**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**FORM
      10-Q**









(Mark
      One)




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




**For
      the quarterly period ended September 30, 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 November 9, 2006 was 9,346,966 shares.














**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**INDEX**




**Page****Part
                I.**
            
            **Financial
                Information**Item
                1.
            
            Condensed
                Consolidated Balance Sheets as of September 30, 2006 and December
                31, 2005
                (unaudited)
            
            3Condensed
                Consolidated Statements of Operations for the three and nine months
                ended
                September 30, 2006 and 2005 (unaudited)
            
            4Condensed
                Consolidated Statements of Cash Flows for the nine months ended September
                30, 2006 and 2005 (unaudited)
            
            5Notes
                to Condensed Consolidated Financial Statements (unaudited)
            
            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
            
            18Item
                4.
            
            Controls
                and Procedures
            
            18**Part
                II.**
            
            **Other
                Information**Item
                1A.
            
            Risk
                Factors
            
            18-25Item
                6.
            
            Exhibits
            
            25Signatures
            
            26Exhibit
                Index
            
            27Exhibits





2




**PART
      I - FINANCIAL INFORMATION**





**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Consolidated
      Balance Sheets**


**(unaudited)**




**September
                30, 2006**
            
            **December
                31, 2005**AssetsCurrent
                assets:Cash
                and cash equivalents
            
            $
            4,158,695
            
            $
            9,081,122Accounts
                receivable, net of allowances of $1,179,481 at September 30, 2006
                and
                $1,294,637 at December 31, 2005
            
            
            1,825,416
            
            
            2,630,859Inventories
            
            
            4,288,425
            
            
            5,073,178Prepaid
                expenses and other current assets
            
            
            64,221
            
            
            301,265Total
                current assets
            
            
            10,336,757
            
            
            17,086,424Property,
                plant and equipment, net
            
            
            2,513,227
            
            
            2,600,660Certificate
                of deposit held for debt service
            
            
            214,637
            
            
            -Total
                assets
            
            $
            13,064,621
            
            $
            19,687,084Liabilities
                and Stockholders’ Equity:Current
                liabilities:Current
                portion of long-term debt
            
            $
            135,075
            
            $
            4,889,928Accounts
                payable
            
            
            1,641,342
            
            
            3,140,593Accrued
                expenses
            
            
            713,859
            
            
            788,427Total
                current liabilities
            
            
            2,490,276
            
            
            8,818,948Long-term
                debt, less current portion
            
            
            3,479,595
            
            
            -Total
                liabilities
            
            
            5,969,871
            
            
            8,818,948Stockholders’
                Equity:Common
                stock, $0.01 par value: authorized - 25,000,000 shares; and issued
                -
                9,355,366 shares, including shares held in treasury
            
            
            93,554
            
            
            93,554Additional
                paid-in capital
            
            
            31,196,955
            
            
            31,015,977Accumulated
                deficit
            
            
            (24,691,902
            )
            
            (20,627,318
            )Accumulated
                other comprehensive income - currency translation adjustment
            
            
            503,465
            
            
            393,245Treasury
                stock, at cost stock (8,400 shares),
            
            
            (7,322
            )
            
            (7,322
            )Total
                stockholders’ equity
            
            
            7,094,750
            
            
            10,868,136Total
                liabilities and stockholders’ equity
            
            $
            13,064,621
            
            $
            19,687,084





See
      accompanying notes.




3




**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Consolidated
      Statements of Operations**


**(Unaudited)**




**Three
                Months Ended September 30,**
            
            **Nine
                Months ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                sales
            
            $
            3,579,317
            
            $
            5,308,380
            
            $
            13,378,260
            
            $
            18,269,296Costs
                of goods sold
            
            
            3,338,349
            
            
            4,789,732
            
            
            11,948,971
            
            
            14,836,965Gross
                profit
            
            
            240,968
            
            
            518,648
            
            
            1,429,289
            
            
            3,432,331Operating
                expenses:Selling
            
            
            781,954
            
            
            977,718
            
            
            2,563,921
            
            
            3,172,332General
                and administrative
            
            
            689,599
            
            
            314,188
            
            
            2,236,287
            
            
            2,867,694Research
                and development
            
            
            520,768
            
            
            664,641
            
            
            1,709,640
            
            
            2,109,347Total
                operating expenses
            
            
            1,992,321
            
            
            1,956,547
            
            
            6,509,848
            
            
            8,149,373Operating
                income (loss)
            
            
            (1,751,353
            )
            
            (1,437,899
            )
            
            (5,080,559
            )
            
            (4,717,042
            )Other:Interest
                income
            
            
            51,138
            
            
            69,984
            
            
            189,327
            
            
            151,508Interest
                expense
            
            
            (76,140
            )
            
            (63,596
            )
            
            (221,845
            )
            
            (190,511
            )Gain
                on sale of investmentin
                InterMute, Inc.
            
            
            869,750
            
            
            
            
            
            869,750
            
            
            3,495,516Other,
                net
            
            
            74,364
            
            
            56,251
            
            
            178,744
            
            
            2,131Total
                other income (expense), net
            
            
            919,112
            
            
            62,639
            
            
            1,015,976
            
            
            3,458,644Income
                (loss) before income taxes
            
            
            (832,241
            )
            
            (1,375,260
            )
            
            (4,064,583
            )
            
            (1,258,398
            )Income
                taxes
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                income (loss)
            
            $
            (832,241
            )
            $
            (1,375,260
            )
            $
            (4,064,583
            )
            $
            (1,258,398
            )Earnings
                (loss) per common share:Basic
            
            $
            (0.09
            )
            $
            (
                0.15
            )
            $
            (0.43
            )
            $
            (0.14
            )Diluted
            
            $
            (0.09
            )
            $
            (
                0.15
            )
            $
            (0.43
            )
            $
            (0.14
            )Weighted
                average common and common equivalent sharesBasic
            
            
            9,346,966
            
            
            9,341,124
            
            
            9,346,966
            
            
            9,158,734Diluted
            
            
            9,346,966
            
            
            9,341,124
            
            
            9,346,966
            
            
            9,158,734





See
      accompanying notes.




4


**ZOOM
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Consolidated
      Statements of Cash Flows**


**(Unaudited)**




**Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005****Operating
                activities**:Net
                income (loss)
            
            $
            (4,064,583
            )
            $
            (1,258,398
            )Adjustments
                to reconcile net income (loss) to net cash provided (used) by operating
                activities:Gain
                on sale of Investment in InterMute, Inc.
            
            
            (869,750
            )
            
            (3,495,516
            )Depreciation
            
            
            172,006
            
            
            200,605Stock
                based compensation
            
            
            180,977
            
            
            0Changes
                in operating assets and liabilities:Accounts
                receivable, net
            
            
            921,914
            
            
            381,433Inventories
            
            
            784,753
            
            
            (101,735
            )Prepaid
                expenses and other assets
            
            
            22,406
            
            
            321,758Accounts
                payable and accrued expenses
            
            
            (1,573,819
            )
            
            (949,674
            )Net
                cash provided (used ) by operating activities
            
            
            (4,426,096
            )
            
            (4,901,527
            )**Investing
                activities:**Proceeds
                from sale of Investment in InterMute, Inc.
            
            
            869,750
            
            
            3,495,516Additions
                to property, plant and equipment
            
            
            (84,572
            )
            
            (46,896
            )Net
                cash provided (used) by investing activities
            
            
            785,178
            
            
            3,448,620**Financing
                activities:**Principal
                payments on long-term debt
            
            
            (1,275,258
            )
            
            (158,429
            )Proceeds
                from exercise of stock options
            
            
            0
            
            
            447,450Net
                cash provided (used) by financing activities
            
            
            (1,275,258
            )
            
            289,021Effect
                of exchange rate changes on cash
            
            
            (6,251
            )
            
            (2,562
            )Net
                change in cash
            
            
            (4,922,427
            )
            
            (1,166,448
            )Cash
                and cash equivalents at beginning of period
            
            
            9,081,122
            
            
            9,438,596Cash
                and cash equivalents at end of period
            
            $
            4,158,695
            
            $
            8,272,148**Supplemental
                disclosures of cash flow information:**Cash
                paid during the period for:Interest
            
            $
            221,845
            
            $
            190,511Income
                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" or “Zoom”) 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 financial position, results of operations, and cash flows for
      the interim periods.




The
      accompanying financial statements include the accounts and operations of the
      Company and 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 September 30, 2006 by $58 thousand, or $0.01
      per
      basic and diluted share and for the nine months ended September 30, 2006 by
      $181
      thousand, or $0.02 per basic and diluted share.




The
      unrecognized stock-based compensation cost related to non-vested stock awards
      as
      of September 30, 2006 was $117,921. Such amount will be recognized in operations
      over a remaining period of 3 quarters.




The
      fair
      value of each option granted was estimated on the date of grant using the
      Black-Scholes option-pricing model. The fair value of options granted during
      the
      three and nine months ended September 30, 2006 and September 30, 2005 were
      estimated using the following assumptions:




Three
                Months Ended
              September
                30,
            
            Nine
                Months ended
              September
                30,2006
            
            2005
            
            2006
            
            2005Weighted-average
                expected stock-price volatility
            
            
            60.5
            %
            
            88.9
            %
            
            63.3
            %
            
            91.1
            %Weighted-average
                expected option life
            
            
            2.0
                years
            
            
            2.0
                years
            
            
            2.0
                years
            
            
            2.47
                yearsAverage
                risk-free interest rate
            
            
            5.03
            %
            
            3.74
            %
            
            4.66
            %
            
            3.60
            %Average
                dividend yield
            
            
            0
            
            
            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) follows:





**Three
                Months**
              **Ended**
              **September
                30, 2005**
            
            **Nine
                Months**
              **Ended**
              **September
                30, 2005**Net
                income (loss), as reported
            
            $
            (1,375,260
            )
            $
            (1,258,398
            )Stock-based
                employee compensation expense determined under fair value
                method
            
            
            (214,657
            )
            
            (473,398
            )Pro
                forma net income (loss)
            
            $
            (1,589,917
            )
            $
            (1,731,796
            )Net
                income (loss) per share:Basic
                - as reported
            
            $
            (0.15
            )
            $
            (0.14
            )Diluted
                - as reported
            
            $
            (0.15
            )
            $
            (0.14
            )Basic
                - pro forma
            
            $
            (0.17
            )
            $
            (0.19
            )Diluted
                - pro forma
            
            $
            (0.17
            )
            $
            (0.19
            )







*(c)*
            *New
                Accounting Pronouncements*





In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48). FIN 48
      clarifies the accounting and disclosure for uncertain tax positions, as defined,
      and seeks to reduce the diversity in practice associated with certain aspects
      of
      the recognition and measurement related to accounting for income taxes. This
      interpretation is effective for fiscal years beginning after December 15, 2006.
      The Company does not believe that the adoption of FIN 48 will have a significant
      impact on its financial statements.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value,
      establishes a framework for measuring fair value, and expands disclosure
      requirements regarding fair value measurement. This statement simplifies and
      codifies fair value related guidance previously issued and is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The Company does not believe
      that
      SFAS 157 will significantly impact its financial statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 provides
      guidance on the consideration of the effects of prior year unadjusted errors
      in
      quantifying current year misstatements for the purpose of a materiality
      assessment. SAB 108 requires registrants to apply the new guidance the first
      time that it identifies material errors in existence at the beginning of the
      first fiscal year ending after November 15, 2006 by correcting those errors
      through a one-time cumulative effect adjustment to beginning-of-year retained
      earnings. The Company does not believe that SAB 108 will significantly
      impact its financial statements




**(2)
      Liquidity**





On
      September 30, 2006 the Company had working capital of $7.8 million, including
      $4.2 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 prime rate as published in the Wall Street
      Journal. The rate of interest at September 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 ($214,637 as of September 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 September 30, 2006. The Company’s tangible net worth at
      September 30, 2006 was $7.1 million. For additional liquidity, the Company
      has
      negotiated a Purchase and Sale Agreement for the sale of its company-owned
      buildings which now house its entire Boston headquarters staff. On October
      30,
      2006 the deposit relating to that purchase was increased to $400,000. If the
      sale closes, which is likely but not certain, the Company expects the closing
      to
      occur in December 2006. The liquidity impact of the sale would be to eliminate
      $3.6 million in bank debt and increase cash by approximately $4.2 million.
      The
      agreement provides for the lease-back to Zoom of a portion of the sold property
      at below-market lease rates.




7




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 and Silicon Valley Bank have put further discussions for a new
      one
      year line on hold pending the outcome of the sale of the headquarter buildings.
      There can be no assurance as to the outcome of these negotiations.




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 125 at September 30, 2005 and
      79
      at September 30, 2006. The Company continues to implement cost cutting
      initiatives including the reduction of employee headcount and overhead costs,
      and most recently, the move of most of its manufacturing operations to a
      dedicated facility in Tijuana, Mexico during September 2006. In connection
      therewith on June 30, 2006 the Company notified 40 employees working at Zoom
      in
      Boston that they would be terminated on approximately August 31, 2006. One-time
      severance benefits of approximately $100,000 were accrued in the second quarter
      of 2006 and paid in the third quarter of 2006. 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 realized a gain on the sale of its investment in InterMute, Inc. of
      $3.5
      million during the quarter ended June 30, 2005. The Company realized in cash
      an
      additional contingent gain of $837,750 during the quarter ended September 30,
      2006, representing its portion of an earnout payment paid by the buyer as a
      result of the achievement of a performance milestone. On November 11, 2006
      the
      Company received a second and final performance milestone payment, also of
      $837,750. The Company expects to receive in December 2006 a return of its escrow
      deposit of approximately $370,000. No further payments from the sale of
      InterMute are expected.




The
      Company believes that its current level of working capital combined with the
      anticipated proceeds from the completion of the pending sale of the Company’s
      headquarter buildings will provide sufficient resources to fund the Company’s
      normal operations over the next twelve months, the relevant period for a
      going-concern evaluation, through September 30, 2007. However, the Company
      cannot assure that it can sell its building on favorable terms and on a timely
      basis, if at all. The Company’s $3.6 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 September 30, 2006 the Company’s tangible
      net worth was $7.1 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 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 entered into a consignment arrangement with a significant retailer
      customer in October 2006. In connection with this agreement ownership of all
      unsold products previously purchased from the Company by that retailer will
      revert to the Company in November 2006. The Company estimated the amount of
      products for which ownership is expected to revert to the Company and applied
      consignment accounting to them retroactively for products shipped prior to
      October 1, 2006. The new arrangement has resulted in a reduction of net sales
      in
      the quarter ended September 30, 2006 of $0.5 million and a reduction of cost
      of
      sales and other directly related expenses of $0.3 million, which increased
      the
      net loss for the quarter ended September 30, 2006 by $0.2 million. As of
      September 30, 2006, the Company estimated that the cash repayment in November
      for the inventory ownership transferring back to the Company will be
      approximately $0.2 million




If
      the
      Company is not able to sell its building on a timely basis 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.




8




(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 September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Basic:Net
                income (loss)
            
            $
            (832,241
            )
            $
            (1,375,260
            )
            $
            (4,064,583
            )
            $
            (1,258,398
            )Weighted
                average shares outstanding
            
            
            9,346,966
            
            
            9,341,124
            
            
            9,346,966
            
            
            9,158,734Earnings
                (loss) per share
            
            $
            (0.09
            )
            $
            (0.15
            )
            $
            (.43
            )
            $
            (0.14
            )Diluted:Net
                income (loss)
            
            $
            (832,241
            )
            $
            (1,375,260
            )
            $
            (4,064,583
            )
            $
            (1,258,398
            )Weighted
                average shares outstanding
            
            
            9,346,966
            
            
            9,341,124
            
            
            9,346,966
            
            
            9,158,734Net
                effect of dilutive stock options based on the Treasury stock method
                using
                average market price
            
            
            -
            
            
            -
            
            
            -
            
            
            -Weighted
                average shares outstanding
            
            
            9,346,966
            
            
            9,341,124
            
            
            9,346,966
            
            
            9,158,734Earnings
                (loss) per share
            
            $
            (.09
            )
            $
            (0.15
            )
            $
            (.43
            )
            $
            (0.14
            )




Options
      to purchase 1,228,200 shares of common stock at September 30, 2006, were
      outstanding but not included in the computation of diluted earnings per share
      for the three and nine months ended September 30, 2006 as their effect would
      be
      antidilutive.




**(4)
      Inventories**




Inventories
        consist of the following:


**September
                30, 2006**
            
            **December
                31, 2005**Raw
                materials
            
            $
            3,421,463
            
            $
            2,333,949Work
                in process
            
            
            394,717
            
            
            648,034Finished
                goods (including $294,784 held by a customer as of September 30,
                2006)
            
            
            472,245
            
            
            2,091,195Total
            
            $
            4,288,425
            
            $
            5,073,178




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




**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                income (loss)
            
            $
            (832,241
            )
            $
            (1,375,260
            )
            $
            (4,064,583
            )
            $
            (1,258,398
            )Foreign
                currency translation adjustment
            
            
            44,696
            
            
            (10,356
            )
            
            110,220
            
            
            (107,193
            )Comprehensive
                income (loss)
            
            $
            (876,937
            )
            $
            (1,385,616
            )
            $
            (3,954,363
            )
            $
            (1,365,591
            )




**(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 prime rate as published in the Wall
      Street Journal. The rate of interest at September 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 September 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
      ($214,637 as of September 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 September 30, 2006.
      The
      Company’s tangible net worth at September 30, 2006 was $7.1 million. For
      additional liquidity, the Company has negotiated a Purchase and Sale Agreement
      for the sale of its company-owned buildings which now house its entire Boston
      headquarters staff. On October 30, 2006 the deposit relating to that purchase
      was increased to $400,000. If the sale closes, which is likely but not certain,
      the Company expects the closing to occur in December 2006. The liquidity impact
      of the sale would be to eliminate $3.6 million in bank debt and increase cash
      by
      approximately $4.2 million. The agreement provides for the lease back to Zoom
      of
      a portion of the sold property at below-market lease rates. If the sale of
      the
      building is not completed, the Company may not meet the minimum tangible net
      worth requirement in the near term. If the Company defaults, 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 may not have
      sufficient liquid assets to repay the loan if the lender makes demand. As such,
      the Company may be unable to continue as a going concern.




9




**(7)
      Commitments**




Except
      as
      related to the Company’s mortgage as discussed 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 were comprised as follows:





**Three
                Months**
              **Ended**
              **September
                30, 2006**
            
            **%
                of**
              **Total**
            
            
            **Three
                Months**
              **Ended**
              **September
                30, 2005**
            
            **%
                of**
              **Total**
            
            
            **Nine
                Months**
              **Ended**
              **September
                30, 2006**
            
            **%
                of**
              **Total**
            
            
            **Nine
                Months**
              **Ended**
              **September
                30, 2005**
            
            **%
                of**
              **Total**North
                America
            
            $
            2,280,425
            
            
            64
            %
            
            $
            2,668,030
            
            
            50
            %
            
            $
            7,711,063
            
            
            58
            %
            
            $
            8,439,326
            
            
            46
            %Turkey
            
            
            49,630
            
            
            1
            %
            
            
            973,349
            
            
            18
            %
            
            
            1,101,894
            
            
            8
            %
            
            
            3,110,560
            
            
            17
            %UK
            
            
            679,357
            
            
            19
            %
            
            
            1,108,810
            
            
            21
            %
            
            
            2,474,063
            
            
            18
            %
            
            
            4,057,410
            
            
            22
            %All
                Other
            
            
            569,905
            
            
            16
            %
            
            
            558,191
            
            
            11
            %
            
            
            2,091,240
            
            
            16
            %
            
            
            2,661,511
            
            
            15
            %Total
            
            $
            3,579,317
            
            
            100
            %
            
            $
            5,308,380
            
            
            100
            %
            
            $
            13,378,260
            
            
            100
            %
            
            $
            18,269,296
            
            
            100
            %




**(9)
      Customer Concentrations**




Relatively
      few customers have accounted for a substantial portion of the Company's net
      sales. In the third quarter of 2006 the Company's net sales to its top three
      customers accounted for 37% of its total net sales, with the Company's net
      sales
      to a North American distributor accounting for 19% of total net sales. The
      remaining 18% was divided between a United Kingdom retailer at 12% and a North
      American distributor at 6%. For the first nine months of 2006 the Company’s net
      sales to its top three customers accounted for 28% of the Company’s net sales,
      with the Company’s net sales to a United Kingdom retailer accounting for 10%, a
      North American retailer accounting for 9%, and a North American distributor
      accounting for 9% of total net sales.




In
      the
      third quarter of 2006 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 Turkish
      distributor accounting for 17% of the total net sales. The Company’s net sales
      to a North American retailer accounted for 14% and to a United Kingdom retailer
      8% of 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 1A 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.*




10




**Overview**




We
      derive
      our net sales primarily from sales of Internet-related communication products,
      principally broadband and dial-up modems and other communication products,
      to
      retailers, distributors, Internet Service Providers and Original Equipment
      Manufacturers. We sell our products through a direct sales force and through
      independent sales agents. Our employees are primarily located at our
      headquarters in Boston, Massachusetts, our support office in Boca Raton,
      Florida, our sales office in the United Kingdom, and our new production facility
      in Tijuana, Mexico. 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 or Taiwan.




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




Since
      1983 our headquarters has been near South Station in downtown Boston. Zoom
      owns
      two adjacent company-owned buildings which connect on most floors, and which
      now
      house our entire Boston staff. We recently announced that we have negotiated
      a
      Purchase and Sale Agreement for our sale of those buildings, and on October
      30,
      2006 the deposit relating to that purchase was increased to $400,000. If that
      sale closes, which is likely but not certain, we expect the close to occur
      in
      December 2006. The liquidity impact of the sale would be to eliminate $3.6
      million in bank debt and increase cash by approximately $4.2 million. Of course
      Zoom’s total cash and equity will also depend on other factors including our
      operating results.




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




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




Over
      the
      past several years our net sales have declined. In response to declining sales
      volume, we have cut costs by reducing staffing and some overhead costs. Our
      total headcount of full-time employees, including temporary workers, went from
      125 on September 30, 2005 to 79 on September 30, 2006 primarily due to
      termination of most of the employees who worked at our Summer Street facility.
      However, we have made commitments relating to workers staffing our Tijuana
      facility, most of whom are hired through a company called NAPS, and are not
      employees of Zoom.




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 master distributor for each country who handles
      the support and marketing costs within the country. Gross margin for sales
      to
      these master distributors tends to be low, since lower pricing to these
      distributors helps them to cover the support and marketing costs for their
      country. 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.




11




In
      the
      third quarter of 2006 our net sales were down 33% compared to the third quarter
      of 2005. In the first nine months of 2006 our net sales were down 27% compared
      to the first nine months of 2005. The main reason for the sales decreases was
      the decline in DSL modem and dial-up modem sales. Until the second quarter
      of
      2006 we have generally experienced growth in our DSL modem sales. However,
      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
      Turkey sales in 2006 have been declining. We attribute this decline to a number
      of factors including increased competition and actions by Turkish Telecom to
      dramatically increase their bundling of DSL modems with their service. We are
      seeing growth in some areas, including DSL sales to U.S. Internet Service
      Providers, and we are continuing our efforts to expand our DSL customer base
      and
      product line. 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 which we recorded as a
      non-operating gain in our second quarter of 2005. We realized in cash an
      additional contingent gain of $837,750 during the quarter ended September 30,
      2006, representing our portion of an earnout payment paid by the buyer as a
      result of the achievement of a performance milestone. On November 11, 2006
      we
      received a second and final performance milestone payment, also of $837,750.
      We
      expect to receive in December 2006 a return of our escrow deposit of
      approximately $370,000. No further payments from the sale of InterMute are
      expected.




Our
      cash
      and cash equivalents balance at September 30, 2006 was $4.2 million compared
      to
      $9.1 million at December 31, 2005. This reduction of $4.9 million was due
      primarily to funding our $4.1 million net loss for the first nine months of
      2006, and to a $1.4 million cash reduction from the refinancing of our mortgage
      loan.




**Critical
      Accounting Policies and Estimates**




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




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




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





·
            computer
                peripherals retailers,




·
            computer
                product distributors,




·
            Internet
                service providers, and




·
            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.




12




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 when billable services were consumed or when a monthly flat-fee
      service was billed.




**Product
      Returns** .
      Products are returned by retail stores and distributors for inventory balancing,
      contractual stock rotation privileges, and warranty repair or replacements.
      We
      estimate the sales and cost value of expected future product returns of
      previously sold products. Our estimates for product returns are based on recent
      historical trends plus estimates for returns prompted by, among other things,
      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 11.8% and 9.2 %, respectively, for the
      three and nine months ended September 30, 2006 compared to 8.9 % and 7.5%,
      respectively, for the three and nine months ended September 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 nine months ended September 30, 2006, the reduction in our net sales
      due to price protection was $0.02 million and $0.07 million, respectively
      compared to $0.07 million and $0.22 million, respectively, for the three and
      nine months ended September 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 nine months ended September 30,
      2006,
      the reduction in our net sales due to sales and marketing incentives was $0.14
      million and $0.71 million, respectively compared to $0.21 million and $0.86
      million, respectively, for the three and nine months ended September 30, 2005.




**Consumer
      Mail-In and In-Store Rebates** .
      Our
      estimates for consumer mail-in and in-store rebates are based on a detailed
      understanding and tracking by customer and sales program, supported by actual
      rebate claims processed by the rebate redemption centers plus an accrual for
      an
      estimated lag in processing at the redemption centers. The estimate for mail-in
      and in-store rebates is recorded as a reserve against accounts receivable and
      a
      reduction of net sales in the same period that the rebate obligation was
      triggered. Reductions in our net sales due to the consumer rebates were $0.2
      million in 2003, $1.4 million in 2004, and $0.8 million in 2005. In the three
      and nine months ended September 30, 2006, the reduction in our net sales due
      to
      consumer rebates was $0.02 million and $0.56 million, respectively compared
      to
      $0.24 million and $0.88 million, respectively, for the three and nine months
      ended September 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 $0.01 million for the three and nine months ended
      September 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 third
      quarter of 2006 we recorded an additional $0.1 million charge for inventory
      reserves related to some slow-moving VoIP products.




**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.




13




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 $3.6 million for our third quarter ended September 30, 2006, down
      32.6% (including the $0.5 million sales reduction resulting from our new
      consignment arrangement with a significant retailer customer) from $5.3 million
      in the third quarter of 2005. We had a net loss of $0.8 million for the third
      quarter of 2006, compared to a net loss of $1.4 million in the third quarter
      of
      2005. Our operating loss for the third quarter of 2006 was $1.8 million,
      compared to an operating loss of $1.4 million for the third quarter of 2005.
      The
      net loss of $0.8 million for the third quarter of 2006 was comprised of an
      operating loss of $1.8 million offset by other income of $0.9 million, due
      to
      the additional $870 thousand payment based on a performance goal earn-out from
      the 2005 sale of our interest in InterMute. Loss per diluted share was $0.09
      for
      the third quarter of 2006 compared to a loss per diluted share of $0.15 for
      the
      third quarter of 2005 .




Net
      sales
      were $13.4 million for the nine months ended September 30, 2006, down 26.8%
      (including the $0.5 million sales reduction resulting from our new consignment
      arrangement with a significant retailer customer) from $18.3 million in the
      first nine months of 2005. We had a net loss of $4.1 million for the first
      nine
      months of 2006, compared to a net loss of $1.3 million in the first nine months
      of 2005. Our operating loss for the first nine months of 2006 was $5.1 million,
      and our operating loss was $4.7 million for the first nine months of 2005.
      Other
      income for the nine months ended September 30, 2006 and 2005 was $1.0 million
      and $3.5 million, respectively, due primarily to proceeds from the sale of
      our
      interest in InterMute. Net loss per diluted share was $0.43 for the first nine
      months of 2006 compared to net loss per diluted share of $0.14 for the first
      nine months of 2005.




**Net
      Sales** .
      Our net
      sales for the third quarter of 2006 decreased 32.6% from the third quarter
      of
      2005, primarily due to a 49% decrease in DSL modem sales and a 14% decrease
      in
      dial-up modem sales. DSL modem net sales decreased from $2.6 million in the
      third quarter of 2005 to $1.3 million in the third quarter of 2006 primarily
      as
      a result of: (i) decreased DSL sales to our Turkish distributor due to the
      plans
      by Turkish Telecom to dramatically increase their bundling of DSL modems with
      their service offerings, (ii) reduced DSL sales at retail in the U.K. due to
      the
      decision in the third quarter of 2005 of a large U.K retailer to
      discontinue carrying most of our DSL product line; and (iii) reduced DSL sales
      to our distributor in Vietnam. Dial-up modem net sales declined to $2.0 million
      in the third quarter of 2006 compared to $2.3 million in the third quarter
      of
      2005, and net sales would have risen without the $0.5 million reserve recorded
      against the third quarter sales to our major retailer customer who will be
      moving to consignment in the fourth quarter. Net sales in our other products
      sales categories, which include wireless networking equipment, cable modems,
      and
      VoIP decreased $0.1 million from $0.4 million in the first nine months of 2005
      to $0.3 million in the first nine months of 2006.




Our
      net
      sales for the first nine months of 2006 decreased 26.8% from the first nine
      months of 2005, primarily due to a 35% decrease in DSL modem sales and a 24%
      decrease in dial-up modem sales. DSL modem net sales decreased to $5.8 million
      in the first nine months of 2006 compared to $8.8 million in the first nine
      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 in the third quarter of 2005 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. Dial-up modem net sales declined
      to $6.2 million in the first nine months of 2006 compared to $8.2 million in
      the
      first nine months of 2005, primarily due to lower dial-up modem unit sales,
      primarily resulting from the continued decline of the dial-up modem
      after-market, lower dial-up modem average selling prices, and to the $0.5
      million reserve recorded against the third quarter sales to our major retailer
      customer who will be moving to consignment in the fourth quarter. Net
      sales
      in our other product sales categories, which include wireless networking
      equipment, cable modems, and VoIP increased $0.1 million from $1.3 million
      for
      the first nine months of 2005 to $1.4 million in the first nine months of 2006,
      primarily due to increased wireless product sales.




14




Our
      net
      sales in North America were $2.3 million in the third quarter of 2006, a
      decrease from $2.7 million in the third quarter of 2005. Our net sales in Turkey
      were $0.05 million in the third quarter of 2006, a decrease from $1.0 million
      in
      the third quarter of 2005. Our net sales in the U.K. were $0.7 million in the
      third quarter of 2006, a decline from $1.1 million in the third quarter of
      2005.
      The decline in net sales in Turkey and the U.K. are for the reasons discussed
      above. Our net sales other than North America, Turkey and the U.K. were $0.6
      million in the third quarter of 2006, and $0.6 million in the third
      quarter of 2005. Our net sales in North America were $7.7 million in the first
      nine months of 2006, a decline from $8.4 million in the first nine months of
      2005. Our net sales in Turkey were $1.1 million in the first nine months of
      2006
      and $3.1 million in the first nine months of 2005. Our net sales in the U.K.
      were $2.5 million in the first nine months of 2006, a decline from $4.1 million
      in the first nine months of 2005. Our net sales in countries other than North
      America, Turkey and the U.K. were $2.1 million for the first nine months of
      2006
      and $2.7 million for the first nine months of 2005.




Relatively
      few customers have accounted for a substantial portion of our net sales. In
      the
      third quarter and nine months of 2006, respectively, net sales to our top three
      customers accounted for 37% and 28% of total net sales. In the third quarter
      and
      nine months of 2005, respectively, net sales to our top three customers
      accounted for 38% and 39% of total net sales.




**Gross
      Profit.** Our
      total
      gross profit was $0.2 million in the third quarter of 2006, a decline from
      $0.5
      million in the third quarter of 2005. Our gross margin percent of net sales
      decreased to 6.7% in the third quarter of 2006 from 9.8% in the third quarter
      of
      2005. The lower gross profit resulted primarily from lower sales volume with
      the
      gross margin drop due primarily to lower absorption of fixed manufacturing
      overhead due to lower sales, and transition costs relating to the move of our
      production operations from Boston to Tijuana, Mexico.




Our
      total
      gross profit was $1.4 million in the first nine months of 2006, a decline from
      $3.4 million in the first nine months of 2005. Our gross margin percent of
      net
      sales decreased to 10.7% in the first nine months of 2006 from 18.8% in the
      first nine months of 2005. Gross margins were lower primarily because of lower
      absorption of fixed manufacturing overhead due to lower sales in the first
      nine
      months of 2006 compared to the first nine months of 2005, and a $0.1 million
      severance charge and other moving-related costs associated with the closing
      of
      our manufacturing operations in Boston and the move of those operations to
      Tijuana, Mexico in the second and third quarters of 2006. .




**Selling
      Expense.** Selling
      expense decreased $0.2 million to $0.8 million or 21.8% of net sales in the
      third quarter of 2006 from $1.0 million or 18.4% of net sales in the third
      quarter of 2005. Selling expense was lower primarily because of lower personnel
      and related costs resulting from employee headcount reductions and lower sales,
      sales promotions, and product delivery expense.




Selling
      expense decreased $.6 million to $2.6 million or 19.2% of net sales in the
      first
      nine months of 2006 from $3.2 million or 17.4% of net sales in the first nine
      months of 2005. Selling expense was lower primarily because of lower personnel
      and related costs resulting from employee headcount reductions and lower sales,
      sales promotions, and product delivery expense.




**General
      and Administrative Expense.** General
      and administrative expense was $0.7 million or 19.3% of net sales in the third
      quarter of 2006 compared to $0.3 million or 5.9% of net sales in the third
      quarter of 2005. General and administrative expense in the third quarter of
      2005
      was low due to the $0.4 million reversal of a $1.1 million bad debt allowance
      recorded in the second quarter of 2005 for the business failure of Granville
      Technologies.




General
      and administrative expense decreased $0.6 million to $2.2 million, or 16.7%
      of
      net sales in the first nine months of 2006 from $2.9 million or 15.7% of net
      sales in the first nine months of 2005. The decrease of $0.6 million was
      primarily due to the $0.7 million bad debt charge to general and administrative
      expense for Granville Technologies in 2005.




**Research
      and Development Expense.** Research
      and development expense decreased $0.2 million to $0.5 million or 14.5% of
      net
      sales in the third quarter of 2006 from $0.7 million or 12.5% of net sales
      in
      the third quarter of 2005. Research and development costs decreased primarily
      as
      a result of lower personnel costs due to headcount reductions and lower
      consulting and 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 $0.4 million to $1.7 million or 12.8% of
      net
      sales in the first nine months of 2006 from $2.1 million or 11.5% of net sales
      in the first nine months of 2005. Research and development costs decreased
      primarily as a result of lower personnel costs due to headcount reductions
      and
      lower consulting and product license and approval fees.




15




**Other
      Income (Expense), Net.** Other
      income (expense), net was net income of $0.9 million in the third quarter of
      2006 compared to net income of $0.1 million in the third quarter of 2005. The
      $0.9 million income gain resulted primarily from a performance milestone
      payment in the third quarter ended September 30, 2006 related to the sale of
      InterMute to Trend Micro in 2005.




Other
      income net was $1.0 million in the first nine months of 2006, compared to $3.5
      million in the first nine months of 2005. The primary reason for both the $1.0
      million and $3.5 million income in the first nine months of 2006 and 2005,
      respectively, was due to payments we received from the sale of our
      interest in InterMute to Trend Micro.





**Liquidity
      and Capital Resources**




On
      September 30, 2006 we had working capital of $7.8 million, including $4.2
      million in cash and cash equivalents. Our net loss in the first nine months
      of
      2006 was $4.1 million. In the first nine months of 2006, operating activities
      used $4.4 million in cash. 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 $0.9 million, and
      a
      decrease of inventory of $0.8 million.




In
      the
      first nine months of 2006 net cash used in financing activities was $1.3
      million, due primarily to the refinancing of the mortgage on our headquarters
      buildings. Our original mortgage was a 5-year balloon mortgage that was
      initially 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 prime rate as published
      in
      the Wall Street Journal. The rate of interest as of September 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 Zoom 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 ($214,637 as of September 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 September 30, 2006. Our tangible net worth at
      September 30, 2006 was $7.1 million. For additional liquidity, we negotiated
      a
      Purchase and Sale Agreement for the sale of our company-owned buildings which
      now house our entire Boston headquarters staff. On October 30, 2006 the deposit
      relating to that purchase was increased to $400,000. If the sale closes, which
      is likely but not certain, we expect the closing to occur in December 2006.
      The
      liquidity impact of the sale would be to eliminate $3.6 million in bank debt
      and
      increase cash by approximately $4.2 million. The agreement provides for the
      lease-back to Zoom of a portion of the sold property at below-market lease
      rates. If the sale of the building is not completed, we may not meet the minimum
      tangible net worth requirement in the near term. If we default, 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 may not have sufficient liquid
      assets to repay the loan if the lender makes demand. As such, we may be unable
      to continue as a going concern.




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. Out discussions on a new line of credit are currently on hold, pending
      the outcome of the sale of our Headquarters buildings. Accordingly, we do not
      currently have a line of credit from which we can borrow.




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 third quarter of 2005 in connection
      with this sale. At that time we disclosed that we could receive up to $3.0
      million in additional payments in 2006 if certain conditions and performance
      targets are met. We realized in cash an additional contingent gain of $837,750
      during the quarter ended September 30, 2006, representing our portion of an
      earnout payment paid by the buyer as a result of the achievement of a
      performance milestone. On November 11, 2006 we received a second and final
      performance milestone payment, also of $837,750. We expect to receive in
      December 2006 a return of our escrow deposit of approximately $370,000. No
      further payments from the sale of InterMute are expected.




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
      $100,000 were accrued for this termination and charged to operations as of
      June
      30, 2006. We expect to incur approximately $300,000 of costs, including the
      aforementioned severance benefits, in connection with the move. 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.




16




We
      believe that our current level of working capital combined with the anticipated
      proceeds from the completion of the pending sale of our headquarter buildings
      will provide sufficient resources to fund the Company’s normal operations over
      the next twelve months, the relevant period for a going-concern evaluation,
      through September 30, 2007. However, we cannot assure that we can sell our
      building on favorable terms and on a timely basis, if at all. Our $3.6 million
      mortgage loan contains financial covenants including the requirement that we
      maintain a tangible net worth of at least $7.0 million. As of September 30,
      2006
      our tangible net worth was $7.1 million. If we continue to incur operating
      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 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
      entered into a consignment arrangement with a significant retailer customer
      in
      October 2006. In connection with this agreement ownership of all unsold products
      previously purchased from Zoom are scheduled to revert to us in November 2006.
      The new arrangement has resulted in an accounting adjustment that reduced our
      net sales in the quarter ended September 30, 2006 by $0.5 million and reduced
      cost of sales and other directly related expenses by $0.3 million, which
      increased the net loss for the quarter ended September 30, 2006 by $0.2 million.
      We estimated, as of September 30, 2006, that the cash repayment to the retailer
      in November for the inventory ownership transferring back to us will be
      approximately $0.2 million. Sales in the fourth quarter ending December 31,
      2006
      will also be reduced compared to a non-consignment arrangement. The recording
      of
      sales under the consignment arrangement does not take place until the retailer
      makes a sale to its customer. The dating of invoices, the recognition of
      Accounts Receivable, and the due dates for payments to Zoom are also delayed.




If
      the
      buyer of our headquarters buildings does not close on the sale through no fault
      of ours, we are entitled to $0.4 million of cash that has been deposited in
      escrow by the buyer. However, if we subsequently are not able 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. 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 1A 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.





**Commitments**





During
      the nine months ended September 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.





**"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 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.*




17




**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. 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
      September 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.





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
      recently announced that we have negotiated a Purchase and Sale Agreement for
      the
      sale of our headquarters facility. The potential purchaser has deposited
      $400,000 related to this purchase. While we expect the closing of the sale
      of
      our headquarters will occur in December 2006, there can be no assurance that
      the
      sale will close. If the sale of our headquarters to the currently identified
      purchaser does not close there can be no assurance that we would be able to
      locate another purchaser for the buildings on a timely basis and on terms
      acceptable to us. Our headquarters facility is subject to a $3.6 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. As of September 30, 2006 our tangible net
      worth was $7.1 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 on April 10, 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.




18




**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. Our discussions
      on
      a new line of credit are currently on hold, pending the outcome of the sale
      of
      our Headquarters buildings. Additional financing may not be available to us
      on a
      timely basis if at all, or on terms acceptable to us. If we fail to obtain
      acceptable additional financing when needed, we may not have sufficient
      resources to fund our normal operations and we may be required to further reduce
      planned expenditures or forego business opportunities. These factors could
      reduce our net sales, increase our losses, and harm our business. Moreover,
      additional equity financing could dilute the per share value of our common
      stock
      held by current shareholders, while additional debt financing could restrict
      our
      ability to make capital expenditures or incur additional indebtedness, all
      of
      which would impede our ability to succeed.





**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.**




In
      September 2006 we transferred most of our manufacturing operations from Boston,
      Massachusetts to Tijuana, Mexico. As a result of moving our manufacturing
      options to Mexico, we experienced delays and interruptions in production and
      may
      experience additional delays and interruptions as well as unanticipated costs
      and other problems. We incurred approximately $280,000 in costs in connection
      with the move of our manufacturing operations to Mexico. Delays, interruptions in production or other problems
      related to 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.





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





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




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




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





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





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




19




**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
      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 our operations in Mexico. Our
      outsourcing partner’s related functions include acquiring the necessary Mexican
      permits, providing the appropriate Mexican operating entity, assisting in
      customs clearances, and providing other general assistance and administrative
      services in connection with the 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
      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 nine 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 of, reduction of business with, or less favorable terms
      for any of our significant customers. For example, in the first nine months
      of
      2006, DSL sales to our Turkish distributor, one of our top three customers,
      have
      declined significantly from $3.1 million in the first nine months in 2005 to
      $1.1 million in the first nine months in 2006. We attribute this decline due
      to
      a number of factors including increased competition and plans by Turkish Telecom
      to dramatically increase the bundling of DSL modems with their service. We
      cannot guarantee that we will increase our sales to our Turkish distributor.  A
      reduction or delay in orders from any of our significant customers, or a delay
      or default in payment by any significant customer could materially harm our business,
      results of operation and liquidity.




**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.**





The
      Company entered into a consignment arrangement with a significant retailer
      customer in October 2006. In connection with this arrangement ownership of
      all
      unsold products previously purchased from the Company are scheduled to revert
      to
      the Company in November 2006. The new arrangement has resulted in an accounting
      adjustment that reduced the Company’s net sales in the quarter ended September
      30, 2006 by $0.5 million and reduced cost of sales and other directly related
      expenses by $0.3 million, which increased the net loss for the quarter ended
      September 30, 2006 by $0.2 million. The Company estimated, as of September
      30,
      2006, that the cash repayment to the retailer in November for the inventory
      ownership transferring back to the Company will be approximately $0.2 million.
      Sales in the fourth quarter ending December 31, 2006 will also be reduced due
      to
      the start of the consignment arrangement. Under the consignment arrangement
      we
      are not able to recognize revenue from the sale of a product until the retailer
      actually sells such product to its customer. The consignment arrangement also
      results in a delay in the dating of invoices, the recognition of accounts
      receivable, and the due dates for payment by the retailer for goods sold. If
      additional significant customers adopt similar arrangements or otherwise change
      the terms of sale, our business, results of operation and liquidity will be
      harmed.




20




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




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




·
            the
                current limited retail market for broadband
                modems;




·
            the
                relatively small number of cable, telecommunications and Internet
                service
                provider customers that make up 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;




·
            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.




21




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




Currently
      our business is significantly dependent on our operations outside the United
      States, particularly sales of our products and the production of most of our
      products. All of our manufacturing operations except our rework operations
      are
      now located outside of the United States. In the first nine months of 2005,
      sales outside of North America were approximately 54% of our net sales. In
      the
      first nine months of 2006, sales outside North America were 42% 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.




**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
      $0.1
      million inventory obsolescence charge in the three months ended September
      30,2006 for inventory reserves related to some slow-moving VoIP
      products.





**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.




22




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




·
            reduced
                management and control of component purchases;




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




·
            lack
                of adequate capacity during periods of excess demand;




·
            limited
                warranties on products supplied to us;




·
            potential
                increases in prices;




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




·
            misappropriation
                of our intellectual property.





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




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




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




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





**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 2007 may increase our manufacturing costs and harm our
      business.**





The
      Federal government has 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 2007, may require us and other electronics companies
      to
      change or discontinue many products. We believe compliance with these new
      requirements will be difficult, and will typically increase our product costs
      by
      up 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 nine 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 recently enacted
      regulatory requirements in the European Union.




23




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




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




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





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




VoIP
      services currently have different regulations from traditional telephony in
      most
      countries including the US. The US, various states and other countries may
      impose surcharges, taxes or new regulations upon providers of VoIP services.
      The
      imposition of any such surcharges, taxes and regulations on VoIP services could
      materially increase our costs, may limit or eliminate our competitive pricing
      and may require us to restructure the VoIP services we currently offer. For
      example, regulations requiring compliance with the Communications Assistance
      for
      Law Enforcement Act (CALEA) or provision of the same type of 911 services as
      required for traditional telecommunications providers could place a significant
      financial burden on us depending on the technical changes required to
      accommodate the requirements. In May 2005 the FCC issued an order requiring
      interconnected VoIP providers to deliver 911 calls to the customer’s local
      emergency operator as a standard feature of the service. We believe our VoIP
      products are capable of meeting the FCC requirements. In the event our VoIP
      products do not meet the FCC requirements, we may need to modify our products,
      which could increase our costs.




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




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




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




24




**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
      6. EXHIBITS**




Exhibit
                No.
            
            Exhibit
                Description31.1
            
            CEO
                Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.**31.2
            
            CFO
                Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.**32.1
            
            CEO
                Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.**32.2
            
            CFO
                Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.**




**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:
                November 13, 2006
            By:
            /s/
              Frank B. ManningFrank
                B. Manning, President


Date:
                    November 13, 2006
              By:
              /s/
                Robert CristRobert
                    Crist, Vice President of Finance and Chief Financial Officer
                    (Principal
                    Financial and Accounting
                    Officer)
  26




**EXHIBIT
      INDEX**


Exhibit
                No.
              
              Exhibit
                Description31.1
              
              CEO
                  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
                  of
                  2002.**31.2
              
              CFO
                  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
                  of
                  2002.**32.1
              
              CEO
                  Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
                  of
                  2002.**32.2
              
              CFO
                  Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
                  of
                  2002.**


**Filed
      herewith





27