, these forward-looking
        statements represent our estimates and assumptions only as of the date of
        this
        report. 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 below
        as
        well as those discussed elsewhere in this report and in our filings with
        the
        Securities and Exchange Commission. We qualify all of our forward-looking
        statements by these cautionary statements.*
  **RISK
        FACTORS**
  *This
        report contains forward-looking statements that involve risks and uncertainties,
        such as statements of our objectives, expectations and intentions. The
        cautionary statements made in this report should be read as applicable to
        all
        forward-looking statements wherever they appear in this report. Our actual
        results could differ materially from those discussed herein. Factors that
        could
        cause or contribute to such differences include those discussed below, as
        well
        as those discussed elsewhere in this report.*
  **We
        may continue to incur net losses if we are unable to increase sales of our
        broadband modems.**
  Our
        net
        sales have been declining primarily due to the decline in the dial-up modem
        market, continuing decreases in the average selling prices of dial-up modems,
        and the trend toward faster connection speeds and broadband access products.
        Despite numerous cost reductions over the last few years, we have continued
        to
        incur significant net losses primarily due to our continuous decline in net
        sales from dial-up modems. We believe that the future of our business is
        largely
        dependent on the success of our broadband modems and other products. Although
        we
        believe that we have sufficient resources to fund our planned operations
        over
        the next year, if we fail to increase our net sales of our broadband modems
        and
        other products, our longer-term ability to stay in business and to achieve
        our
        intended business objectives could be adversely effected. Our continuing
        losses
        could also adversely affect our ability to fund the growth of our business
        should our strategies prove successful.
 
 19
 
 **Our
        liquidity may be significantly impaired if we repay our mortgage prior to
        the
        maturity of our mortgage in January 2006 with our current sources of cash
        and
        are not able to refinance all or a significant portion of our mortgage or
        otherwise sell our owned buildings for adequate
        consideration.**
  Our
        mortgage loan on the two buildings constituting our headquarters facility,
        of
        which $4.9 million was outstanding on September 30, 2005, will be due and
        payable on January 10, 2006. We believe that we have sufficient resources
        to
        repay the mortgage through current sources of cash and/or by refinancing
        all or
        a portion of the mortgage on or before the maturity date in 2006. We also
        believe that, in connection with or following the repayment of the mortgage,
        we
        will be able to sell our owned building on favorable terms if we require
        additional liquidity. Our liquidity could be significantly impaired if we
        repay
        our mortgage with our current sources of cash on or before the maturity date
        in
        January 2006 and we are not able to refinance all or a significant portion
        of
        the mortgage or we are not otherwise able to sell our owned buildings for
        adequate consideration.
  If
        we
        were to sell the portion of our owned buildings that includes our principal
        headquarters, we believe we would be able to lease back a portion of the
        sold
        property or otherwise find suitable space for our principal headquarters
        on satisfactory terms. If we are unable to lease back a portion of the sold
        property or otherwise find suitable space for our principal headquarters
        on
        satisfactory terms, our business may be harmed.
  **To
        stay in business we may require future additional funding which we may be
        unable
        to obtain on favorable terms, if at all.**
  In
        addition to obtaining funds to refinance or repay our mortgage, over the
        next
        twelve months we may require additional financing for our operations either
        to
        fund losses beyond those we anticipate or to fund growth in our inventory
        and
        accounts receivable. Additional financing may not be available to us on a
        timely
        basis if at all, or on terms acceptable to us. If we fail to obtain acceptable
        additional financing when needed, we may be required to further reduce planned
        expenditures or forego business opportunities, which could reduce our net
        sales,
        increase our losses, and harm our business. Moreover, additional equity
        financing could dilute the per share value of our common stock held by current
        shareholders, while additional debt financing could restrict our ability
        to make
        capital expenditures or incur additional indebtedness, all of which would
        impede
        our ability to succeed.
  **Our
        net sales and operating results have been adversely affected because of a
        decline in average selling prices for our dial-up modems and because of the
        decline in the retail market for dial-up modems.**
  The
        dial-up modem industry has been characterized by declining average selling
        prices and a declining retail market. The decline in average selling prices
        is
        due to a number of factors, including technological change ,
        lower
        component costs, and competition. The decline in the size of the retail market
        for dial-up modems is primarily due to the inclusion of dial-up modems as
        a
        standard feature contained in new PCs, and the advent of broadband products.
        Due
        to these factors and others, one of our significant retail customers has
        notified us that they want to purchase on a consignment basis for their dial-up
        modem category. That customer has also indicated that they plan to reduce
        the
        number of brands of dial-up modems they sell, and that they cannot assure
        that
        they will continue to sell our products. Less advantageous terms of sales,
        decreasing average selling prices and reduced demand for our dial-up modems
        have
        resulted and may in the future result in decreased net sales for dial-up
        modems.
        If we fail to replace declining revenue from the sales of dial-up modems
        with
        the sales of our other products, including our broadband modems, our business
        and results of operation will be harmed.
  **Our
        reliance on a limited number of customers for a large portion of our revenues
        could materially harm our business and prospects.**
  Relatively
        few customers have accounted for a substantial portion of our net sales.
        In
        2004, our net sales to each of three companies constituted over 10% of our
        net
        sales and together these three customers accounted for 35% of our total net
        sales. In the third quarter of 2005, our net sales to our top three customers
        accounted for 38% of our total net sales, with our sales to one customer
        accounting for 18% of our total net sales. Our customers generally do not
        enter
        into long-term agreements obligating them to purchase our products. We may
        not
        continue to receive significant revenues from any of these or from other
        large
        customers. Because of our significant customer concentration, our net sales
        and
        operating income could fluctuate significantly due to changes in political
        or
        economic conditions or the loss, reduction of business, or less favorable
        terms
        for any of our significant customers. For example, we expect our ongoing
        net
        sales to be adversely affected by the failure of Granville Technologies in
        July
        2005. Granville Technologies accounted for 0% and 6% of our net sales in
        the
        third quarter and first nine months of 2005, respectively compared to 6%
        and 5%
        of our net sales in the third quarter and first nine months of 2004. A reduction
        or delay in orders from any of our significant customers, or a delay or default
        in payment by any significant customer could materially harm our business
        and
        prospects.
 
 20
  **Our
        international operations are subject to a number of risks inherent in
        international activities.**
  Our
        sales
        outside of North America continue to represent an increasingly significant
        portion of our sales. Sales outside of North America have increased from
        38% of
        net sales in 2001 to approximately 55% of our net sales in 2004, including
        27%
        in the UK and 16% in Turkey. In the third quarter of 2005, our sales outside
        of
        North America accounted for 50% of our total net sales, including 18% in
        Turkey
        and 21% in the U.K. Currently our operations are significantly dependent
        on our
        international operations, particularly sales of our DSL modems, and may be
        materially and adversely affected by many factors including:
  ·
                international
                    regulatory and communications requirements and policy changes;
  ·
                favoritism
                    toward local suppliers;
  ·
                delays
                    in the rollout of broadband services by cable and DSL service
                    providers;
  ·
                local
                    language and technical support requirements;
  ·
                difficulties
                    in inventory management, accounts receivable collection and the
                    management
                    ofdistributors
                    or representatives;
  ·
                difficulties
                    in staffing and managing foreign operations;
  ·
                political
                    and economic changes and disruptions;
  ·
                governmental
                    currency controls;
  ·
                shipping
                    costs;
  ·
                currency
                    exchange rate fluctuations; and
  ·
                tariff
                    regulations
  We
          anticipate that our international sales will continue to account for a
          significant percentage of our net sales. If foreign markets for our current
          and
          future products develop more slowly than currently expected, our sales
          and our
          future results of operations may be harmed.
  **We
        believe that our future success will depend in large part on our ability
        to more
        successfully penetrate the broadband modem markets, which have been challenging
        markets, with significant barriers to entry.**
  With
        the
        shrinking of the dial-up modem market, we believe that our future success
        will
        depend in large part on our ability to more successfully penetrate the broadband
        modem markets, DSL and cable, and the VoIP market. These markets have been
        challenging markets, with significant barriers to entry that have adversely
        affected our sales to these markets. Although some cable and DSL modems are
        sold
        at retail, the high volume purchasers of these modems are concentrated in
        a
        relatively few large cable, telecommunications, and Internet service providers
        which offer broadband modem services to their customers. These customers,
        particularly cable services providers, also have extensive and varied approval
        processes for modems to be approved for use on their network. These approvals
        are expensive, time consuming, and continue to evolve. Successfully penetrating
        the broadband modem market therefore presents a number of challenges
        including:
  ·
              the
                  current limited retail market for broadband modems;
  ·
              the
                  relatively small number of cable, telecommunications and Internet
                  service
                  provider customersthat
                  make up a substantial part of the market for broadband modems;
 
 21
  ·
              the
                  significant bargaining power of these large volume purchasers;
  ·
              the
                  time consuming, expensive, uncertain and varied approval process
                  of the
                  various cable serviceproviders;
                  and
  ·
              the
                  strong relationships with cable service providers enjoyed by incumbent
                  cable equipmentproviders
                  like Motorola and Scientific Atlanta.
  Our
        sales
        of broadband products have been adversely affected by all of these factors.
        Sales of our broadband products in European countries have fluctuated and
        may
        continue to fluctuate due to approvals and delays in the deployment by service
        providers of cable and DSL service in these countries. We cannot assure that
        we
        will be able to successfully penetrate these markets.
  **Our
        failure to meet changing customer requirements and emerging industry standards
        would adversely impact our ability to sell our products and
        services.**
  The
        market for PC communications products and high-speed broadband access products
        and services is characterized by aggressive pricing practices, continually
        changing customer demand patterns, rapid technological advances, emerging
        industry standards and short product life cycles. Some of our product and
        service developments and enhancements have taken longer than planned and
        have
        delayed the availability of our products and services, which adversely affected
        our sales and profitability in the past. Any significant delays in the future
        may adversely impact our ability to sell our products and services, and our
        results of operations and financial condition may be adversely affected.
        Our
        future success will depend in large part upon our ability to:
  ·
              identify
                  and respond to emerging technological trends and industry standards
                  in the
                  market;
  ·
              develop
                  and maintain competitive products that meet changing customer demands;
  ·
              enhance
                  our products by adding innovative features that differentiate our
                  products
                  from those ofour
                  competitors;
  ·
              bring
                  products to market on a timely basis;
  ·
              introduce
                  products that have competitive prices;
  ·
              manage
                  our product transitions, inventory levels and manufacturing processes
                  efficiently;
  ·
              respond
                  effectively to new technological changes or new product announcements
                  by
                  others; and
  ·
              meet
                  changing industry standards.
  Our
        product cycles tend to be short, and we may incur significant non-recoverable
        expenses or devote significant resources to sales that do not occur when
        anticipated. Therefore, the resources we devote to product development, sales
        and marketing may not generate material net sales for us. In addition, short
        product cycles have resulted in and may in the future result in excess and
        obsolete inventory, which has had and may in the future have an adverse affect
        on our results of operations. In an effort to develop innovative products
        and
        technology, we have incurred and may in the future incur substantial
        development, sales, marketing, and inventory costs. If we are unable to recover
        these costs, our financial condition and operating results could be adversely
        affected. In addition, if we sell our products at reduced prices in anticipation
        of cost reductions and we still have higher cost products in inventory, our
        business would be harmed and our results of operations and financial condition
        would be adversely affected.
  **We
        have been selling our VoIP service for a limited period and there is no
        guarantee that this service will gain broad market
        acceptance.**
  We
        have
        only recently introduced our VoIP service. Given our limited history with
        offering this service, there are many difficulties that we may encounter,
        including technical hurdles, multiple and changing regulations and industry
        standards, and other problems that we may not anticipate. To date, we have
        not
        generated significant revenue from the sale of our VoIP products and services,
        and there is no guarantee that we will be successful in generating significant
        revenues.
 
 22
  **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 second and third
        quarters of 2005 our gross inventory levels of our DSL products continued
        to
        increase due to the rescheduling of customer orders in Turkey and resulting
        decreased sales. An inventory obsolescence provision of $.3 million was recorded
        in the third quarter of 2005 for older models of DSL modems and VOIP hardware.
        In the event this trend continues or we otherwise fail to effectively manage
        our
        inventory our liquidity may be adversely affected and we may face increased
        risk
        of inventory obsolescence, a decline in market value of the inventory, or
        losses
        from theft, fire, or other casualty.
  **We
        may be unable to produce sufficient quantities of our products because we
        depend
        on third party manufacturers. If these third party manufacturers fail to
        produce
        quality products in a timely manner, our ability to fulfill our customer
        orders
        would be adversely impacted.**
  We
        use
        contract manufacturers to partially manufacture our products. We use these
        third
        party manufacturers to help ensure low costs, rapid market entry, and
        reliability. Any manufacturing disruption could impair our ability to fulfill
        orders, and failure to fulfill orders would adversely affect our sales. Although
        we currently use four contract manufacturers for the bulk of our purchases,
        in
        some cases a given product is only provided by one of these companies. The
        loss
        of the services of any of our significant third party manufacturers or a
        material adverse change in the business of or our relationships with any
        of
        these manufacturers could harm our business. Since third parties manufacture
        our
        products and we expect this to continue in the future, our success will depend,
        in part, on the ability of third parties to manufacture our products cost
        effectively and in sufficient quantities to meet our customer
        demand.
  We
        are
        subject to the following risks because of our reliance on third party
        manufacturers:
  ·
              reduced
                  management and control of component purchases;
  ·
              reduced
                  control over delivery schedules, quality assurance and manufacturing
                  yields;
  ·
              lack
                  of adequate capacity during periods of excess demand;
  ·
              limited
                  warranties on products supplied to us;
  ·
              potential
                  increases in prices;
  ·
              interruption
                  of supplies from assemblers as a result of a fire, natural calamity,
                  strike or othersignificant
                  event; and
  ·
              misappropriation
                  of our intellectual property.
 
 23
 
 **We
        may be unable to produce sufficient quantities of our products because we
        obtain
        key components from, and depend on, sole or limited source
        suppliers.**
  We
        obtain
        certain key parts, components, and equipment from sole or limited sources
        of
        supply. For example, we purchase most of our dial-up and broadband modem
        chipsets from Conexant Systems, Agere Systems, and Analog Devices. Integrated
        circuit product areas covered by at least one of these companies include
        dial-up
        modems, DSL modems, cable modems, networking, routers, and gateways. In the
        past
        we have experienced delays in receiving shipments of modem chipsets from
        our
        sole source suppliers. We may experience similar delays in the future. In
        addition, some products may have other components that are available from
        only
        one source. We believe the market for chipsets is currently experiencing
        shortages and there are increased lead times for some chipsets. If we are
        unable
        to obtain a sufficient supply of components from our current sources, we
        would
        experience difficulties in obtaining alternative sources or in altering product
        designs to use alternative components. Resulting delays or reductions in
        product
        shipments could damage relationships with our customers and our customers
        could
        decide to purchase products from our competitors. Inability to meet our
        customers’ demand or a decision by one or more of our customers to purchase
        products from our competitors could harm our operating results.
  **The
        market for high-speed communications products and services has many competing
        technologies and, as a result, the demand for our products and services is
        uncertain.**
  The
        market for high-speed communications products and services has a number of
        competing technologies. For instance, Internet access can be achieved
        by:
  ·
              using
                  a standard telephone line and appropriate service for dial-up modems;
  ·
              ISDN
                  modems, or DSL modems, possibly in combination;
  ·
              using
                  a cable modem with a cable TV line and cable modem service;
  ·
              using
                  a router and some type of modem to service the computers connected
                  to a
                  local areanetwork;
                  or
  ·
              other
                  approaches, including wireless links to the
                  Internet.
  Although
        we currently sell products that include these technologies, the market for
        high-speed communication products and services is fragmented and evolving.
        The
        introduction of new products by competitors, market acceptance of products
        based
        on new or alternative technologies, or the emergence of new industry standards
        could render and have in the past rendered our products less competitive
        or
        obsolete. If any of these events occur, we may be unable to sustain or grow
        our
        business. Industry analysts believe that the market for our dial-up modems
        will
        continue to decline. If we are unable to increase demand for and sales of
        our
        broadband modems, we may be unable to sustain or grow our business.
  **We
        face significant competition, which could result in decreased demand for
        our
        products or services.**
  We
        may be
        unable to compete successfully. A number of companies have developed, or
        are
        expected to develop, products that compete or will compete with our products.
        Furthermore, many of our current and potential competitors have significantly
        greater resources than we do. Intense competition, rapid technological change
        and evolving industry standards could result in less favorable selling terms
        to
        our customers, decrease demand for our products or make our products
        obsolete.
  **Changes
        in the accounting treatment of stock options may adversely affect our results
        of
        operations.**
  In
        December 2004 the FASB issued SFAS 123R, which is a revision of SFAS 123.
        SFAS
        123R requires all share-based payments to employees, including grants of
        employee stock options, to be recognized in the financial statements based
        on
        their fair values and does not permit pro forma disclosure as an alternative
        to
        financial statement recognition. SFAS 123R will be effective for us beginning
        in
        the first quarter of 2006. The adoption of the SFAS 123R fair value method
        may
        have a significant adverse impact on our reported results of operations because
        the stock-based compensation expense will be charged directly against our
        reported earnings. The impact of our adoption of SFAS 123R cannot be predicted
        at this time because that will depend on the future fair values and number
        of
        share-based payments granted in the future.
 
 24
  On
        October 26, 2005 the Company accelerated the vesting of all stock options
        previously awarded to employees and officers that were scheduled to vest
        on or
        before May 6, 2006. These stock options had exercise prices in excess of
        $1.76,
        the closing price of the Company’s Common Stock on October 26, 2005, the
        effective date of the acceleration. As a result of the acceleration, stock
        options to purchase 317,500 shares became exercisable immediately. These
        accelerated stock options represent 33% of the total outstanding unvested
        stock
        options and approximately 25% of the total outstanding stock options. The
        weighted average exercise price of the accelerated stock options is $2.44
        per
        share.
 
 The
        primary purpose of the acceleration of the vesting of these stock options
        is to
        reduce the Company’s future reported compensation expense upon the planned
        adoption of Statement of Financial Accounting Standards (SFAS) No. 123R,
“Share
        Based Payment” effective January 1, 2006. As a result of the acceleration, the
        Company expects to reduce the stock option expense, a non-cash charge, it
        otherwise would be required to record by approximately $130,000 total for
        the
        first two quarters of 2006.
  **Changes
        in existing regulations or adoption of new regulations affecting the Internet
        could increase the cost of our products or otherwise affect our ability to
        offer
        our products and services over the Internet.**
  Congress
        has adopted legislation that regulates certain aspects of the Internet,
        including online content, user privacy, taxation, liability for third-party
        activities and jurisdiction. In addition, a number of initiatives pending
        in
        Congress and state legislatures would prohibit or restrict advertising or
        sale
        of certain products and services on the Internet, which may have the effect
        of
        raising the cost of doing business on the Internet generally. Federal, state,
        local and foreign governmental organizations are considering other legislative
        and regulatory proposals that would regulate the Internet. We cannot predict
        whether new taxes will be imposed on our services, and depending on the type
        of
        taxes imposed, whether and how our services would be affected thereafter.
        Increased regulation of the Internet may decrease its growth and hinder
        technological development, which may negatively impact the cost of doing
        business via the Internet or otherwise harm our business.
  **New
        regulations to reduce the use of hazardous materials in products scheduled
        to be
        implemented in 2006 could increase our manufacturing costs and harm our
        business.**
  The
        European Union and the US have announced plans to reduce the use of hazardous
        materials, such as lead, in electronic equipment. The implementation of these
        new requirements, currently scheduled to begin in Europe in 2006 and the
        US in
        2007, would require us and other electronics companies to change or discontinue
        many products. We believe that our transition process to comply with these
        new
        requirements is difficult, and will typically increase our product costs
        by from
        zero to $.50 per unit, depending on the product. In addition, we may incur
        additional costs involved with the disposal of inventory or with returned
        products that do not meet the new requirements, which could further harm
        our
        business.
  **Changes
        in current or future laws or governmental regulations and industry standards
        that negatively impact our products, services and technologies could harm
        our
        business.**
  The
        jurisdiction of the Federal Communications Commission, or the FCC, extends
        to
        the entire United States communications industry including our customers
        and
        their products and services that incorporate our products. Our products are
        also
        required to meet the regulatory requirements of other countries throughout
        the
        world where our products and services are sold. Obtaining government regulatory
        approvals is time-consuming and very costly. In the past, we have encountered
        delays in the introduction of our products, such as our cable modems, as
        a
        result of government certifications. We may face further delays if we are
        unable
        to comply with governmental regulations. Delays caused by the time it takes
        to
        comply with regulatory requirements may result in cancellations or postponements
        of product orders or purchases by our customers, which would harm our
        business.
  In
        addition to reliability and quality standards, the market acceptance of our
        VoIP
        products and services is dependent upon the adoption of industry standards
        so
        that products from multiple manufacturers are able to communicate with each
        other. Standards are continuously being modified and replaced. As standards
        evolve, we may be required to modify our existing products or develop and
        support new versions of our products. The failure of our products to comply,
        or
        delays in compliance, with various existing and evolving industry standards
        could delay or interrupt volume production of our products, which could harm
        our
        business.
 
 25
 
 **Future
        legislation or regulation of Internet telephony could restrict our VoIP
        business, prevent us from offering service, or increase our cost of doing
        business.**
  VoIP
        services currently have different regulations from traditional telephony
        in most
        countries including the US. Regulatory bodies including the FCC and regulators
        in various states and countries may impose surcharges, taxes or new regulations
        upon providers of Internet telephony. These surcharges could include access
        charges payable to local exchange carriers to carry and terminate traffic,
        contributions to the Universal Service Fund (USF) or other charges. The
        imposition of any such additional fees, charges, taxes and regulations on
        IP
        communications services could materially increase our costs and may limit
        or
        eliminate our competitive pricing. Regulations requiring compliance with
        the
        Communications Assistance for Law Enforcement Act (CALEA) or provision of
        the
        same type of 911 services as required for traditional telecommunications
        providers could also place a significant financial burden on us depending
        on the
        technical changes required to accommodate the requirements. In May 2005 the
        FCC
        issued an order requiring interconnected VoIP providers to deliver 911 calls
        to
        the customer’s local emergency operator as a standard feature of the service. We
        believe our VoIP products are capable of meeting the FCC requirements. In
        the
        event our VoIP products do not meet the FCC requirements, we may need to
        modify
        our products, which could increase our costs.
  In
        many
        countries outside the US in which we operate or our services are sold, we
        cannot
        be certain that we will be able to comply with existing or future requirements,
        or that we will be able to continue to be in compliance with any such
        requirements. Our failure to comply with these requirements could materially
        adversely affect our ability to continue to offer our VoIP services in these
        jurisdictions.
  **Fluctuations
        in the foreign currency exchange rates in relation to the U.S. Dollar could
        have
        a material adverse effect on our operating results.**
  Changes
        in currency exchange rates that increase the relative value of the U.S. dollar
        may make it more difficult for us to compete with foreign manufacturers on
        price, may reduce our foreign currency denominated sales when expressed in
        dollars, or may otherwise have a material adverse effect on our sales and
        operating results. A significant increase in our foreign currency denominated
        sales would increase our risk associated with foreign currency fluctuations.
        A
        weakness in the U.S. dollar relative to various Asian currencies including
        the
        Chinese renminbi could increase our product costs.
  **Our
        future success will depend on the continued services of our executive officers
        and key product development personnel.**
  The
        loss
        of any of our executive officers or key product development personnel, the
        inability to attract or retain qualified personnel in the future, or delays
        in
        hiring skilled personnel could harm our business. Competition for skilled
        personnel is significant. We may be unable to attract and retain all the
        personnel necessary for the development of our business. In addition, the
        loss
        of Frank B. Manning, our president and chief executive officer, or Peter
        Kramer,
        our executive vice president, some other member of the senior management
        team, a
        key engineer or salesperson, or other key contributors, could harm our relations
        with our customers, our ability to respond to technological change, and our
        business.
  **We
        may have difficulty protecting our intellectual property.**
  Our
        ability to compete is heavily affected by our ability to protect our
        intellectual property. We rely primarily on trade secret laws, confidentiality
        procedures, patents, copyrights, trademarks, and licensing arrangements to
        protect our intellectual property. The steps we take to protect our technology
        may be inadequate. Existing trade secret, trademark and copyright laws offer
        only limited protection. Our patents could be invalidated or circumvented.
        We
        have more intellectual property assets in some countries than we do in others.
        In addition, the laws of some foreign countries in which our products are
        or may
        be developed, manufactured or sold may not protect our products or intellectual
        property rights to the same extent as do the laws of the United States. This
        may
        make the possibility of piracy of our technology and products more likely.
        We
        cannot assure that the steps that we have taken to protect our intellectual
        property will be adequate to prevent misappropriation of our
        technology.
 
 26
 
 **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.
 
 **ITEM
        3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK**
  We
        own
        financial instruments that are sensitive to market risks as part of our
        investment portfolio. The investment portfolio is used to preserve our capital
        until it is required to fund operations, including our research and development
        activities. None of these market-risk sensitive instruments are held for
        trading
        purposes. We do not own derivative financial instruments in our investment
        portfolio. The investment portfolio contains instruments that are subject
        to the
        risk of a decline in interest rates. Investment Rate Risk - Our investment
        portfolio consists entirely of money market funds, which are subject to interest
        rate risk. Due to the short duration and conservative nature of these
        instruments, we do not believe that it has a material exposure to interest
        rate
        risk.
  **ITEM
        4. CONTROLS AND PROCEDURES**
  We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed in our Securities Exchange Act reports
        is
        recorded, processed, summarized and reported within the time periods specified
        in the SEC’s rules and forms, and that such information is accumulated and
        communicated to our management, including our Chief Executive Officer and
        Chief
        Financial Officer, as appropriate, to allow timely decisions regarding required
        disclosure. In designing and evaluating the disclosure controls and procedures,
        management recognized that any controls and procedures, no matter how well
        designed and operated, can provide only reasonable assurance of achieving
        the
        desired control objectives, as ours are designed to do, and management
        necessarily was required to apply its judgment in evaluating the cost-benefit
        relationship of possible controls and procedures.
  As
        of
        September 30, 2005 we carried out an evaluation, under the supervision and
        with
        the participation of our management, including our Chief Executive Officer
        and
        Chief Financial Officer, of the effectiveness of the design and operation
        of our
        disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
        under the Securities Exchange Act of 1934. Based upon that evaluation, our
        Chief
        Executive Officer and Chief Financial Officer concluded that our disclosure
        controls and procedures are effective in enabling us to record, process,
        summarize and report information required to be included in our periodic
        SEC
        filings within the required time period.
  There
        have been no changes in our internal control over financial reporting that
        occurred during the period covered by this report that have materially affected,
        or are reasonably likely to materially affect, our internal control over
        financial reporting.
  **PART
        II - OTHER INFORMATION**
  **ITEM
        5. OTHER INFORMATION**
 
 On
        October 26, 2005 the Company accelerated the vesting of all stock options
        previously awarded to employees and officers that were scheduled to vest
        on or
        before May 6, 2006 . These stock options had exercise prices in excess of
        $1.76,
        the closing price of the Company’s Common Stock on October 26, 2005, the
        effective date of the acceleration. As a result of the acceleration, stock
        options to purchase 317,500 shares became exercisable immediately. These
        accelerated stock options represent 33% of the total outstanding unvested
        stock
        options and approximately 25% of the total outstanding stock options. The
        weighted average exercise price of the accelerated stock options is $2.44
        per
        share.
 
 27
 
 The
        primary purpose of the acceleration of the vesting of these stock options
        is to
        reduce the Company’s future reported compensation expense upon the planned
        adoption of Statement of Financial Accounting Standards (SFAS) No. 123R,
“Share
        Based Payment” effective January 1, 2006. As a result of the acceleration, the
        Company expects to reduce the stock option expense, a non-cash charge, it
        otherwise would be required to record by approximately $130,000 total for
        the
        first two quarters of 2006.
  **ITEM
        6. EXHIBITS**
 
 Exhibits
  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.
  
 
 28
  **ZOOM
        TECHNOLOGIES, INC. AND SUBSIDIARY**
  **SIGNATURES**
  **Pursuant
        to the requirements of the Securities and Exchange Act of 1934, the Company
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.**
  **ZOOM
                    TECHNOLOGIES, INC.**
                  **(Registrant)****Date:
                    November 10, 2005**
                **By:**
                **/s/
                  Frank B. Manning****Frank
                    B. Manning,
                    President**
 **Date:
                  November 10, 2005**
              **By:**
              **/s/
                Robert Crist****Robert
                  Crist, Vice President of Finance and Chief Financial Officer (Principal
                  Financial and Accounting Officer)**
 
   
 
 29
 
  **EXHIBIT
        INDEX**
  Exhibit
                  No.
              Description31.1
              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.









30