**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 June 30, 2006**




or




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




**For
      the transition period from________ to ________**




**Commission
      File Number 0-18672**




**ZOOM
      TECHNOLOGIES, INC.**


**(Exact
      Name of Registrant as Specified in its Charter)**





**Delaware**
            **51-0448969**____________________________
            ____________________________(State
                or Other Jurisdiction of 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 a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.





Large
      accelerated filer o    Accelerated
      filer o   Non-accelerated
      filer x




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




Yes
o      No
x







The
      number of shares outstanding of the registrant’s Common Stock, $.01 Par Value,
      as of August 11, 2006 was 9,346,966 shares.




1




**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**INDEX**






**Part
                  I.**
              **Financial
                  Information**
              **Page**Item
                  1.
              Condensed
                  Consolidated Balance Sheets as of June 30, 2006 and December 31,
                  2005
                  (unaudited)
              3Condensed
                  Consolidated Statements of Operations for the three and six months
                  ended
                  June 30, 2006 and 2005 (unaudited)
              4Condensed
                  Consolidated Statements of Cash Flows for the six months ended
                  June 30,
                  2006 and 2005 (unaudited)
              5Notes
                  to Condensed Consolidated Financial Statements
              6-10Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              10-17Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              17Item
                  4.
              Controls
                  and Procedures
              17-18**Part
                  II.**
              **Other
                  Information**Item
                  1A.
              Risk
                  Factors
              18-24Item
                  4.
              Submission
                  of Matters to a Vote of Security HoldersItem
                  6.
              Exhibits
              25Signatures
              26Exhibit
                  Index
              27Exhibits
              28-31


2





**PART
      I - FINANCIAL INFORMATION**


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Consolidated
      Balance Sheets**


**(unaudited)**




**June
                30, 2006**
            
            **December
                31, 2005**AssetsCurrent
                assets:Cash
                and cash equivalents
            
            $
            4,526,639
            
            $
            9,081,122Accounts
                receivable, net of reserves for doubtful accounts, returns, and allowances
                of $1,324,721 at June 30, 2006 and $1,294,637 at December 31,
                2005
            
            
            2,253,422
            
            
            2,630,859Inventories
            
            
            4,157,224
            
            
            5,073,178Prepaid
                expenses and other current assets
            
            
            124,965
            
            
            301,265Total
                current assets
            
            
            11,062,250
            
            
            17,086,424Property,
                plant and equipment, net
            
            
            2,524,635
            
            
            2,600,660Certificateof
                deposit indebt
                service reserve account
            
            
            212,714
            
            
            -Total
                assets
            
            $
            13,799,599
            
            $
            19,687,084Liabilities
                and Stockholders’ EquityCurrent
                liabilities:Current
                portion of long-term debt
            
            $
            139,208
            
            $
            4,889,928Accounts
                payable
            
            
            1,495,256
            
            
            3,140,593Accrued
                expenses
            
            
            833,393
            
            
            788,427Total
                current liabilities
            
            
            2,467,857
            
            
            8,818,948Long-term
                debt, less current portion
            
            
            3,507,406
            
            
            -Total
                liabilities
            
            
            5,975,263
            
            
            8,818,948Stockholders’
                equity:Common
                stock, $0.01 par value. Authorized 25,000,000 shares; issued 9,355,366
                shares at June 30, 2006 andissued
                9,355,366 shares atDecember
                31, 2005, including shares held in treasury
            
            
            93,554
            
            
            93,554Additional
                paid-in capital
            
            
            31,138,996
            
            
            31,015,977Retained
                earnings (accumulated deficit)
            
            
            (23,859,661
            )
            
            (20,627,318
            )Accumulated
                other comprehensiveincome
                - currency translation adjustmentincome
                (loss)
            
            
            458,769
            
            
            393,245Treasury
                stock, at coststock
                (8,400 shares),
            
            
            (7,322
            )
            
            (7,322
            )Total
                stockholders’ equity
            
            
            7,824,336
            
            
            10,868,136Total
                liabilities and stockholders’ equity
            
            $
            13,799,599
            
            $
            19,687,084





See
      accompanying notes to
      unaudited consolidated financial statements .




3





**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Consolidated
      Statements of Operations**


**(Unaudited)**













**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,********2006**
            
            ******2005**
            
            ******2006**
            
            ******2005**Net
                sales
            
            $
            4,518,233
            
            $
            6,524,374
            
            $
            9,798,943
            
            $
            12,960,916Costs
                of goods sold
            
            
            4,295,669
            
            
            5,142,880
            
            
            8,610,622
            
            
            10,047,233Gross
                profit
            
            
            222,564
            
            
            1,381,494
            
            
            1,188,320
            
            
            2,913,683Operating
                expenses:Selling
            
            
            878,022
            
            
            1,074,524
            
            
            1,781,967
            
            
            2,194,614General
                and administrative
            
            
            697,780
            
            
            1,731,049
            
            
            1,546,688
            
            
            2,553,506Research
                and development
            
            
            557,112
            
            
            695,408
            
            
            1,188,873
            
            
            1,444,706Total
                operating expenses
            
            
            2,132,914
            
            
            3,500,981
            
            
            4,517,527
            
            
            6,192,826Operating
                income (loss)
            
            
            (1,910,350
            )
            
            (2,119,487
            )
            
            (3,329,206
            )
            
            (3,279,143
            )Other
                income (expense):Interest
                income
            
            
            57,868
            
            
            34,543
            
            
            138,190
            
            
            81,524Interest
                (expense)
            
            
            (54,978
            )
            
            (61,132
            )
            
            (145,704
            )
            
            (126,915
            )Gain
                on sale of investmentin
                InterMute, Inc.
            
            
            
            
            
            3,495,516
            
            
            
            
            
            3,495,516Other,
                net
            
            
            49,964
            
            
            71,973
            
            
            104,378
            
            
            (54,120
            )Total
                other income (expense), net
            
            
            52,854
            
            
            3,540,900
            
            
            96,864
            
            
            3,396,005Income
                (loss) before income taxes
            
            
            (1,857,496
            )
            
            1,421,413
            
            
            (3,232,342
            )
            
            116,862Income
                taxes
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                income (loss)
            
            $
            (1,857,496
            )
            $
            1,421,413
            
            $
            (3,232,342
            )
            $
            116,862Earnings
                (loss) per common share:Basic
            
            $
            (0.20
            )
            $
            0.16
            
            $
            (0.35
            )
            $
            0.01Diluted
            
            $
            (0.20
            )
            $
            0.15
            
            $
            (0.35
            )
            $
            0.01Weighted
                average common and common
              equivalent
                sharesBasic
            
            
            9,346,966
            
            
            9,163,847
            
            
            9,346,966
            
            
            9,066,028Diluted
            
            
            9,346,966
            
            
            9,396,546
            
            
            9,346,966
            
            
            9,426,115





See
      accompanying notes.




4




**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Consolidated
      Statements of Cash Flows**


**(Unaudited)**




**Six
                Months Ended****June
                30,********2006**
            
            ******2005****Operating
                activities**:Net
                income (loss)
            
            $
            (3,232,342
            )
            $
            116,862Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:Gain
                on Sale of Investment in InterMute, Inc.
            
            
            0
            
            
            (3,495,516
            )Depreciation
            
            
            111,966
            
            
            140,575Stock
                based compensation
            
            
            123,018
            
            
            0Changes
                in operating assets and liabilities:
              Accounts
                receivable, net
            
            
            440,986
            
            
            668,618Inventories
            
            
            915,954
            
            
            (1,320,726
            )Prepaid
                expenses and other assets
            
            
            (36,414
            )
            
            333,569Accounts
                payable and accrued expenses
            
            
            (1,600,372
            )
            
            (574,923
            )Net
                cash provided by (used in) operating activities
            
            
            (3,277,204
            )
            
            (4,131,541
            )**Investing
                activities:**Proceeds
                from Sale of Investment in InterMute
            
            
            0
            
            
            3,495,516Additions
                to property, plant and equipment
            
            
            (35,941
            )
            
            (17,354
            )Net
                cash provided by (used in) investing activities
            
            
            (35,941
            )
            
            3,478,162**Financing
                activities:**Principal
                payments on long-term debt
            
            
            (1,243,313
            )
            
            (106,242
            )Proceeds
                from exercise of stock options
            
            
            0
            
            
            418,637Net
                cash provided by (used in) financing activities
            
            
            (1,243,313
            )
            
            312,395Effect
                of exchange rate changes on cash
            
            
            1,975
            
            
            (3,250
            )Net
                change in cash
            
            
            (4,554,483
            )
            
            (344,234
            )Cash
                and cash equivalents at beginning of period
            
            
            9,081,122
            
            
            9,438,596Cash
                and cash equivalents at end of period
            
            $
            4,526,639
            
            $
            9,094,362**Supplemental
                disclosures of cash flow information:**Cash
                paid during the period for:Interest
            
            $
            54,978
            
            $
            61,132Income
                taxes
            
            $
            —
            
            $
            —





See
                accompanying notes.****




5




**ZOOM
      TECHNOLOGIES, INC.**


**Notes
      to Condensed Consolidated Financial Statements**


**(Unaudited)**




**(1)**
            **Summary
                of Significant Accounting
                Policies**




*(a)*
            *Basis
                of Presentation and Principles of
                Consolidation*




The
      condensed 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 disclosures required by accounting principles
      generally accepted in the United States of America. These statements should
      be
      read in conjunction with the audited consolidated financial statements and
      notes
      thereto for the year ended December 31, 2005 included in the Company's 2005
      Annual Report on Form 10-K.




The
      accompanying financial statements are unaudited. However, the condensed balance
      sheet as of December 31, 2005 was derived from audited financial statements.
      In
      the opinion of management, the accompanying financial statements include all
      adjustments (consisting of normal, recurring adjustments) necessary for a fair
      presentation of results for these interim periods.




The
      accompanying financial statements include the accounts and operations of the
      Company and include the accounts of its wholly-owned subsidiary, Zoom
      Telephonics, Inc. 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.




*(b)*
            *Stock-Based
                Compensation*




Effective
      January 1, 2006, the Company adopted SFAS No. 123 (R), “Accounting for Stock
      Based Compensation” using the modified-prospective method. Under this method,
      compensation cost is recognized for all share-based payments granted, modified
      or settled after January 1, 2006, as well as for any unvested awards that were
      granted prior thereto. Compensation cost for unvested awards granted prior
      to
      January 1, 2006 is recognized using the same estimate of the grant-date fair
      value and the same attribution method used to determine the pro forma
      disclosures under SFAS No. 123, “Accounting for Stock-Based Compensation.”
Compensation cost for awards granted after January 1, 2006 is based on the
      estimated fair value of the awards on their grant date and is generally
      recognized over the required service period. Prior to January 1, 2006, the
      Company accounted for its stock option plans under the recognition and
      measurement principles of Accounting Principles Board (APB) Opinion No. 25,
      "Accounting for Stock Issued to Employees, and Related Interpretations.” No
      stock-based compensation expense was recognized in operations for these plans,
      since all options granted under them had an exercise price equal to the market
      value of the underlying common stock on the date of grant. The effect of
      adopting SFAS No. 123 (R) was to increase compensation cost and the reported
      net
      loss for the quarter ended June 30, 2006 by $61 thousand, or $0.01 per basic
      and
      diluted share and for the six months ended June 30, 2006 by $123 thousand,
      or
      $0.01 per basic and diluted share.




The
      unrecognized stock-based compensation cost related to non-vested stock awards
      as
      of June 30, 2006 was $99,331. Such amount will be recognized in operations
      over
      a weighted average remaining period of 4 quarters.




The
      fair
      value of each option granted was estimated on the date of grant using the
      Black-Scholes option-pricing model. There were no stock options granted in
      the
      second quarter of 2006. The fair value of options granted during the three
      and
      six months ended June 30, 2005 and the three months ended March 31, 2006 were
      estimated using the following assumptions:




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2006
            
            2005
            
            2006
            
            2005Weighted-average
                expected stock-price volatility
            
            
            n.a.
            
            
            91.0
            %
            
            66.2
            %
            
            92.8
            %Weighted-average
                expected option life
            
            
            n.a.
            
            
            2.5
                years
            
            
            2
                years
            
            
            2.47
                yearsAverage
                risk-free interest rate
            
            
            n.a.
            
            
            3.62
            %
            
            4.29
            %
            
            3.59
            %Average
                dividend yield
            
            
            n.a.
            
            
            0
            
            
            0
            
            
            0





6




Pro-forma
      information required under SFAS No. 123, *Accounting
      for Stock-Based Compensation* before
      the adoption of SFAS No.123(R) for the three and six months ended June 30,
      2005
      follows:






**Three
                Months Ended**
              **June****30**, **2005**
            
            
            **Six
                Months Ended**
              **June
                30, 2005**Net
                income (loss), as reported
            
            
            $
            1,421,413
            
            
            
            
            
            
            $
            116,862Stock-based
                employee compensation expense determined under fair value
                method
            
            
            
            (169,175
            )
            
            
            
            
            
            
            (258,741
            )Pro
                forma net income (loss)
            
            
            $
            1,252,238
            
            
            
            
            
            
            $
            (141,879
            )Net
                income (loss) per share:Basic
                - as reported
            
            
            $
            0.16
            
            
            
            
            
            
            $
            0.01Diluted
                - as reported
            
            
            $
            0.15
            
            
            
            
            
            
            $
            0.01Basic
                - pro forma
            
            
            $
            0.14
            
            
            
            
            
            
            $
            (0.02
            )Diluted
                - pro forma
            
            
            $
            0.13
            
            
            
            
            
            
            $
            (0.02
            )









*(c)*
            *Recently
                Issued or Proposed Accounting
                Pronouncements*




*Share-Based
      Payments*




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB
      Statement No. 123(R), “Share Based Payment: an amendment of FASB Statements No.
      123 and 95” (“SFAS No. 123(R)”). FASB Statement 123(R) requires companies to
      recognize in the income statement, effective for annual periods beginning after
      June 15, 2005, the grant-date fair value of stock options and other equity-based
      compensation issued to employees, but expresses no preference for a type of
      valuation model. Effective January 1, 2006 the Company adopted SFAS 123(R)
      using
      the modified prospective application.




**(2)
      Liquidity**





On
      June
      30, 2006 the Company had working capital of $8.6 million, including $4.5 million
      in cash  and
      cash
      equivalents.





On
      January 10, 2001 the Company obtained a mortgage for $6 million on the real
      estate property located at 201 and 207 South Street, Boston, Massachusetts.
      The
      loan was scheduled to be paid in full on January 10, 2006 and the final payment
      was deferred during negotiations for a new mortgage. On March 30, 2006 the
      Company paid the lender $1.2 million to reduce the then balance of $4.9 million,
      and refinanced the remaining $3.7 million with a new mortgage. Payments on
      the
      new mortgage are based on a 15 year amortization period with initial interest
      at
      7.75%, adjusted along with the federal prime rate. The rate of interest at
      June
      30, 2006 was 8.25%.  The
      mortgage matures April 10, 2007 but may be extended at Zoom’s option to April
      10, 2008 if Zoom makes the election to extend the loan and pays the lender
      an
      extension fee of $36,750 by March 10, 2007 and prior to and following such
      election Zoom is not in default under the loan. As required by the lender the
      Company has deposited six months of principal and interest ($212,714 as of
      June
      30, 2006) in a Certificate of Deposit held by the lender as a debt service
      reserve account The new mortgage contains certain customary financial and
      non-financial covenants including requirements to maintain tangible net worth
      of
      $7.0 million and to maintain cash and cash equivalents, free from any and all
      encumbrances, of not less than $1.0 million. The Company was in compliance
      with
      these covenants as of June 30, 2006. The Company’s tangible net worth at June
      30, 2006 was $7.8 million. The Company believes it should be able to sell its
      owned buildings on favorable terms for any required additional liquidity. If
      the
      Company were to sell the portion of its owned buildings that include the
      principal headquarters, it would expect to be able to lease back a portion
      of
      the sold property or otherwise find suitable space for its principal
      headquarters on satisfactory terms.




On
      March
      16, 2005 the Company entered into a one year Loan and Security Agreement with
      Silicon Valley Bank that provides for a revolving line of credit of up to $2
      million. The revolving line of credit terminated, as scheduled, on March 15,
      2006. There were no borrowings under the line for the entire one year contract.
      The Company is currently discussing a new one year line with Silicon Valley
      Bank. There can be no assurance as to the outcome of these
      negotiations.




7




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 130 at June 30, 2005 and 116
      at
      June 30, 2006. The Company continues to implement cost cutting initiatives
      including the reduction of employee headcount and overhead costs, and most
      recently, the planned move of most of its manufacturing operations to a
      dedicated facility in Tijuana, Mexico starting on approximately September 1,
      2006. In connection therewith on June 30, 2006 the Company notified 40 employees
      currently working at Zoom in Boston that they would be terminated on
      approximately August 31, 2006. One-time severance benefits approximating
      $108,000 have been accrued for this termination and charged to operations as
      of
      June 30, 2006. For a further discussion of this transaction and potential cost
      savings, see “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” under Part I and “Risk Factors” in Item 1A under Part II
      below. The Company plans to continue to assess its cost structure as it relates
      to the Company’s revenues and cash position in 2006, and may make further
      changes if the actions are deemed necessary.




The
      Company believes that its current level of working capital combined with the
      anticipated proceeds from the planned sale of the Company’s headquarters
      building will provide it with sufficient resources to fund its normal operations
      through June 30, 2007. The Company also believes that it may obtain additional
      liquidity from additional consideration it may receive from its prior sale
      of
      interest in InterMute. However, the Company cannot assure that it can sell
      its
      building on favorable terms and on a timely basis, if at all, nor can it assure
      that it will receive any additional proceeds from the sale of its interest
      in
      InterMute. The Company’s $3.7 million mortgage loan contains financial covenants
      including the requirement that the Company maintain a tangible net worth of
      at
      least $7.0 million. As of June 30, 2006 the Company’s tangible net worth was
      $7.8 million. If the Company continues to incur operating losses that are not
      otherwise offset by proceeds from the timely sale of the Company’s headquarters
      facility or any additional consideration the Company may receive from its prior
      sale of its interest in InterMute, the Company could be in default of this
      covenant before the loan matures in April 2007. In such event, the lender would
      have the right to demand payment in full of the loan and the Company
      would **** have
      no
      right to exercise its option to extend the loan. The Company is also under
      continuing pressures from its customers to reduce prices and provide more
      advantageous terms of sale, and one of its significant retailer customers has
      notified the Company that they would like to purchase modems from the Company
      on
      a consignment basis. Such a change, if implemented, could require the Company
      to
      repurchase the customer’s inventory of modems that the Company had previously
      sold to that customer, which the Company estimates to be approximately $1.3
      million as of June 30, 2006. If the Company is not able to sell its building
      on
      a timely basis or obtain significant additional proceeds from the sale of its
      interest in InterMute, the Company’s liquidity could be significantly impaired
      and the Company may not have sufficient resources to fund its normal operations
      over the next twelve months. Longer-term, if the Company is unable to increase
      its revenues, reduce or otherwise adequately control its expenses, or raise
      capital, the Company’s ability to continue as a going concern and achieve its
      intended business objectives would be adversely affected..




(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:




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Basic:Net
                income (loss)
            
            $
            (1,857,496
            )
            $
            1,421,413
            
            $
            (3,232,342
            )
            $
            116,862Weighted
                average shares outstanding
            
            
            9,346,966
            
            
            9,163,847
            
            
            9,346,966
            
            
            9,066,028Earnings
                (loss) per share
            
            $
            (.20
            )
            $
            0.16
            
            $
            (.35
            )
            $
            0.01Diluted:Net
                income (loss)
            
            $
            (1,857,496
            )
            $
            1,421,413
            
            $
            (3,232,342
            )
            $
            116,862Weighted
                average shares outstanding
            
            
            9,346,966
            
            
            9,163,847
            
            
            9,346,966
            
            
            9,066,028Net
                effect of dilutive stock options based on the Treasury stock method
                using
                average market price
            
            
            -
            
            
            232,699
            
            
            -
            
            
            360,087Weighted
                average shares outstanding
            
            
            9,346,966
            
            
            9,396,546
            
            
            9,346,966
            
            
            9,426,115Earnings
                (loss) per share
            
            $
            (.20
            )
            $
            0.15
            
            $
            (.35
            )
            $
            0.01




8




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 six months ended June 30, 2006. Options to purchase 1,226,200
      shares of common stock at June 30, 2006, were outstanding but not included
      in
      the computation of diluted earnings per share for the three and six months
      ended
      June 30, 2006 as their effect would be antidilutive.




**(4)
      Inventories**




Inventories
                consist of the following:
            
            **June
                30, 2006**
            
            **December
                31, 2005**Raw
                materials
            
            $
            1,910,976
            
            $
            2,333,949Work
                in process
            
            
            501,925
            
            
            648,034Finished
                goods
            
            
            1,744,323
            
            
            2,091,195Total
            
            $
            4,157,224
            
            $
            5,073,178




**(5)
      Comprehensive Income (Loss)**




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                income (loss)
            
            $
            (1,857,496
            )
            $
            1,421,413
            
            $
            (3,232,342
            )
            $
            116,862Foreign
                currency translation adjustment
            
            
            59,882
            
            
            (61,240
            )
            
            65,524
            
            
            (96,837
            )Comprehensive
                income (loss)
            
            $
            (1,797,614
            )
            $
            1,
                360,173
            
            $
            (3,166,818
            )
            $
            20,025




**(6)
      Long-Term Debt**




On
      January 10, 2001 the Company obtained a mortgage for $6 million on the real
      estate property located at 201 and 207 South Street, Boston, Massachusetts.
      The
      loan was scheduled to be paid in full on January 10, 2006 and the final payment
      was deferred during negotiations for a new mortgage. On March 30, 2006 the
      Company paid the lender $1.2 million to reduce the then balance of $4.9 million,
      and refinanced the remaining $3.7 million with a new mortgage. Payments on
      the
      new mortgage are based on a 15 year amortization period with the initial
      interest at 7.75%, adjusted along with the federal prime rate. The rate of
      interest at June 30, 2006 was 8.25%. The mortgage matures April 10, 2007 but
      may
      be extended at Zoom’s option to April 10, 2008 if Zoom makes the election to
      extend the loan and pays the lender an extension fee of $36,750 by March 10,
      2007 and prior to and following such election Zoom is not in default under
      the
      loan. Zoom has classified the scheduled principal payments due after June 30,
      2007 as long-term debt because the Company intends to extend the maturity date
      to April 10, 2008 unless other more financially advantageous arrangements are
      obtained. As required by the lender the Company has deposited six months of
      principal and interest ($212,714 as of June 30, 2006) in a Certificate of
      Deposit held by the lender as a debt service reserve account The new mortgage
      contains certain customary financial and non-financial covenants including
      requirements to maintain tangible net worth of $7.0 million and to maintain
      cash
      and cash equivalents, free from any and all encumbrances, of not less than
      $1.0
      million. The Company was in compliance with these covenants as of June 30,
      2006.




**** **(7)
      Commitments**




During
      the six month period ended June 30, 2006, other than the renewal of the mortgage
      on the Company’s headquarters buildings discussed in Note 2 and Note 6 above
      there were no material changes to the Company’s commitments and contractual
      obligations compared to those disclosed in the Form 10-K for the year ended
      December 31, 2005




**(8)
      Segment and Geographic Information**




The
      Company’s operations are classified as one reportable segment. The Company’s net
      sales for the three and six months ended June 30, 2006 and 2005, respectively,
      for North America and those outside North America were comprised as
      follows:




9




**Three
                Months**
              **Ended**
            
            **%
                of**
            
            **Three
                Months Ended**
            
            **%
                of**
            
            **Six
                Months Ended**
            
            **%
                of**
            
            **Six
                Months Ended**
            
            **%
                of****June
                30, 2006**
            
            **Total**
            
            **June
                30, 2005**
            
            **Total**
            
            **June
                30, 2006**
            
            **Total**
            
            **June
                30, 2005**
            
            **Total**North
                America
            
            $
            2,478,515
            
            55%
            
            $
            3,191,152
            
            49%
            
            $
            5,430,638
            
            55%
            
            $
            5,771,297
            
            45%Turkey
            
            
            391,042
            
            9%
            
            
            615,474
            
            9%
            
            
            1,052,264
            
            11%
            
            
            2,137,211
            
            16%UK
            
            
            888,340
            
            20%
            
            
            1,660,733
            
            26%
            
            
            1,794,706
            
            18%
            
            
            2,949,089
            
            23%All
                Other
            
            
            760,336
            
            16%
            
            
            1,057,015
            
            16%
            
            
            1,521,335
            
            16%
            
            
            2,103,319
            
            16%Total
            
            $
            4,518,233
            
            100%
            
            $
            6,524,374
            
            100%
            
            $
            9,798,943
            
            100%
            
            $
            12,960,916
            
            100%




**(9)
      Customer Concentrations**




Relatively
      few customers have accounted for a substantial portion of the Company's net
      sales. In the second quarter of 2006 the Company's net sales to its top three
      customers accounted for 35% of its total net sales, with the Company's net
      sales
      to a North American retailer accounting for 19% of total net sales. The
      remaining 16% was split between two other customers, a Turkish distributor
      and a
      United Kingdom retailer, at 9% and 7% respectively. For the first six months
      of
      2006 the Company’s net sales to its top three customers accounted for 34% of the
      Company’s net sales, with the Company’s net sales to a North American retailer
      accounting for 13% of total net sales. The remaining 20% was split between
      two
      other customers, a Turkish distributor and a North American distributor, at
      11%
      and 10% respectively.





In
      the
      second quarter of 2005 the Company’s net sales to its top three customers
      accounted for 39% of its total net sales, with the Company’s sales to a large
      U.S. retailer accounting for 21% of the total net sales. The remaining 18%
      was
      divided fairly equally between the other two customers, both with less than
      a
      10% share. In the first six months of 2005 the Company's net sales to its top
      three customers accounted for 40% of its total net sales.






**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 in Item IA of Part II of this
      Quarterly Report on Form 10-Q as well those set forth in our Annual Report
      on
      Form 10-K for the year ended December 31, 2005 and our other filings with the
      SEC. 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 the Company’s products in accordance with our
      specifications is typically done in China.




We
      have
      traditionally performed most of the packaging and distribution effort at our
      production and warehouse facility on Summer Street in Boston, Massachusetts,
      which has also engaged in firmware programming and in testing. Our headquarters
      is about a mile away, on South Street in Boston. Our lease for our Summer Street
      facility is scheduled to expire in August 2006. On June 30, 2006 we announced
      our plans to move most of our Summer Street operations to a dedicated facility
      in Tijuana, Mexico commencing approximately September 1, 2006, and we do not
      plan to renew our Summer Street lease.




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




10


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 declining sales
      volume, we have cut costs by reducing staffing and some overhead costs. On
      March
      31, 2005 our total headcount of full-time employees, including temporary
      workers, was 143 which was reduced to 116 at June 30, 2006. As described above,
      in connection with the move of our Summer Street manufacturing operations to
      Tijuana, Mexico, we did not renew our Summer Street lease and on June 30, 2006
      we communicated termination notices to 40 Summer Street employees.




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




In
      the
      second quarter of 2006 our net sales were down 31.0% compared to the second
      quarter of 2005. In the first six months of 2006 our net sales were down 24%
      compared to the first six months of 205. The main reason for the sales decreases
      was the decline in dial-up modem and DSL modem sales. While we have generally
      experienced growth in our DSL modem sales, a significant portion of these sales
      is currently concentrated with a small number of customers, and this reduces
      the
      predictability of our results. In Turkey Zoom has had a relatively high share
      of
      the small but growing DSL market, but our sales in 2006 have been declining.
      We
      attribute this decline to a number of factors including increased competition
      and the lack of a significant DSL promotion by Turkish Telecom in 2006. We
      are
      working hard to reverse this trend, but plans by Turkish Telecom to dramatically
      increase their bundling of DSL modems with their service are likely to
      significantly reduce our sales to Turkey. We are also continuing our efforts
      to
      expand our DSL customer base and product line, and to enter new markets. Because
      of our significant customer concentration, however, our net sales and operating
      results have fluctuated and in the future 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.




Since
      1999 we had a minority interest in a privately held software company, InterMute,
      Inc. In June 2005 InterMute was acquired by Trend Micro Inc., a U.S. subsidiary
      of Trend Micro Japan. In connection with the acquisition, in June 2005 we
      received a payment of approximately $3.5 million in exchange for our investment.
      We recorded a non-operating gain of $3.5 million in our second quarter of 2005
      in connection with this sale. We may also receive up to $3.0 million in
      additional payments in 2006 if certain conditions and performance targets are
      met. We will not record gains from these additional payments, if any, until
      and
      unless they are fully earned.




Our
      cash
      and cash equivalents balance at June 30, 2006 was $4.5 million compared to
      $9.1
      million at December 31, 2005. This reduction of $4.6 million was due primarily
      to funding our $3.2 million net loss for the first six months of 2006, and
      to a
      $1.4 million cash reduction from the refinancing of our mortgage loan which
      included a principal pay-down of $1.2 million and the deposit of $0.2 million
      in
      a debt service reserve account.




**Critical
      Accounting Policies and Estimates**




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




11


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




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


·
            computer
                peripherals retailers,




·
            computer
                product distributors,




·
            internet
                service providers, and




·
            original
                equipment manufacturers (OEMs)




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




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




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




**Product
      Returns** .
      Products are returned by retail stores and distributors for inventory balancing,
      contractual stock rotation privileges, and warranty repair or replacements.
      We
      estimate the sales and cost value of expected future product returns of
      previously sold products. Our estimates for product returns are based on recent
      historical trends plus estimates for returns prompted by, among other things,
      new product introductions, announced stock rotations and announced customer
      store closings. Management reviews historical returns, current economic trends,
      and changes in customer demand and acceptance of our products when estimating
      sales return allowances. The estimate for future returns is recorded as a
      reserve against accounts receivable, a reduction of net sales, and the
      corresponding change to inventory reserves and cost of sales. Product returns
      as
      a percentage of total net sales were 9.7% and 8.3 %, respectively, for the
      three
      and six months ended June 30, 2006 compared to 7.7 % and 7.0%, respectively,
      for
      the three and six months ended June 30, 2005.




**Price
      Protection Refunds.** We have
      a policy of offering price protection to certain of our retailer and distributor
      customers for some or all their inventory. Under the price protection policies,
      when we reduce our prices for a product, the customer receives a credit for
      the
      difference between the original purchase price and our reduced price for their
      unsold inventory of that product. Our estimates for price protection refunds
      are
      based on a detailed understanding and tracking by customer and by sales program.
      Estimated price protection refunds are recorded in the same period as the
      announcement of a pricing change. Information from customer inventory-on-hand
      reports or from direct communications with the customers is used to estimate
      the
      refund, which is recorded as a reduction of net sales and a reserve against
      accounts receivable. Reductions in our net sales due to price protection were
      $0.2 million in 2003, $0.1 million in 2004, and $0.2 million in 2005. In the
      three and six months ended June 30, 2006, the reduction in our net sales due
      to
      price protection was $0.02 million and $0.04 million, respectively compared
      to
      $0.11 million and $0.15 million, respectively, for the three and six months
      ended June 30, 2005.




**Sales
      and Marketing Incentives** .
      Many of
      our retailer customers require sales and marketing support funding, usually
      set
      as a percentage of our sales in their stores. The incentives were reported
      as
      reductions in our net sales and were $1.5 million in 2003, $1.3 million in
      2004,
      and $1.1 million in 2005. In the three and six months ended June 30, 2006,
      the
      reduction in our net sales due to sales and marketing incentives was $0.3
      million and $0.6 million, respectively compared to $0.4 million and $0.7
      million, respectively, for the three and six months ended June 30, 2005.




12


**Consumer
      Mail-In and In-Store Rebates** .
      Our
      estimates for consumer mail-in and in-store rebates are based on a detailed
      understanding and tracking by customer and sales program, supported by actual
      rebate claims processed by the rebate redemption centers plus an accrual for
      an
      estimated lag in processing at the redemption centers. The estimate for mail-in
      and in-store rebates is recorded as a reserve against accounts receivable and
      a
      reduction of net sales in the same period that the rebate obligation was
      triggered. Reductions in our net sales due to the consumer rebates were $2.1
      million in 2003, $1.4 million in 2004, and $0.8 million in 2005. In the three
      and six months ended June 30, 2006, the reduction in our net sales due to
      consumer rebates was $0.2 million and $0.5 million, respectively compared to
      $0.4 million and $0.6 million, respectively, for the three and six months ended
      June 30, 2005.




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




**Accounts
      Receivable Valuation** .
      We
      establish accounts receivable valuation allowances equal to the above-discussed
      net sales adjustments for estimates of product returns, price protection
      refunds, consumer rebates, and general bad debt reserves. These allowances
      are
      reduced as actual credits are issued to the customer's accounts. Our bad-debt
      write-offs were less than $0.03 million for the three and six months ended
      June
      30, 2006.




**Inventory
      Valuation and Cost of Goods Sold.** Inventory is valued on a standard cost basis where the material standards are
      periodically updated for current material pricing. Allowances for obsolete
      inventory are established by management based on usability reviews performed
      each quarter. Our allowances against the inventory of a particular product
      range
      from 0% to 100%, based on management's estimate of the probability that the
      material will not be consumed or that it will be sold below cost. In the second
      quarter of 2006 we recorded an additional $0.2 million charge for inventory
      reserves related to some slow-moving VoIP products. On July 1, 2006 Europe
      began
      a program for “RoHS” or Restriction on Hazardous Substances, which seeks to
      minimize lead and other hazardous substances. In the second quarter of 2006
      we
      established a $0.1 million inventory obsolescence reserve for some non-RoHS
      components that were purchased for use in European countries that now require
      RoHS.




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




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




On
      December 31, 2005 we had federal net operating loss carryforwards of
      approximately $31,854,000. These federal net operating losses are available
      to
      offset future taxable income, and are due to expire in years ranging from
      2018 to 2025. On December 31, 2005 we had state net operating loss carryforwards
      of approximately $22,253,000. These state net operating losses are available
      to
      offset future taxable income, and are primarily due to expire in years ranging
      from 2006 to 2010. ****





**Results
      of Operations**




**Summary** .
      Net
      sales were $4.5 million for our second quarter ended June 30, 2006, down 30.7%
      from $6.5 million in the second quarter of 2005. We had a net loss of $1.9
      million for the second quarter of 2006, compared to net income of $1.4 million
      in the second quarter of 2005. Our operating loss for the second quarter of
      2006
      was $1.9 million, a small improvement over the operating loss of $2.1 million
      for the second quarter of 2005. The net income of $1.4 million for the second
      quarter of 2005 was comprised of other income of $3.5 million, due to the gain
      from the sale of our interest in InterMute, offset by the operating loss of
      $2.1
      million. Loss per diluted share was $0.20 for the second quarter of 2006
      compared to a gain per diluted share of $0.15 for the second quarter of
      2005.




Net
      sales
      were $9.8 million for the six months ended June 30, 2006, down 24.4% from $13.0
      million in the first six months of 2005. We had a net loss of $3.2 million
      for
      the first six months of 2006, compared to a net gain of $0.1 million in the
      first six months of 2005. Our operating loss for the first six months of both
      2006 and 2005 was $3.3 million. Other income for the first six months of 2006
      was $0.1 million compared to $3.4 million for the first six months of 2005,
      due
      primarily to the gain from the sale of our interest in InterMute. Loss per
      diluted share was $0.35 for the first six months of 2006 compared to income
      per
      diluted share of $0.01 for the first six months of 2005.




13




**Net
      Sales** .
      Our net
      sales for the first quarter of 2006 decreased 30.7% from the first quarter
      of
      2005, primarily due to a 33% decrease in dial-up modem sales and a 37% decrease
      in DSL modem sales Dial-up modem net sales declined to $2.1 million in the
      second quarter of 2006 compared to $3.2 million in the second quarter of 2005,
      primarily due to the continued decline of the dial-up modem after-market. DSL
      modem net sales decreased from $3.2 million in the second quarter of 2005 to
      $1.8 million in the second quarter of 2006 primarily as a result of decreased
      DSL sales to our Turkish distributor as discussed above, reduced DSL sales
      at
      retail in the U.K. due to the decision of a large U.K retailer to discontinue
      carrying most of our DSL product line, and the loss of Granville Technologies,
      a
      former large DSL and dial-up modem customer in the United Kingdom that went
      out
      of business in mid-2005.




Our
      net
      sales for the first six months of 2006 decreased 24.4% from the first six months
      of 2005, primarily due to a 29% decrease in dial-up modem sales and a 29%
      decrease in DSL modem sales. Dial-up modem net sales declined to $4.2 million
      in
      the first six months of 2006 compared to $5.9 million in the first six months
      of
      2005, 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
      lower dial-up modem average selling prices. DSL modem net sales decreased to
      $4.4 million in the first six months of 2006 compared to $6.3 million in the
      first six months of 2005, primarily as a result of decreased DSL sales to our
      Turkish distributor as discussed above, reduced DSL sales at retail in the
      U.K.
      due to the decision of a large U.K retailer to discontinue carrying most of
      our
      DSL product line, and the loss of Granville Technologies, a former large DSL
      and
      dial-up modem customer in the United Kingdom that went out of business in
      mid-2005. Net sales in our other product sales categories, which include cable
      modems, VoIP, and wireless networking equipment, increased $0.3 million or
      39%
      from $0.8 million for the first six months of 2005 to $1.2 million in the first
      six months of 2006, primarily due to increased wireless product
      sales.




Our
      net
      sales in North America were $2.5 million in the second quarter of 2006, a
      decrease from $3.2 million in the second quarter of 2005. Our net sales in
      Turkey were $0.4 million in the second quarter of 2006, a decrease from $0.6
      million in the second quarter of 2005. Our net sales in the U.K. were $0.9
      million in the second quarter of 2006, a decline from $1.7 million in the second
      quarter of 2005. The decline in net sales in the U.K and Turkey as discussed
      above. Our net sales other than North America, Turkey and the U.K. were $0.8
      million in the second quarter of 2006, a decrease from $1.1million in the second
      quarter of 2005. Our net sales in North America were $5.4 million in the first
      six months of 2006, a decline from $5.8 million in the first six months of
      2005.
      Our net sales in Turkey were $1.1 million in the first six months of 2006 and
      $2.1 million in the first six months of 2005. Our net sales in the U.K. were
      $1.8 million in the first six months of 2006, a decline from $2.9 million in
      the
      first six months of 2005. Our net sales in countries other than North America,
      Turkey and the U.K. were $1.5 million for the first six months of 2006 and
      $2.1
      million for the first six months of 2005.




In
      the
      second quarter of 2006 our net sales to our top three customers accounted for
      35% of our total net sales, with our net sales to a North American retailer
      accounting for 19% of total net sales. The remaining 16% was split between
      two
      other customers our Turkish distributor and a United Kingdom retailer, at 9%
      and
      7%, respectively. For the first six months of 2006, our net sales to our top
      three customer accounted for 34% of our net sales, with our net sales to a
      North
      American retailer accounting for 13% of total net sales. The remaining 20%
      was
      split between two other customers, our Turkish distributor and a North American
      distributor, at 11% and 10%, respectively.




In
      the
      second quarter of 2005 our net sales to our top three customers accounted for
      39% of our total net sales, with our sales to a large U.S. retailer accounting
      for 21% of the total net sales. The remaining 18% was divided fairly equally
      between the other two customers, both with less than a 10% share. In the first
      six months of 2005 our net sales to our top three customers accounted for 40%
      of
      our total net sales. Because of our significant customer concentration, our
      net
      sales and operating income has fluctuated and could in the future fluctuate
      significantly due to changes in political or economic conditions or the loss,
      reduction of business, or less favorable terms for any of our significant
      customers.




**Gross
      Profit.** Our
      total
      gross profit was $0.2 million in the second quarter of 2006, a decline from
      $1.4
      million in the second quarter of 2005. Our gross margin percent of net sales
      decreased to 4.9% in the second quarter of 2006 from 21.2% in the second quarter
      of 2005. Gross margins were lower primarily because of the negative effect
      of
      fixed manufacturing overhead spread over the lower sales, increased charges
      for
      inventory obsolescence due to VoIP and RoHS as discussed above, lower product
      margins at standard cost due to pricing, cost, and sales mix changes, and a
      $0.1
      million severance charge for our planned third quarter of 2006 closing of our
      Boston production facility, which was announced and communicated to all affected
      employees on June 30, 2006.




Our
      total
      gross profit was $1.2 million in the first six months of 2006, a decline from
      $2.9 million in the first six months of 2005. Our gross margin percent of net
      sales decreased to 12.1% in the first six months of 2006 from 22.5% in the
      first
      six months of 2005. Gross margins were lower primarily because of lower
      absorption of fixed manufacturing overhead due to lower sales in the first
      six
      months of 2006 compared to the first six months of 2005, lower product margins
      at standard cost due to pricing, cost, and sales mix changes, increased
      obsolescence charges, and the $0.1 million severance charge.




14


**Selling
      Expense.** Selling
      expense decreased $0.2 million to $0.9 million or 19.4% of net sales in the
      second quarter of 2006 from $1.1 million or 16.5% of net sales in the second
      quarter of 2005. Selling expense was lower primarily because of lower personnel
      and related costs resulting from employee headcount reductions, lower sales,
      and
      lower product delivery expense.




Selling
      expense decreased $0.4 million to $1.8 million or 18.2% of net sales in the
      first six months of 2006 from $2.2 million or 16.9% of net sales in the first
      six months of 2005. Selling expense was lower primarily because of lower
      personnel and related costs resulting from employee headcount reductions, lower
      sales, and lower product delivery expense.




**General
      and Administrative Expense.** General
      and administrative expense was $0.7 million or 15.4% of net sales in the second
      quarter of 2006 compared to $1.7 million or 26.5% of net sales in the second
      quarter of 2005. General and administrative expense in the second quarter of
      2005 included $1.1 million of bad debt expense for the business failure of
      Granville Technologies. Excluding the $1.1 million bad debt expense, the second
      quarter year-over-year expense was relatively constant.




General
      and administrative expense decreased $1.0 million to $1.5 million, or 15.8%
      of
      net sales in the first six months of 2006 from $2.6 million or 19.7% of net
      sales in the first six months of 2005. The decrease of $1.0 million was
      primarily due to the $1.1 million bad debt charge to general and administrative
      expense for Granville Technologies in 2005.




**Research
      and Development Expense.** Research
      and development expense decreased $0.1 million to $0.6 million or 12.3% of
      net
      sales in the second quarter of 2006 from $0.7 million or 10.7% of net sales
      in
      the second quarter of 2005. Research and development costs decreased primarily
      as a result of lower personnel costs due to headcount reductions and lower
      product license and approval fees. Development and support continues on all
      of
      our major product lines with particular emphasis on VoIP products and service,
      DSL products, wireless products, and the new iHIFi product line.




Research
      and development expense decreased $.2 million to $1.2 million or 11.1% of net
      sales in the first six months of 2006 from $1.4 million or 11.1% of net sales
      in
      the first six months of 2005. Research and development costs increased primarily
      in salary expense, depreciation, outside services and product evaluation
      materials.




**Other
      Income (Expense), Net.** Other
      income (expense), net was net income of $0.05 million in the second quarter
      of
      2006, primarily from interest and rental income, compared to net income of
      $3.5
      million in the second quarter of 2005. The $3.5 million income gain resulted
      primarily from the sale of our interest in InterMute to Trend Micro in
      2005.




Other
      income net was $3.2 million in the first six months of 2006, compared to $0.1
      million in the first six months of 2005. The reason for the $3.3 million
      increase in net income was primarily from the $3.5 million gain from the sale
      of
      our interest in the InterMute transaction.





**Liquidity
      and Capital Resources**




On
      June
      30, 2006 we had working capital of $8.6 million, including $4.5 million in
      cash
      and cash equivalents. In the first six months of 2006, operating activities
      used
      $3.3 million in cash. Our net loss in the first six months of 2006 was $3.2
      million. Uses of cash from operations included a decrease of accounts payable
      and accrued expenses of $1.6 million. Sources of cash from operations included
      a
      decrease of accounts receivable of $0.4 million and inventory of $0.9 million.




In
      the
      first six months of 2006 net cash used in financing activities was $1.2 million,
      due primarily to the refinancing of the mortgage on our headquarters buildings.
      Our original mortgage was a 5-year balloon mortgage that was scheduled to be
      due
      and payable on January 10, 2006. The balloon payment was deferred until March
      30, 2006 when a mortgage amendment was agreed and signed. On that date, we
      paid
      the lender $1.2 million to reduce the then outstanding balance of $4.9 million,
      and refinanced the remaining $3.7 million with a new mortgage. Payments on
      the
      new mortgage are based on a 15 year amortization period with initial interest
      at
      7.75%, adjusted along with the federal prime rate. The rate of interest as
      of
      June 30, 2006 was 8.25%. The mortgage matures April 10, 2007 but may be extended
      at Zoom’s option to April 10,2008 if Zoom makes the election to extend and pays
      the lender an extension fee of $36,750 by March 10, 2007 and prior to and
      following such election Zoom is not in default under the loan. As required
      by
      the lender we deposited six months of principal and interest ($212,714 as of
      June 30, 2006) in a Certificate of Deposit held by the lender as a debt service
      reserve account. The new mortgage contains certain customary financial and
      non-financial covenants, including the requirement to maintain a tangible net
      worth of $7.0 million and an amount of cash and cash equivalents, free from
      any
      and all encumbrances, in an amount of not less than $1.0 million. We were in
      compliance with those covenants as of June 30, 2006. We believe we should be
      able to sell our owned buildings on favorable terms if we require any additional
      liquidity. If we were to sell the portion of our owned buildings that include
      the principal headquarters, we expect we will be able to lease back a portion
      of
      the sold property or otherwise find suitable space for our principal
      headquarters on satisfactory terms.




15


On
      March
      15, 2006 our one year revolving line of credit with Silicon Valley Bank
      terminated. There were no borrowings under the line for the entire one year
      contract. Accordingly, we do not currently have a line of credit from which
      we
      can borrow. We are in discussions with Silicon Valley Bank for a new one year
      line of credit. There can be no assurance as to the outcome of these
      discussions.




In
      June
      2005 InterMute, Inc., a software company in which we have a minority interest,
      was acquired by Trend Micro Inc., a U.S. subsidiary of Trend Micro Japan. In
      connection with the acquisition, in June 2005, we received a payment of
      approximately $3.5 million in exchange for our investment. We recorded a
      non-operating gain of $3.5 million in our second quarter of 2005 in connection
      with this sale. We may also receive up to $3.0 million in additional payments
      in
      2006 if certain conditions and performance targets are met.





To
      conserve cash and manage our liquidity, we continue to implement cost cutting
      initiatives including the reduction of employee headcount and overhead costs,
      and most recently, the move of most of our manufacturing operations to a
      dedicated facility in Tijuana, Mexico starting on approximately September 1,
      2006. In connection therewith on June 30, 2006 we notified 40 employees
      currently working at Zoom in Boston that they would be terminated on
      approximately August 31, 2006. One-time severance benefits approximating
      $108,000 have been accrued for this termination and charged to operations as
      of
      June 30, 2006. We expect to incur approximately $250,000 of costs, including
      the
      aforementioned severance benefits, in connection with the move. We estimate
      that
      the move of our manufacturing facility should save approximately $2 million
      over
      our year 2005 production costs at year 2005’s production volumes. We anticipate
      that our initial savings will be less than $2 million per year as our production
      volumes are currently lower than 2005 levels and as a result of the initial
      expenses we will incur to effect the move. Savings are expected to come
      primarily from savings in costs for personnel, facilities, and shipping. We
      cannot assure that we will be able to achieve these estimated cost savings.
      See
“Risk Factors” in Item 1A under Part II below. We plan to continue to assess our
      cost structure as it relates to our revenues and cash position in 2006, and
      we
      may make further changes if the actions are deemed  necessary.




We
      believe that the anticipated proceeds from the planned sale of our headquarters
      building will provide us with sufficient resources to fund our normal operations
      over the next 12 months, through June 30, 2007. We also believe that we may
      obtain additional liquidity from additional consideration we may receive from
      our prior sale of our interest in InterMute. However, we cannot assure that
      we
      can sell our building on favorable terms and on a timely basis, if at all,
      nor
      can we assure that we will receive any additional proceeds from the sale of
      our
      interest in InterMute. Our $3.7 million mortgage loan contains financial
      covenants including the requirement that we maintain a tangible net worth of
      at
      least $7.0 million. As of June 30, 2006 our tangible net worth was $7.8 million.
      If we continue to incur operating losses that are not otherwise offset by
      proceeds from the timely sale of our headquarters facility or any additional
      consideration we may receive from our prior sale of our interest in InterMute,
      we could be in default of this covenant before the loan matures in April 2007.
      In such event, the lender would have the right to demand payment in full of
      the
      loan and we would **** have
      no
      right to exercise our option to extend the loan. We are also under continuing
      pressures from our customers to reduce prices and provide more advantageous
      terms of sale, and one of our significant retailer customers has notified us
      that they would like to purchase our modems on a consignment basis. Such a
      change, if implemented, could require us to repurchase the customer’s inventory
      of our modems that we had previously sold to that customer, which we estimate
      to
      be approximately $1.3 million as of June 30, 2006. If we are not able sell
      our
      building on a timely basis or obtain significant additional proceeds from the
      sale of our interest in InterMute, our liquidity could be significantly impaired
      and we may not have sufficient resources to fund our normal operations over
      the
      next twelve months. Longer-term, if we are unable to increase our revenues,
      reduce or otherwise adequately control our expenses, or raise capital, our
      ability to continue as a going concern and achieve our intended business
      objectives would be adversely affected. See the safe harbor statement contained
      herein and the "Risk Factors" in Item IA under Part II of this Quarterly Report
      on Form 10-Q below, Zoom’s Annual Report on Form 10-K for the year ended
      December 31, 2005 and Zoom’s other filings with the SEC, for further information
      with respect to events and uncertainties that could harm our business, operating
      results, and financial condition.





16


**Commitments**





During
      the six months ended June 30, 2006, 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, 2005 except that, as described above,
      in
      March 2006 we paid our mortgage lender $1.2 million to reduce the then balance
      of $4.8 million, and refinanced the remaining balance of our mortgage loan
      with
      a new $3.7 million mortgage with a 15 year amortization for one year and a
      Maturity Date of April 10, 2007 and as announced in June 2006, commencing
      approximately September 1, 2006, we plan to move most of our manufacturing
      operations to a dedicated facility in Tijuana, Mexico.





**"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
      and markets for its products* ; *Zoom’s
      expected benefits and cost savings resulting from the move of its manufacturing
      facilities to Mexico; Zoom's ability to sell its owned buildings or receive
      additional proceeds from the sale of its interest in InterMute for additional
      liquidity; Zoom’s sufficiency of capital resources; 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 in
      Item
      1A of Part II 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.*





**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. The 15-year amortization mortgage of our headquarters building is a
      variable rate loan with the interest rate adjusted annually. A 1% point change
      in the interest rate would result in a decrease or increase of approximately
      $37,000 of interest expense per year. Our market risks have not changed
      substantially since December 31, 2005.





**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
      June 30, 2006 we carried out an evaluation, under the supervision and with
      the
      participation of our management, including our Chief Executive Officer and
      Chief
      Financial Officer, of the effectiveness of the design and operation of our
      disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
      under the Securities Exchange Act of 1934. Based upon that evaluation, our
      Chief
      Executive Officer and Chief Financial Officer concluded that our disclosure
      controls and procedures are effective in enabling us to record, process,
      summarize and report information required to be included in our periodic SEC
      filings within the required time period.




17





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
      1A.**  **RISK
      FACTORS**







*This
      report contains forward-looking statements that involve risks and uncertainties,
      such as statements of our objectives, expectations and intentions. The
      cautionary statements made in this report 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.*





**Our
      liquidity may be significantly impaired if we are not able to sell our
      headquarters facility.**





We
      are
      currently seeking to sell our headquarters facility. The facility is subject
      to
      a $3.7 million mortgage. The mortgage matures April 10, 2007 but may be extended
      at our option to April 10, 2008 if we make the election to extend the loan
      and
      pay the lender an extension fee of $36,750 by March 10, 2007 and if prior to
      and
      following such election we are not in default under the loan. The mortgage
      contains financial and non-financial covenants, including the requirement to
      maintain a minimum tangible net worth of $7.0 million and to maintain cash
      and
      cash equivalents, free from any and all encumbrances, of not less than $1.0
      million. As of June 30, 2006 our tangible net worth was $7.8 million. If we
      continue to incur losses that are not otherwise offset by proceeds from the
      timely sale of our headquarters facility, we could be in default of this
      covenant before the loan matures in March 2007. In such event, the lender would
      have the right to demand payment in full of the loan and we would **** have
      no
      right to exercise our option to extend the loan. If we are not able to sell
      our
      building on a timely basis, our liquidity could be significantly impaired and
      we
      may not have sufficient resources to fund our normal operations over the next
      twelve months. Moreover, if we do sell our headquarters facility, we believe
      that we will 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
      fail to lease back a portion of the sold property or to find suitable space
      for
      our principal headquarters, our business would 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. Our revolving credit facility expired on March 15, 2006
      and
      we currently have no line of credit from which we can borrow. We are currently
      in discussions for a new one-year line of credit. Additional financing may
      not
      be available to us on a timely basis if at all, or on terms acceptable to us.
      If
      we fail to obtain acceptable additional financing when needed, we may be
      required to further reduce planned expenditures or forego business
      opportunities, which could reduce our net sales, increase our losses, and harm
      our business. Moreover, additional equity financing could dilute the per share
      value of our common stock held by current shareholders, while additional debt
      financing could restrict our ability to make capital expenditures or incur
      additional indebtedness, all of which would impede our ability to
      succeed.





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




Effective
      on approximately September 1, 2006 we plan to transfer most of our manufacturing
      operations from Boston, Massachusetts to Tijuana, Mexico. We may experience
      delays, unanticipated costs or interruptions in production, or other problems
      in
      moving our manufacturing operations to Mexico. We currently anticipate to incur
      approximately $250,000 in costs in connection with the move of our manufacturing operations to Mexico. Delays, interruptions in production or other problems
      in
      effecting the move could lead to increased or unexpected costs, reduced margins,
      delays in product deliveries, order cancellations, and lost revenue, all of
      which could harm our business,
      results of operation, and liquidity .
      Our
      conduct of business in Mexico is
      subject to the additional challenges and risks associated with international
      operations, including those related to integration of operations across
      different cultures and languages, currency risk, and economic, legal, political
      and regulatory risks.





18


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





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





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




Currently
      our operations are significantly dependent on our operations outside the United
      States, particularly sales of our products and the production of most of our
      products. In the first six months of 2005, sales outside of North America were
      approximately 55% of our net sales in 2005. In the first six months of 2006,
      sales outside North America were 45% of our net sales. The inherent risks of
      international operations could harm our business, results of operation, and
      liquidity. The types of risks faced in connection with international operations
      and sales include, among others:




·
            regulatory
                and communications requirements and policy changes;




·
            favoritism
                toward local suppliers;




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




·
            local
                language and technical support requirements;




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




·
            cultural
                differences;




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




·
            reduced
                protection for intellectual property rights in some
                countries;




·
            political
                and economic changes and disruptions;




·
            governmental
                currency controls;




·
            shipping
                costs;




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




·
            import,
                export, and tariff regulations.




**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
      the
      first six months of 2006, our net sales to three companies constituted 34%
      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, in the first half of 2006, DSL sales
      to our Turkish distributor, one of our top three customers, have declined
      significantly from $2.2 million in the first six months in 2005 to $1.1 million
      in the first six months in 2006. We attribute this decline due to increased
      competition and the lack of a DSL promotion by Turkish Telecom in 2006. We
      are
      working hard to reverse this trend, but plans by Turkish Telecom to increase
      their bundling of DSL modems with their service may significantly reduce our
      sales to Turkey. We cannot guarantee that we will increase our sales to our
      Turkish distributor.  A
      reduction or delay in orders from any of our significant customers, or a delay
      or default in payment by any significant customer could materially harm our business,
      results of operation and liquidity.




19




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





The
      dial-up modem industry has been characterized by declining average selling
      prices and a declining retail market. The decline in average selling prices
      is
      due to a number of factors, including technological change, lower component
      costs, and competition. The decline in the size of the retail market for dial-up
      modems is primarily due to the inclusion of dial-up modems as a standard feature
      contained in new PCs, and the advent of broadband products. Decreasing average
      selling prices and reduced demand for our dial-up modems have resulted and
      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, results of
      operation and liquidity will be harmed .





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





One
      of
      our significant retail customers has notified us that they want to purchase
      our
      modems on a consignment basis. Such a change, if implemented could require
      us to
      repurchase the customer’s inventory of our modems that we had previously sold to
      that customer, which we estimate to be approximately $1.3 million as of June
      30,
      2006. The customer has also indicated that they plan to reduce the number of
      brands of modems they sell, and that they cannot assure that they will continue
      to sell our products. If we obtain less advantageous terms of sale or experience
      other reductions in purchases of our products from significant customers, our
      business, results of operation and liquidity will be harmed.





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




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




·
            the
                current limited retail market for broadband modems;




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




·
            the
                significant bargaining power of these large volume purchasers;




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




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





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




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




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




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




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




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




20




·
            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.





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




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




·
            delays
                in the development of our products;




·
            numerous
                product returns; and




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





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




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




Due
      to
      rapid technological change and changing markets we are required to manage our
      inventory levels carefully to both meet customer expectations regarding delivery
      times and to limit our excess inventory exposure. In the event we fail to
      effectively manage our inventory our liquidity may be adversely affected and
      we
      may face increased risk of inventory obsolescence, a decline in market value
      of
      the inventory, or losses from theft, fire, or other casualty. We incurred a
      $0.3
      million inventory obsolescence charge in the three months ended June 30,2006
      for
      slow-moving VoIP products and products that did not conform to the R0HS
      standards.




**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.




21


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






·
            reduced
                management and control of component purchases;




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




·
            lack
                of adequate capacity during periods of excess demand;




·
            limited
                warranties on products supplied to us;




·
            potential
                increases in prices;




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




·
            misappropriation
                of our intellectual property.





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




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




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




The
      market for high-speed communications products and services has a number of
      competing technologies. For instance, Internet access can be achieved
      by:




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




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




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




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




·
            other
                approaches, including wireless links to the
                Internet.




Although
      we currently sell products that include these technologies, the market for
      high-speed communication products and services is fragmented and evolving.
      The
      introduction of new products by competitors, market acceptance of products
      based
      on new or alternative technologies, or the emergence of new industry standards
      could render and have in the past rendered our products less competitive or
      obsolete. If any of these events occur, we may be unable to sustain or grow
      our
      business. Industry analysts believe that the market for our dial-up modems
      will
      continue to decline. If we are unable to increase demand for and sales of our
      broadband modems, we may be unable to sustain or grow our business.




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




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




22


**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. In the first six months
      of 2006, we incurred an additional $0.1 million in costs due to establishment
      of
      obsolescence reserves for the eventual disposal of some of our modem components
      as a result of these new requirements.




**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.





**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.




23




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




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




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




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




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




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





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




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






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




The
      Company held its Annual Meeting of Stockholders on June 23, 2006. At the Annual
      Meeting, the stockholders elected five directors to serve for the ensuring
      year
      and until their successors are duly elected. The voting results with respect
      to
      the election of directors were as follows:




Proposal
      1 - In the election of directors, each nominee was elected by a vote of the
      stockholders as follows:




**Nominee**
            **For**
            **Withheld**Frank
                B. Manning
            8,659,944
            105,606Peter
                R. Kramer
            8,675,405
            90,145Bernard
                Furman
            8,675,775
            89,775J.
                Ronald Woods
            8,675,575
            89,975Joseph
                Donovan
            8,675,375
            90,175




24





**ITEM
      6. EXHIBITS**





Exhibit
      No.  Exhibit
      Description




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.**




**Filed
      herewith




25




**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:
                August 14, 2006**
            **By:
                /s/ Frank B. Manning****Frank
                B. Manning, President****Date:
                August 14, 2006**
            **By:
                /s/ Robert Crist****Robert
                Crist, Vice President of Finance and Chief Financial Officer (Principal
                Financial and Accounting
                Officer)**






26


**EXHIBIT
      INDEX**




Exhibit
        No.  Exhibit
        Description
  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.**
  **Filed
        herewith
  27