UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB

(Mark One)

    X     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
          OF 1934 (Fee Required)

                   For the fiscal year ended December 31, 1996

          TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
          ACT OF 1934 (No Fee Required)

            For the transition period from __________ to ____________

                             Commission file number _________________

                                ZAP POWER SYSTEMS
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                 (Name of small business issuer in its charter)

           CALIFORNIA                                    94-3210624
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  (State or other jurisdiction of           (I.R.S. Employer Identification No.)
   incorporation or organization)                        

117 Morris Street, Sebastopol, California                      95472
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(Address of principal executive offices)                     (Zip Code)

Issuer's telephone number (707) 824-4150
                          ---------------

Securities registered under Section 12(b) of the Exchange Act:

            Title of each class        Name of each exchange on which registered

            None
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------------------------------------   -----------------------------------------

Securities registered under Section 12(g) of the Exchange Act:

            None
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                                (Title of class)

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                                (Title of class)

         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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

<PAGE>

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10KSB. .

         State  issuer's  revenues for its most recent  fiscal year.  $1,170,900
                                                                     -----------

         State  the  aggregate   market  value  of  the  voting  stock  held  by
non-affiliates  computed by  reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days.  (See  definition  of  affiliate in Rule 12b-2 of the Exchange
Act).

Note:  If  determining  whether  a  person  is  an  affiliate  will  involve  an
unreasonable  effort and expense,  the issuer may calculate the aggregate market
value of the common  equity held by  non-affiliates  on the basis of  reasonable
assumptions, if the assumptions are stated.

         There is no public market for the Company's common stock.

     (ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

         Check whether the issuer has filed all  documents and reports  required
to be  filed  by  Section  12,  13 or  15(d)  of  the  Exchange  Act  after  the
distribution of securities under a plan confirmed by a court. Yes No .


                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

         State the number of shares  outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.  2,076,500 shares of common
stock as of December 31, 1996

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<PAGE>


                                TABLE OF CONTENTS

                                     PART I

Item 1.  Description of Business
     
Item 2.  Description of Property
     
Item 3.  Legal Proceedings
     
Item 4.  Submission of Matters to a Vote of Security Holders
     
                                Part II
     
Item 5.  Market for Common Equity and Related Stockholder Matters
     
Item 6.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
     
Item 7.  Consolidated Financial Statements
     
Item 8.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosure
     
                                   Part III
     
Item 9.  Directors,   Executive   Officers,   Promoters  and  Control   Persons;
         Compliance with Section 16(a) of the Exchange Act
     
Item 10. Executive Compensation
     
Item 11. Security Ownership and Certain Beneficial Owners and Management
     
Item 12. Certain Relationships and Related Transactions
     
Item 13. Exhibits and Reports on Form 8-k
     
     
                                        3
     
<PAGE>
                                     Part I

         Item 1. Description of Business

              A. Business Development

         The Company was incorporated under the laws of the state of California,
on September 23, 1994.

         The Company designs,  assembles,  manufactures and distributes electric
bicycle  power  kits,  electric  bicycles  and  tricycles,  and other  low-power
electric transportation vehicles.

         During 1994 the Company began to develop an electric bicycle system for
the consumer market.  The Company entered into a contract with a High Technology
Development,  a Singapore based company,  to develop an electric bicycle for the
country of Thailand. The Company, in cooperation with Systronics a U.S. Company,
developed a product  that would be built and sold in  Thailand.  The Company was
paid for a technology  transfer and ongoing research and development work on the
product. The Thailand project was terminated in the middle of 1995.

         On February 13, 1996,  the Company was issued a United States Patent on
its electric bicycle motor system (Patent #5,491,390).

         During the second half of 1995 the Company began to develop a marketing
and production  strategy for the United States.  It signed a sales  agreement to
sell bicycles  through Real Goods Trading  Company's mail order catalog.  In the
first  quarter of 1996 the  Company  developed  a Web Site on the World Wide Web
allowing  customers  to buy the  bicycles  through the  internet.  In the second
quarter of 1996 the Company  entered into a contract  with Power Biking Inc., an
entity formed to sell electric bicycles through auto dealerships, to enroll auto
dealers in North  America to sell the Company's  bicycles.  In April the Company
began  selling  electric  bicycles and  electric  motor kits through the Sharper
Image mail order catalog.  The Company signed a joint  marketing  agreement with
Movity S.r.l.  to sell their electric  scooter in the North American  market and
for Movity S.r.l. to sell the Company's products in Italy and Austria.

         In January 1997 ZAP China, a subsidiary of which the Company owns 50% ,
signed an  agreement  with  Forever  Company  to sell up to 5,000  motor  units.
Forever  Company will assemble  these motors on their bicycles and then sell the
completed bicycle in China.

         In March 1997 the  Company  signed a letter of intent to  purchase  the
assets of Movity  S.r.L.  for a  combination  of common stock and cash  totaling
$500,000.  Movity  manufactures  and sells an electric  motor  scooter  into the
European market.

         Although the Company is  registered  with the  Securities  and Exchange
Commission, there was no trading in the Company's stock through the end of 1996.
The Company  initiated an Direct Public  Offering of its public shares  November
29, 1996 at a price of $5.25 per share.  The Company is currently  not traded on
an exchange.


         B. Business of Issuer

         The Company manufactures an electric motor system that is sold as a kit
to be installed by the customer on their own bicycle.  The Company also installs
the motor system on bicycles  which the Company buys. The Company then sells the
complete  electric  bicycle to the  customer.  The  Company  purchases  complete
bicycles from various bicycle  manufacturers for use with the Company's electric
motor  system.  The  Company  manufactures  the  electric  motor  kit  which has
approximately  62  unique  parts.  The  electric  motor  kit  manufacturing  and
installation  of the motor  systems to the  bicycles  is done at its  Sebastopol
location.   The  electric  motors  are  purchased  from  an  original  equipment
manufacturer  (OEM) in the auto and  air-conditioning  industry.  The Company is
using one company for its motors,  although there are other companies that could
be 

                                       4
<PAGE>

used with slight modifications to the motor support brackets.  The batteries are
standard  batteries used in the computer  industry for power interrupt  systems.
The electronic system uses standard electronic components.

         The electric  motor kits and electric  bicycles sold by ZAP are usually
shipped by U.P.S.  and Federal  Express.  Larger  quantity  orders to  wholesale
distributors are shipped common carrier. Overseas shipments are shipped by Ocean
carrier  or  air  freight.   The  Company  has  developed   long  term  purchase
arrangements with its key vendors. The Company has no contractual  relationships
with any of its vendors.

         The  Company's  growth  strategy is to increase net sales by augmenting
its marketing and sales force, and by increasing  distribution  channels through
retail organizations and wholesale  distributors both domestically and overseas.
The Company will  continue to increase  its  production  capability  to meet the
increasing  demand for its  product.  The Company  will  continue to develop the
product so that it is the low cost leader in the industry.  Product improvements
and new product  introductions  will continue to enlarge  ZAP's  presence in the
electric vehicle industry.

         The electric bicycle industry has three major  manufacturers  (3) and a
large group of small manufacturers (30 plus). The major manufacturers are Honda,
Suzuki,  and Yamaha.  They mainly sell products into Japan and China.  The other
group  of  manufacturers  are  much  smaller  in size and  sales  volume.  These
manufacturers  have  products  that  sell  into the  U.S.,  European,  and Asian
markets.  The Company does not consider  electric bicycle industry sales numbers
very accurate at this point in time. As such, the Company's position in terms of
sales volumes is impossible to determine.

Item 2.  Description of Property

         The Company leases its  manufacturing and office facility at 117 Morris
Street,   Sebastopol,   Ca.  The  Company's   property  consists   primarily  of
manufacturing  equipment and office computer systems.  The monthly lease payment
is $4,400 per month.  The landlords are Daniel O. Davis and Robbin H. Davis.  It
is  management's  opinion  that the  Company's  insurance  policies  covers  all
insurance  requirements  of the landlord.  The lease expires June 1, 1998 with a
renewal option for two additional five year periods.

As of December 31, 1996 the Company has 30 full-time and 5 part-time  employees.
All these employees work at the Company's Sebastopol, California location.

Item 3.  Legal Proceedings

         There  were no  material  proceedings  pending  in 1996  in  which  the
Registrant was named as a party.

Item 4.  Submission of Matters to a Vote of Security Holders

         The Company called a special  shareholders  meeting  October 8, 1996. A
total of 1,754,490  shares  (82.5%) were present or  represented by proxy at the
meeting to vote on the following issues;

         Election of James McGreen,  Gary Starr, Nancy Cadigan, Lee Sannella and
         Jessalyn  Nash to the  board of  directors.  For  1,754,490  Against  0
         Abstained 0

         Amend the Articles of Incorporation to increase  authorized shares from
         one  million  to ten  million  shares of common  stock.  For  1,745,490
         Against 7,500 Abstained 1,500


         Authorize  a  three  for one  stock  split.  For  1,754,490  Against  0
         Abstained 0


         Authorize  the 1996 Stock  Option Plan.  For  1,676,490  Against  7,500
         Abstained 70,500

                                       5
<PAGE>

         Approve the  appointment of Moss Adam LLP as the  independent  auditors
         for the Company for 1996. For 1,715,490 Against 7,500 Abstained 31,500


         Waive the notice and meeting requirements set forth in the Bylaws prior
         to the  meeting  of  October  8,  1996.  For  1,702,490  Against  8,010
         Abstained 43,500


         Ratify all  actions  previously  taken by the Board of  Directors.  For
         1,703,490 Against 7,500 Abstained 43,500

                                     Part II

Item 5.  Market for Common Equity and Related Stockholder Matters

              Although  the  Company  is  registered  with  the  Securities  and
         Exchange  Commission,  there  was no  trading  in the  Company's  stock
         through the end of 1996. The Company initiated a Direct Public Offering
         of its public  shares  November 29, 1996 at a price of $5.25 per share.
         The Company is currently not traded on an exchange.

              The number of shares  issued of record as of December  31, 1996 is
         2,076,500.  No dividends of cash or stock have been paid by the Company
         in the past.  The payment of dividends  will depend  entirely  upon the
         Company's ability to generate sufficient earnings,  its financial needs
         and other  unpredictable  factors.  It is not  anticipated  that common
         dividends will be paid in the foreseeable future.

              During 1995, a private  placement was executed for 144,000  shares
         of common stock for an average price of $0.94 per share.

              During 1996 the Company sold 365,100 shares of common stock for an
         average  price of $1.59.  In addition the Company  issued 57,400 shares
         for payment of current and future services at an average price of $3.15
         per share.

              In October of 1996 the Company started a Direct Public Offering of
         500,000 shares of common stock at $5.25 per share.

              In December of 1996 the Company  issued  10,000  shares to a joint
         venture (ZAP (China) LLC), of which the Company owns 50%.

                  As of December 31, 1996 the Company had 202 stockholders.

Item 6. Management's  Discussion and Analysis of Plan of Financial Condition and
        Results of Operations.

Overview

         The Company designs,  assembles,  manufactures and distributes electric
bicycle  power  kits,  electric  bicycles  and  tricycles,  and other  low-power
electric   transportation   vehicles.   Historically,   unit   sales  have  been
approximately  65% kits and 35%  electric  bicycles.  Dollar sales have been 50%
kits and 50% electric bicycles.

         The Company sells its electric  bicycles and kits to retail  customers,
auto dealerships,  bicycle  dealerships and mail order catalogs.  Net revenue is
net of  returns.  The  Company  sells to the mail order  catalogs  and  selected
customers  on credit  with net 30 day terms.  The car  dealerships  and  bicycle
dealerships  are sold cash on delivery.  The retail sales are primarily paid for
with a credit card or personal check before shipment of the product.

         During 1994 and 1995 the Company was paid by governmental  agencies and
private  foundations to further develop the electric bicycle to fit into various
roles in the US and overseas  markets.  During this period the Company developed
electric motor systems for offshore sales and manufacturing.  The Company's work
to develop 

                                       6
<PAGE>

offshore  manufacturing  abilities for the domestic and foreign markets involved
private  and public  foundations  in  Thailand  and other  Asian  countries.  In
addition,  the Company worked on the  development of an electric police bicycle.
Late in the fourth  quarter of 1995 the Company began to sell bicycles to retail
and wholesale customers as its core business.

         The Company manufactures an electric motor system that is sold as a kit
to be installed by the customer on their own bicycle.  The Company also installs
the motor system on bicycles  which the Company buys. The Company then sells the
complete  electric  bicycle to the  customer.  The  Company  purchases  complete
bicycles from various bicycle  manufacturers for use with the Company's electric
motor  system.  The  Company  manufactures  the  electric  motor kit,  which has
approximately 62 unique parts.  The  manufacturing of the electric motor kit and
the  installation of the motor systems to the bicycles is done at its Sebastopol
location.   The  electric  motors  are  purchased  from  an  original  equipment
manufacturer  (OEM) in the auto and  air-conditioning  industry.  The Company is
using one Company for its motors,  although there are other companies that could
be used with slight  modifications to the motor support brackets.  The batteries
are  standard  batteries  used in the  computer  industry  for  power  interrupt
systems. The electronic system uses standard electronic components.

         The electric  motor kits and electric  bicycles sold by ZAP are usually
shipped by U.P.S.  and Federal  Express.  Larger  quantity  orders to  wholesale
distributors  are shipped  common  carrier.  The Company has developed long term
purchase  arrangements  with its key  vendors.  The Company  has no  contractual
relationships with any of its vendors.

         The  Company's  growth  strategy is to increase net sales by augmenting
its marketing and sales force, and by increasing  distribution  channels through
retail organizations and wholesale  distributors both domestically and overseas.
The Company will  continue to increase  its  production  capability  to meet the
increasing  demand for its  product.  The Company  will  continue to develop the
product so that it is the low cost leader in the industry.  Product improvements
and new product  introductions  will continue to enlarge  ZAP's  presence in the
electric vehicle industry.

Results of Operations

         The following table sets forth,  as a percentage of net sales,  certain
items included in the Company's Income Statements (see Financial  Statements and
Notes thereto elsewhere in this Prospectus) for the periods indicated:

                                                  Years Ended December 31,
                                                1994        1995        1996
                                             -----------  --------     ------
     Statements of Income Data:
         Net sales.......................      100.00%       100.00%    100.00%
         Cost of sales...................      109.00         67.00      74.00
         Gross profit (Loss).............       (9.00)        33.00      26.00
         Operating  expenses.............      110.00         69.00      96.00
         Loss from operations............     (119.00)       (36.00)    (70.00)
         Other  income (expense).........        0.00         34.00       0.00
         Loss before income taxes........     (119.00)        (2.00)    (70.00)
         Provision for income taxes......        1.00          1.00       0.00
         Net loss........................     (120.00)        (2.00)    (70.00)

Year Ended December 31, 1995 Compared to Year Ended December 31, 1996

         Net  sales  for the year  ended  December  31,  1996,  were  $1,170,900
compared  to $650,800  in the prior  year,  an increase of $520,100 or 80%.  The
increase in sales is attributed to the Company's development of the retail sales
of its electric  bicycles and kits through Auto  dealers,  Mail order  catalogs,
Electric Utilities companies and bicycle retail outlets. The Company established
sales agreements with The Sharper Image Catalog, Power Biking Corporation, Merry
Sales, and the Beverly Hills Motorcycle Catalog in the USA. Through Power Biking
Corporation  the Company  signed up 8 Auto  dealerships  to sell the ZAP product
line. During 1996 the Company developed a program with forty Electric  Utilities
to promote the use of electric  bicycles.  Through  this program the Company has
sold  approximately  160 electric  bicycles,  electric kits and electric  police
bicycles in 1996. The 

                                       7
<PAGE>

Company established  sales/distribution agreements with Harvey Moore Motoring in
Australia,  and Movity  S.R.L,  in Italy.  The  Company  expanded  its  internet
marketing and sales effort in 1996 by expanding  the existing ZAP Web page.  The
net sales  increase  resulted  from  increased  bicycle  and kit  sales  through
expanded distribution channels both domestically and off shore. The Company also
increased the sales price to distributors and retail customers an average of 25%
in the same period.

         Gross  profit  (loss).  Gross profit  decreased as a percentage  of net
sales, from 33% to 26%. The transition from research and development projects to
electric  bicycle and electric kit sales  resulted in a lower total gross profit
percentage.  The total  gross  profit  increased  $92,800 or 43%  because of the
increase in net sales from 1995 to 1996.

         Selling  expenses  in 1996  were  $476,800.  This  was an  increase  of
$386,500 or 428% from 1995 to 1996. As a percentage of sales,  selling  expenses
increased  from 14% of sales to 41% of  sales.  This was due to an  increase  in
marketing to auto  dealerships  and other dealer  outlets for the 1996 period as
compared  to the 1995  period as well as a  realignment  of sales and  marketing
efforts  towards the sale of electric  bicycles  and kits  versus  research  and
development work.

         General and administrative  expenses for 1996 were $554,800. This is an
increase of $272,600 or 97% from 1995.  As a  percentage  of sales,  general and
administrative  expense increased from 43% to 47% of net sales.  Expenses during
1996  included  the cost of  developing  computer  systems  and  implementation,
accounting and  administration  to support the Company's  public offering and to
support increases in sales volume.

         Research and development increased $25,700 or 34% from 1995 to 1996. As
a percentage of net sales it decreased from 12% to 9% respectively. This expense
decreased as a percentage of net sales due to the Company's manufacturing of the
products it had developed in the prior years.  The expense in 1996 was primarily
on the scooter products that will be introduced in 1997.

         Other  income  (expense)  decreased  $201,200 or 96% from 1995 to 1996.
This decrease was due to the Company  directing  its resources to  manufacturing
and sales of electric bicycles and electric kits and away from royalty, research
and development type revenue.


Year Ended December 31, 1994 Compared to Year Ended December 31, 1995

         Net sales.  The Company was formed September 23, 1994. Sales during the
three months to the end of 1994 were for electric bicycles and kits developed by
the  Company.  The  sales  were to retail  customers,  wholesale  customers  and
distributors.  Net sales  increased  $589,500 or 962% from 1994 to 1995 due to a
full year of  activity in 1995 as compared to only 3 months of activity in 1994.
During 1995,  in addition to sales of electric  bicycles  and kits,  the Company
entered into contracts to perform research and product  development for two U.S.
agencies and one foreign  company.  High Technology  Holdings Group, a Singapore
Company,  paid the  Company  $300,000  to develop an  electric  bicycle  for the
Singapore,  Malaysian  and  Thailand  markets  and to assist in the set up of an
manufacturing  facility in Thailand for electric  bicycles.  This  contract also
included a  technology  licensing  agreement  and  payment  (see  "Other  income
(expense)"  below).  The  contract  with  High  Technology  Holdings  Group  was
terminated in October 1995. The Company also performed research for The Electric
Power Research Institute and the California Energy Commission  totaling $75,000.
Both of these contracts were completed in 1995.

         Gross  profit  (loss).  Gross profit  increased as a percentage  of net
sales,  from (9%) to 33%. The increase in bicycle and kit sales volume  resulted
in  reducing  manufacturing  cost on a per unit  basis.  The  contract  work the
Company performed in 1995 relied on data developed by James McGreen, the current
president  of the Company,  in 1994 and the years prior to the  formation of the
Company.

         Selling. Selling expense increased from 8% of sales to 14% of sales. In
1995 the Company  increased its marketing and sales  expenditures  to launch its
new products into the marketplace.

         General and administrative expense. General and administrative expenses
decreased as a percentage  of net sales from 69.0% in 1994 to 43% in 1995.  This
result was due to  allocating  fixed  salary and rent  expenses  over more sales
dollars than in the prior start-up year.

                                       8
<PAGE>

         Research and  development  expense.  Research and  development  expense
decreased  as a  percentage  of net sales  from 32% in 1994 to 11% in 1995.  The
Company  expenditures  for development of their products was significant in 1994
and the first half of 1995. As sales volume increased in the second half of 1995
research and development expenditures did not increase at the same rate.

         Other income (expense).  Other income (expense) increased significantly
in 1995,  34% of net sales,  as a result of the technology  licensing  agreement
with High  Technology  Holdings  Group,  (see Net sales  above).  The  licensing
agreement allowed High Technology Holdings Group to use the Company's technology
in  Singapore,  Malaysia  and  Thailand.  High  Technology  Holdings  Group paid
$210,000  for this  license.  The  Company  received  a $20,000  grant  from the
Environmental Protection Agency for work it performed in 1995.

Liquidity and Capital Resources

         During 1995 and 1996 the Company  operated with modest cash  resources.
In 1996 the Company had a cash deficit of $618,000  from  operations as compared
to a cash  deficit  of $14,000  in 1995.  In order to meet all of the  Company's
operating  expenses the Company  relied on the sales of common stock and issuing
notes payable.

         In 1996 the Company raised a total of $841,300 from common stock sales,
issuances  of notes  payable and  long-term  debt.  In 1995 the  Company  raised
$111,500 from stock sales and issuance of notes payable. The Company was cleared
by the SEC to sell public shares on November 29, 1996. These funds were utilized
to pay down accounts  payable and to fund the Company's  increases in inventory,
accounts receivable,  operating costs and research and development expenditures.
The Company also issued $52,500 of common stock to ZAP (China) LLC, of which 50%
is owned by the Company.

         At  December  31,  1995 and 1996,  the  Company  had a working  capital
deficit of ($20,100) and ($44,800)  respectively.  As of December 31, 1996,  the
Company  had total  current  assets of  $584,600,  including  cash of  $161,600,
accounts receivable of $60,900, inventories of $246,600, and prepaid expenses of
$115,500.  The  Company's  current  liabilities  as  of  December  31,1996  were
$629,400,  including  accounts payable and accrued  expenses of $367,700,  notes
payable of $236,400  and current  maturity of long-term  debt and leases.  Notes
payable  issued in November  and  December of 1996 in the amount of $189,000 had
preferential  repayment rights of the public stock offering proceeds.  The notes
are due in November and December of 1997. These note holders were also granted a
total  of  37,800  warrants.  The  proceeds  from  this  placement  went to fund
increased inventory levels,  accounts receivables,  capital expenditures and the
Company's public stock offering expenses.  The balance of notes payable $47,400,
were  unsecured  notes  with an  interest  rate of 10%.  These  notes are due in
January, February, March and December of 1997.

         The Company had net cash  provided by financing  activities  of $92,200
for the year ended  December 31, 1995,  and $838,900 for the year ended December
31, 1996. Net cash provided by financing  activities for the year ended December
31,  1996 was from notes  payable  $271,900,  a bank loan  $25,000,  and sale of
common stock $544,400.  Net cash used in financing activities for the year ended
December 31,1996 was $12,400 for repayments of bank debt and lease obligations.

         The bank loan with Wells  Fargo Bank is for  $25,000  amortized  over 2
years at an  interest  rate of 15%.  The  equipment  lease is with  AT&T  Credit
Corporation and is for $43,076 with monthly payments of $1,186 for three years.

         The Company's  primary  capital needs are to fund its growth  strategy,
which  includes  increasing  its net sales,  increasing  distribution  channels,
introducing new products,  improving  existing  product lines and development of
strong corporate infrastructure.

Recent Accounting Pronouncements

         During October 1995, the Financial  Accounting  Standards  Board issued
Statement No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS No. 123"),
which  established  a fair  value-based  method of  accounting  for  stock-based
compensation  plans.  The Company is currently  following  the  requirements  of
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees."

                                       9
<PAGE>

Seasonality and Quarterly Results

         The  Company's  business is subject to  seasonality  influences.  Sales
volumes in the bicycle  industry  typically slows down during the winter months,
November  to March in the U.S.  The  Company  is  selling  worldwide  and is not
impacted 100% by the U.S. seasonality in the bicycle industry.

Inflation

         The Company's  raw  materials are sourced from stable cost  competitive
industries.  As such the  Company  does not foresee  any  material  inflationary
trends for its raw material sources.



                                       10
<PAGE>


Item 7. - Consolidated Financial Statements



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                                ZAP POWER SYSTEMS
                                 AND SUBSIDIARY

                          INDEPENDENT AUDITOR'S REPORT

                                       AND
                        CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1996 AND 1995


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                                    CONTENTS


                                                                           PAGE

INDEPENDENT AUDITOR'S REPORT.................................................1


CONSOLIDATED FINANCIAL STATEMENTS

     Balance sheets..........................................................2

     Statements of operations................................................4

     Statements of stockholders' equity......................................5

     Statements of cash flows................................................6

     Notes to consolidated financial statements..............................8

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<PAGE>


INDEPENDENT AUDITOR'S REPORT



To the Board of Directors
ZAP Power Systems and Subsidiary

We have  audited  the  accompanying  consolidated  balance  sheets  of ZAP Power
Systems  and  Subsidiary  as of  December  31,  1996 and 1995,  and the  related
consolidated  statements of operations,  stockholders' equity and cash flows for
the years then ended.  These financial  statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position  of  ZAP  Power  Systems  and
Subsidiary as of December 31, 1996 and 1995,  and the results of its  operations
and its cash  flows for the years  then  ended,  in  conformity  with  generally
accepted accounting principles.


                                              /s/ Moss Adams LLP



Santa Rosa, California
February 14, 1997 except for Note 2, which is as of March 21, 1997

                                                                          Page 1

<PAGE>
                        ZAP POWER SYSTEMS AND SUBSIDIARY
                                                     CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
December 31,                                                1996         1995
--------------------------------------------------------------------------------

                                     ASSETS

CURRENT ASSETS
    Cash                                                   $161,600     $ 21,800
    Receivables                                              60,900       30,700
    Inventories                                             246,600       58,400
    Prepaid expenses and other assets                       115,500         --
                                                           --------     --------

          Total current assets                              584,600      110,900
                                                           --------     --------

PROPERTY AND EQUIPMENT                                      100,300       66,300
                                                           --------     --------

OTHER ASSETS
    Investment in joint venture                              52,500         --
    Cash restricted to payment of long-term debt             10,000         --
    Intangibles, net of accumulated amortization
       of $1,600 and $700, respectively                       7,300        8,200
    Deposits                                                 15,500        6,000
                                                           --------     --------

                                                             85,300       14,200
                                                           --------     --------

          Total assets                                     $770,200     $191,400
                                                           ========     ========

The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
                                                                          Page 2
<PAGE>
<TABLE>

                                         ZAP POWER SYSTEMS AND SUBSIDIARY
                                         CONSOLIDATED BALANCE SHEETS (Continued)
<CAPTION>
--------------------------------------------------------------------------------------------
December 31,                                                      1996              1995
--------------------------------------------------------------------------------------------

                           LIABILITIES AND STOCKHOLDERS' EQUITY

<S>                                                             <C>            <C>
CURRENT LIABILITIES
    Accounts payable                                            $   301,200    $    94,200
    Accrued liabilities and other expenses                           66,500         12,600
    Income taxes payable                                               --            2,700
    Notes payable                                                   236,400         21,500
    Current maturities of long-term debt                             12,800           --
    Current maturities of obligations under capital leases           12,500           --
                                                                -----------    -----------

          Total current liabilities                                 629,400        131,000
                                                                -----------    -----------

OTHER LIABILITIES
    Long-term debt, less current maturities                           4,700           --
    Obligations under capital leases, less current maturities        23,700           --
                                                                -----------    -----------

                                                                     28,400           --
                                                                -----------    -----------

STOCKHOLDERS' EQUITY
    Common stock, no par value; 10,000,000
       shares authorized, 2,076,500 and 1,644,000
       shares issued and outstanding, respectively                1,019,200        149,900
    Accumulated deficit                                            (906,800)       (89,500)
                                                                -----------    -----------

                                                                    112,400         60,400
                                                                -----------    -----------

          Total liabilities and stockholders' equity            $   770,200    $   191,400
                                                                ===========    ===========
<FN>

The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
--------------------------------------------------------------------------------
                                                                          Page 3
<PAGE>
                        ZAP POWER SYSTEMS AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS

--------------------------------------------------------------------------------
Years Ended December 31,                             1996               1995
--------------------------------------------------------------------------------

NET SALES                                        $ 1,170,900        $   650,800

COST OF GOODS SOLD                                   862,700            435,400
                                                 -----------        -----------

GROSS PROFIT                                         308,200            215,400
                                                 -----------        -----------

OPERATING EXPENSES
     Selling                                         476,800             90,300
     General and administrative                      554,800            282,200
     Research and development                        100,400             74,700
                                                 -----------        -----------

                                                   1,132,000            447,200
                                                 -----------        -----------

LOSS FROM OPERATIONS                                (823,800)          (231,800)
                                                 -----------        -----------

OTHER INCOME (EXPENSE)
     Interest expense                                (11,400)            (2,700)
     Miscellaneous                                    19,500             (8,000)
     Grant income                                       --               20,000
     Royalty income                                     --              210,000
                                                 -----------        -----------

                                                       8,100            219,300
                                                 -----------        -----------

LOSS BEFORE INCOME TAXES                            (815,700)           (12,500)

PROVISION FOR INCOME TAXES                             1,600              3,500
                                                 -----------        -----------

NET LOSS                                         $  (817,300)       $   (16,000)
                                                 ===========        ===========

NET LOSS PER COMMON SHARE                        $     (0.45)       $     (0.01)
                                                 ===========        ===========

WEIGHTED AVERAGE OF COMMON
     SHARES OUTSTANDING                            1,805,317          1,582,656
                                                 ===========        ===========

The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
                                                                          Page 4
<PAGE>
<TABLE>

                        ZAP POWER SYSTEMS AND SUBSIDIARY
                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     Years Ended December 31, 1996 and 1995

-------------------------------------------------------------------------------------
<CAPTION>

                                           Common Stock
                                    ----------------------  Accumulated
                                     Shares       Amount      Deficit         Total
                                   ----------   ----------   ----------    ----------
<S>                                 <C>         <C>          <C>           <C>
Balance, December 31, 1994          1,500,000   $   15,000   $  (73,500)   $  (58,500)

Sale of common stock                   97,500       94,900         --          94,900

Conversion of notes payable            46,500       40,000         --          40,000

Net loss                                 --           --        (16,000)      (16,000)
                                   ----------   ----------   ----------    ----------

Balance, December 31, 1995          1,644,000      149,900      (89,500)       60,400

Sale of common stock                  362,100      574,500         --         574,500

Conversion of notes payable             3,000        5,000         --           5,000

Stock issued for current and
     future services                   57,400      181,000         --         181,000

Stock issued to joint venture          10,000       52,500         --          52,500

Warrants issued for finance fees         --         56,300         --          56,300

Net loss                                 --           --       (817,300)     (817,300)
                                   ----------   ----------   ----------    ----------

Balance, December 31, 1996          2,076,500   $1,019,200   $ (906,800)   $  112,400
                                   ==========   ==========   ==========    ==========

<FN>

The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
--------------------------------------------------------------------------------
                                                                          Page 5
<PAGE>

<TABLE>

                        ZAP POWER SYSTEMS AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
--------------------------------------------------------------------------------------
Years Ended December 31,                                        1996          1995
--------------------------------------------------------------------------------------
<S>                                                           <C>          <C>

CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                 $(817,300)   $ (16,000)
     Adjustments to reconcile net loss to net cash
         used by operating activities:
             Depreciation and amortization                       47,400       11,100
             Allowance for doubtful accounts                      7,400        1,000
             Issuance of common stock for services rendered     127,400       24,900
         Changes in:
             Receivables                                        (37,600)     (21,800)
             Inventories                                       (188,200)     (41,400)
             Prepaids expenses                                   (6,400)        --
             Deposits                                            (9,500)      (6,000)
             Accounts payable                                   207,000       71,000
             Accrued liabilities and other expenses              53,900      (39,500)
             Income taxes payable                                (2,700)       2,700
                                                              ---------    ---------
                Net cash used by operating activities          (618,600)     (14,000)
                                                              ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES
     Purchases of equipment                                     (80,500)     (61,700)
     Purchase of patent and trademark                              --         (8,900)
                                                              ---------    ---------
                Net cash used by investing activities           (80,500)     (70,600)
                                                              ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from notes payable                                271,900       41,500
     Proceeds from long-term debt                                25,000         --
     Sale of common stock, net of stock offering costs          544,400       70,000
     Principal repayments on long-term debt                      (7,500)        --
     Payments on obligations under capital leases                (4,900)        --
     Cash restricted to payment of certain notes payable         10,000         --
     Principal repayments on note payable                          --        (19,300)
                                                              ---------    ---------
                Net cash provided by financing activities       838,900       92,200
                                                              ---------    ---------

NET INCREASE IN CASH                                            139,800        7,600

CASH, beginning of year                                          21,800       14,200
                                                              ---------    ---------

CASH, end of year                                             $ 161,600    $  21,800
                                                              =========    =========

<FN>

The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
--------------------------------------------------------------------------------
                                                                          Page 6
<PAGE>
                        ZAP POWER SYSTEMS AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)



--------------------------------------------------------------------------------
Years Ended December 31,                                     1996        1995
--------------------------------------------------------------------------------

SUPPLEMENTAL CASH-FLOW INFORMATION:

     Cash paid during the year for:
         Interest                                           $ 11,400    $    100
         Income taxes                                       $  1,600    $    800

     Non-cash investing and financing activities:
         Conversion of notes payable to common stock        $  5,000    $ 40,000
         Stock issued for future services                   $ 53,600    $   --
         Stock issued to joint venture                      $ 52,500    $   --
         Stock issued for current services                  $127,400    $   --
         Warrants issued for financing fees                 $ 56,300    $   --



The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
                                                                          Page 7
<PAGE>

                        ZAP POWER SYSTEMS AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1996 and 1995
--------------------------------------------------------------------------------

NOTE  1 -     DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
              POLICIES

Description  of  operations - ZAP Power  Systems,  (ZAP),  was  incorporated  in
California in September, 1994. ZAP and its wholly-owned subsidiary, Electricycle
Corporation, designs, manufactures, and distributes electric bicycle power kits,
electric  bicycles and tricycles,  and other low power  electric  transportation
vehicles.  Company  products are sold directly to end-users and to  distributors
throughout the United States.

Principles  of  consolidation  -  Electricycle  Corporation  (Electricycle)  was
incorporated in June 1995, with the sole stockholder also a founding stockholder
of  ZAP  Power  Systems  (ZAP).  The  activities  of  Electricycle   were  fully
incorporated within the activities of ZAP, including common management, location
and employees. In December 1995, the outstanding shares of stock in Electricycle
were  acquired  at no cost by  ZAP.  Because  of the  common  ownership  and the
interrelated  activities of Electricycle and ZAP, the accounts of both companies
in 1995 were consolidated  from  Electricycles'  incorporation  date rather than
from the date of  acquisition  by ZAP.  All material  intercompany  balances and
transactions were eliminated.  There was no activity within  Electricycle during
1996.

Inventories - Inventories  consist primarily of raw materials,  work-in-process,
and  finished  goods and are carried at the lower of cost  (first-in,  first-out
method) or market.

Property  and  equipment  -  Property  and  equipment  are  stated  at cost  and
depreciated  using  straight-line  and  accelerated  methods  over  the  assets'
estimated useful lives.  Costs of maintenance and repairs are charged to expense
as incurred;  significant  renewals and betterment's are capitalized.  Estimated
useful lives are as follows:

                  Machinery and equipment                   7 years
                  Equipment under capital leases            5 years
                  Demonstration bicycles                    2 years
                  Office furniture and equipment            7 years
                  Vehicle                                   5 years
                  Leasehold improvements                   15 years


Intangibles - Intangibles  consist of costs expended to perfect  certain patents
and are amortized over an estimated useful life of ten years.

Income taxes - ZAP and Electricycle file separate tax returns.  Income taxes are
recognized  using  enacted tax rates,  and are  composed  of taxes on  financial
accounting  income  that is  adjusted  for  requirements  of current tax law and
deferred  taxes.  Deferred  taxes are the expected  future tax  consequences  of
temporary  differences  between the financial statement carrying amounts and tax
basis of existing assets and liabilities. A valuation allowance is recognized to
offset a deferred tax asset if the eventual  realization  of all or a portion of
the asset is uncertain.

--------------------------------------------------------------------------------
                                                                          Page 8
<PAGE>

                        ZAP POWER SYSTEMS AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

--------------------------------------------------------------------------------

NOTE  1 -     DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
              POLICIES (Continued)

Research  and  development  - Research  and  development  costs are  expensed as
incurred.

Concentrations  of  risk -  Financial  instruments  potentially  subjecting  the
Company to concentrations of credit risk consist primarily of trade receivables.
This credit risk is limited due to the large number of customers  comprising the
Company's customer base.

Advertising - Advertising costs are expensed as incurred and totaled $38,300 and
$8,600 for the years ended December 31, 1996 and 1995, respectively.

Use of estimates - The  preparation of financial  statements in conformity  with
generally accepted accounting principles requires the Company make estimates and
assumptions affecting the reported amounts of assets, liabilities, revenues, and
expenses,  and  disclosure of  contingent  assets and  liabilities.  The amounts
estimated could differ from actual results.

Fair value of financial  instruments - The Company measures its financial assets
and liabilities in accordance with generally accepted accounting principles. The
fair value of a financial instrument is the amount at which the instrument could
be exchanged in a current  transaction  between willing parties.  For certain of
the Company's  financial  instruments,  including cash,  accounts receivable and
accounts  payable,  the carrying amount  approximates  fair value because of the
short maturities.  The carrying amount of notes payable  approximates fair value
because  current  interest  rates  available to the Company for similar debt are
approximately the same.

Net  loss per  common  share - The net  loss  per  common  share is based on the
weighted  average  number of common shares  outstanding  in each period.  Common
stock  equivalents  associated  with stock  options have been  excluded from the
weighted  average  shares  outstanding  since the  effect  of these  potentially
dilutive securities would be antidilutive.

Stock-based  compensation - The Financial  Accounting  Standards  Board recently
issued  Statement  of  Financial   Accounting  Standards  No.  123  (SFAS  123),
Accounting for Stock-Based Compensation.  This standard became effective for the
year ended  December  31,  1996.  Under SFAS 123, a fair value method is used to
determine  compensation  cost for stock options or similar  equity  instruments.
Compensation is measured at the grant date and is recognized over the service or
vesting period. Under the current accounting standard,  compensation cost is the
excess,  if any, of the quoted market price of the stock at a  measurement  date
over the amount that must be paid to acquire the stock.

The  standard  allows  the  Company  to  continue  to  account  for  stock-based
compensation  under the current  standard,  with disclosure of the effect of the
standard,  or adopt a fair value based  method of  accounting.  The company will
continue to apply current accounting rules.

Common stock - All share and per share data, including stock options,  have been
adjusted retroactively to reflect a three-for-one stock split.

--------------------------------------------------------------------------------
                                                                          Page 9
<PAGE>

                        ZAP POWER SYSTEMS AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

--------------------------------------------------------------------------------

NOTE  2 -     MANAGEMENT PLANS

The Company's loss from  operations is  attributable  to costs  associated  with
augmenting its marketing and sales force;  implementing  a new computer  system;
and increasing its  administrative  and accounting  staff to support the planned
increases in sales volume.

Management  believes  the  Company  will  generate  sufficient  cash  flows from
operations,  and from equity infusions related to its direct public offering, to
meet its expected cash requirements.  Through March 21, 1997, more than $600,000
has been generated through the public offering.


NOTE  3 -     RECEIVABLES
                                                1996                1995
                                         -----------------    -----------------

Trade accounts receivable                  $       77,300       $       39,700
Less allowance for doubtful accounts               16,400                9,000
                                         -----------------    -----------------

                                           $       60,900       $       30,700
                                         =================    =================


NOTE  4 -     INVENTORIES
                                                1996                 1995
                                         -----------------    -----------------

Raw materials                              $       99,900       $       25,900
Work-in-process                                    95,500               24,900
Finished goods                                     51,200                7,600
                                         -----------------    -----------------

                                            $     246,600       $       58,400
                                         =================    =================

--------------------------------------------------------------------------------
                                                                         Page 10
<PAGE>

                        ZAP POWER SYSTEMS AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

--------------------------------------------------------------------------------

NOTE  5 -     PROPERTY AND EQUIPMENT
                                                             1996        1995
                                                           --------     --------

Machinery and equipment                                    $ 41,600     $ 35,600
Equipment under capital leases                               42,100         --
Demonstration bicycles                                       33,500       15,400
Office furniture and equipment                               30,000       20,000
Leasehold improvements                                        6,600        6,600
Vehicle                                                       4,300         --
                                                           --------     --------

                                                            158,100       77,600
Less accumulated depreciation and amortization               57,800       11,300
                                                           --------     --------

                                                           $100,300     $ 66,300
                                                           ========     ========

NOTE  6 -     NOTES PAYABLE
                                                               1996       1995
                                                             --------   --------

Notesto stockholders,  with interest at 12%; interest and principal due when the
     notes mature in November and December,  1997; the Company is allocating 50%
     of the proceeds  received from the Company's Direct Public Offering towards
     repayment of the loans until fully repaid; the noteholders have been issued
     warrants to purchase, in the aggregate, 37,800 shares of common
     stock at $5.25 per share through October, 1999          $189,000   $   --

Notes to a stockholder, with interest at 10%; principal
     and interest is due when the notes mature in March
     and December, 1997; unsecured                             35,400     16,500

Notes, with interest at 10%; principal and interest is due when the notes mature
     in January and February, 1997;
     unsecured                                                 12,000       --

Note, with interest at 10%; the note was converted
     to 3,000 shares of common stock in 1996                     --        5,000
                                                             --------   --------

                                                             $236,400   $ 21,500
                                                             ========   ========

--------------------------------------------------------------------------------
                                                                         Page 11
<PAGE>

                        ZAP POWER SYSTEMS AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

--------------------------------------------------------------------------------

NOTE  7 -     LONG-TERM DEBT
                                                                  1996     1995
                                                                -------   ------
Note to bank, with interest at 15%; principal and interest
     due in monthly installments and maturing in March, 1998;
     secured by an interest in other checking or savings
     accounts in the bank and held by the Company               $17,500   $  --

Less current maturities                                          12,800      --
                                                                -------   ------

                                                                $ 4,700   $  --
                                                                =======   ======

NOTE  8 -     CAPITAL LEASES

Minimum  future lease  payments  under  capital lease  obligations  for computer
equipment are as follows:


                                   Year Ending December 31,
                                   ------------------------
                                             1997            $17,900
                                             1998             17,900
                                             1999              9,200
                                                           ---------

Total minimum lease payments                                  45,000
Less amounts representing interest                             8,800
                                                           ---------

Present value of minimum lease payments                       36,200
Less current maturities                                       12,500
                                                           ---------

                                                             $23,700
                                                           =========

--------------------------------------------------------------------------------
                                                                         Page 12
<PAGE>

                        ZAP POWER SYSTEMS AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

--------------------------------------------------------------------------------

NOTE  9 -     PROVISION FOR INCOME TAXES

                                                        1996             1995
                                                     ---------        ---------

Current tax liability
     Federal                                         $    --          $   1,700
     State                                               1,600            1,800
                                                     ---------        ---------

                                                     $   1,600        $   3,500
                                                     =========        =========

Deferred tax assets (liabilities)
     Federal tax loss carryforward                   $ 297,000        $  25,900
     State tax loss carryforward                        79,000            4,700
     Other, net                                        (19,600)            (500)
                                                     ---------        ---------

                                                       356,400           30,100
Less valuation allowance                               356,400           30,100
                                                     ---------        ---------

                                                     $    --          $     --
                                                     =========        =========

ZAP Power  Systems has  available for  carryforward  approximately  $876,000 and
$850,000  of federal  and state net  operating  losses,  respectively,  expiring
through 2011.  The Tax Reform Act of 1986 and the  California  Conformity Act of
1987 impose restrictions on the utilization of net operating losses in the event
of an "ownership change" as defined by Section 382 of the Internal Revenue Code.
There has been no determination  whether an ownership  change,  as defined,  has
taken place. Therefore, the extent of any limitation has not been ascertained.

A valuation  allowance  is required  for those  deferred tax assets that are not
likely to be realized.  Realization is dependent upon future earnings during the
period  that  temporary   differences  and  carryforwards  are  expected  to  be
available. Because of the uncertain nature of their ultimate utilizations, based
upon the Company's  past  performance,  a full  valuation  allowance is recorded
against these deferred tax assets.


NOTE 10 -     COMMON STOCK

In April, the Company, through a private placement memorandum,  offered for sale
300,000 shares of common stock at $1.67 per share.

In November 1996,  the Company began offering for sale,  directly to the public,
500,000  shares of common stock at $5.25 per share.  The net  proceeds  from the
sale are to be used to retire certain debt, increase manufacturing capacity, and
provide working capital for new product development and general purposes.

Stock  issuance  costs  through  December 31, 1996,  of $41,500 have been offset
against  $616,000 of sale proceeds from both the direct public  offering and the
private placement memorandum.

--------------------------------------------------------------------------------
                                                                         Page 13
<PAGE>

                        ZAP POWER SYSTEMS AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

--------------------------------------------------------------------------------

NOTE 10 -     COMMON STOCK (Continued)

In September,  1996,  the Board of Directors  authorized a  three-for-one  stock
split.  After giving effect to the split,  the number of shares  outstanding  at
December 31, 1995  increased  from 548,000 to  1,644,000  shares.  The number of
shares the Company is authorized to issue was also  increased  from 1 million to
10 million shares.


NOTE 11 -     STOCK OPTIONS AND WARRANTS

Options to purchase common stock are granted by the Board of Directors under two
Stock Option Plans.  Options  granted may be incentive stock options (as defined
under Section 422 of the Internal  Revenue Code) or nonstatutory  stock options.
The number of shares that may be optioned and sold under the 1996 and 1995 Plans
are 600,000 and 750,000, respectively.  Options are granted at no less than fair
market value on the date of grant,  become  exercisable as they vest, and expire
from five to ten years after the grant.  Options  totaling  365,000  shares were
vested under both Plans at December 31, 1996. <TABLE>

Options activity under the two plans is as follows:
<CAPTION>

                                                1996 Plan                              1995 Plan
                                   ----------------------------------      ---------------------------------
                                     Number           Exercise Price         Number         Exercise Price
                                    of Shares            Per Share          of Shares          Per Share
                                    ---------            ---------          ----------          --------
<S>                                   <C>                 <C>               <C>                 <C>     
Outstanding at                                                                               
     December 31, 1994                   --               $   --               --               $  --
Granted                                  --               $   --            237,000             $   0.40
Canceled                                 --               $   --               --               $  --
                                      -------                               -------
                                                                                                  
Outstanding at                                                                               
     December 31, 1995                   --               $   --            237,000             $   0.40
Granted                               501,000             $   1.00          318,000             $   0.40
Canceled                                 --               $   --               --               $   --
                                      -------                               -------
                                                                                             
Outstanding at                                                                               
     December 31, 1996                501,000             $   1.00          555,000             $   0.40
                                      =======                               =======
</TABLE>
                                                                                
Warrants to acquire  stock were  issued to certain  stockholders  as  additional
consideration for providing financial  assistance,  in the form of notes, to the
Company  (see  Note 6).  The  fair  value of the  warrants  at time of  issuance
$56,300,  are  reported as financing  fees to be amortized  over the life of the
related debt.

--------------------------------------------------------------------------------
                                                                         Page 14
<PAGE>

                        ZAP POWER SYSTEMS AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

--------------------------------------------------------------------------------

NOTE 11 -     STOCK OPTIONS AND WARRANTS (Continued)

The Company has adopted the disclosure  only provision of Statement of Financial
Accounting  Standards No. 123,  "Accounting for Stock-Based  Compensation  (SFAS
123)".  Accordingly,  no  compensation  expense  has been  recognized  for stock
options  issued during 1996 and 1995.  Had  compensation  cost for the Company's
options been based on the fair value of the awards at the grant date  consistent
with the  provisions  of SFAS No. 123, the Company's net loss and loss per share
would have approximated the following proforma amounts:

                                            1996                    1995
                                     ------------------    --------------------

Net loss - as reported                $       (817,300)      $         (16,000)
Net loss - pro forma                  $       (981,000)      $         (36,600)

Loss per share - as reported          $          (0.45)      $           (0.01)
Loss per share - pro forma            $          (0.54)      $           (0.02)


The fair value of each  option and warrant is  estimated  on date of grant using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions:

                                                       1996         1995
                                                      --------    --------

Dividends                                                 None        None
Expected volatility                                        30%         30%
Risk free interest rate                                  6.28%       5.43%
Expected life                                         10 years    10 years

Volatility  is a measure of the amount by which a price is expected to fluctuate
during a period. The higher the volatility the more the returns on the stock can
be expected to vary. Factors in estimating volatility include the length of time
stock has been publicly  traded.  The  volatility  used is an estimate since the
Company  is  currently  offering  stock to the public and it does not yet have a
history of volatility.

The effects of applying SFAS 123 in this proforma  disclosure are not indicative
of the effect on income in future years because  options vest over several years
and additional awards are expected to be authorized.


NOTE 12 -     JOINT VENTURE

In December 1996, the Company joined with MW McWong International, Inc., to form
ZAP (China),  a limited  liability  corporation  registered in  California.  The
Company is a 50% owner of ZAP (China) LLC.

ZAP (China) LLC entered  into a joint  venture with a Shanghai  Forever  Company
Ltd., a bicycle  manufacturing company in China. The joint venture is registered
and incorporated in Shanghai as ZAP Forever Electric Vehicles Company, Ltd., and
is 50% owned by ZAP (China). There were no material transactions with this joint
venture at December 31, 1996.  In 1997,  the Company  intends to account for its
investment in the joint venture by the equity method.

--------------------------------------------------------------------------------
                                                                         Page 15
<PAGE>
                        ZAP POWER SYSTEMS AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

--------------------------------------------------------------------------------

NOTE 13 -     COMMITMENTS

The Company  rents  warehouse  and office  space under an  operating  lease that
expires in June 1998. The monthly rent of $4,400 is adjusted annually to reflect
the average percentage increase in the Consumer Price Index. An option exists to
extend the lease for two  periods  of five  years  each.  Future  minimum  lease
payments are $52,800 in 1997 and $22,000 in 1998.  Rent expense under this lease
was $52,800 and $24,000 in 1996 and 1995, respectively.

A marketing  agreement with a Broker requires the Company pay,  commencing March
1, 1997, a 3% fee on all Company  sales in the United States and Canada that are
not  generated by the Broker.  This  contingent  brokerage fee is subject to the
Broker meeting certain sales targets.



--------------------------------------------------------------------------------
                                                                         Page 16

<PAGE>

Item  8.  -  Changes  in  and  Disagreements   with  Accountants  and  Financial
             Disclosure.

         The Company has retained  Moss Adams LLP as the  Company's  Accountants
for the years 1994, 1995 and 1996.

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        with Section 16(a) of the Exchange Act.

                                   MANAGEMENT


                  Name                      Age                Position
         ----------------------            -----      -------------------------
         Gary Starr                         41        Managing Director

         James McGreen                      43        President and Director

         Dave Workman                       43        Vice President, Operations

         Jessalyn Nash                      37        Director

         Lee S. Sannella, M.D.              80        Director

         Nancy K. Cadigan                   38        Director and Secretary

         Gary Starr is Managing Director of the Company.  He founded the Company
with James  McGreen in  September  24,  1994.  He has been  building and driving
electric cars for more than 20 years. In addition to overseeing the marketing of
more than 3,000 electric  bicycles and vehicles,  Mr. Starr has invented several
solar  electric  products  and  conservation  devices.  Mr.  Starr  founded U.S.
Electricar's  electric  vehicle  operations in 1983. That Company grew from 3 to
more than 300 employees and raised more than $40 million.

         Mr. Starr also serves as an advisor to Zebra  Motors,  Inc., a designer
of an electric  sports car,  and has been a  technical  advisor to UCLA's  Lewis
Center  for  Regional  Policy  Studies.  He's  been a member  of the  California
Environmental  Technology  Advisory  Council  and has been a guest  lecturer  at
Stanford University Graduate School of Business.

         In 1993, Mr. Starr earned a Private Industry Council  Recognition Award
for  creating job  opportunities  in the EV industry and was named as one of the
ten most influential electric car authorities by Automotive News. More recently,
he was honored by the American Lung  Association  of San Francisco  with a Clean
Air Award in Technology and was recognized by U.S. Senator Barbara Boxer for his
contribution towards clean air.

         Mr. Starr has several publications:  Electric Cars: Your Guide to Clean
Motoring,  The  Shocking  Truth of Electric  Cars,  and The True Cost of Oil. In
addition,  he has appeared on more than 300 radio and  television  talk and news
shows (including Larry King Live, The Today Show,  Inside Edition,  CNN Headline
News, Prime Time Live, and the CBS Evening News and the McNeil Lehrer News Hour)
as a recognized authority in the field of electric vehicles.

         James  McGreen,  President,  has over 25 years  experience  in  design,
development,  engineering,  manufacturing and marketing. He has brought over 100
successful  consumer  products from conception to the mass market. He has been a
pioneer in the ultralight aircraft,  personal watercraft,  and motorcycle racing
fields.  He is the founder and/or former president of Protopipe Exhaust Systems,
Inc.,  McGreen  Metalworking,  Kanemoto  Racing  and  McGreen  Development.  His
commitment to electric  transportation began in 1991 with successful competition
in  Electrathon  racing.  He holds  several  records and winning  times for this
lightweight  electric  vehicle class. He has been a racer of motorcycles and has
built  motor  parts,  frames,   chassis  and  other  specialty  parts  for  both
manufacturers  and  other  racers.  Mr.  McGreen  has also  designed  and  built
composite  racing  sail boats.  A skilled  machinist,  welder,  and tool and die
maker,  he has designed and built  nearly  every kind of  lightweight  motorized
vehicle.  A prolific  inventor  McGreen has filed five  patents,  (1 granted,  2
pending, 2 expired), in the resource 

                                       12
<PAGE>

conservation and  transportation  fields. He also managed the World Championship
team that won the World Solar Bicycle Races,  in Akita,  Japan in 1995. In 1996,
McGreen was selected as an honored member of the Who's Who of American Inventors
for his positive impact on society.

         David Workman,  M.B.A., is Vice President of Operations of the Company.
He has been  involved  with  start-up  and rapid growth  companies  for the last
twenty years. From 1980 to 1991, he worked for California  Energy Company,  Inc.
an alternative energy company,  that had 12 employees and five-hundred  thousand
dollars  sales when he started and now is listed on the New York Stock  Exchange
with a  market  capitalization  of over $1  billion.  He held  the  position  of
Corporate  Controller  when he left the company in 1991. In the past five years,
he has worked for Precision Wood Manufacturing, Inc. (8/92-6/93 and 8/95-12/95),
U.S. Electricar  (7/93-4/95) and as a consultant (6/91-8/92 and 1/96-4/96).  Mr.
Workman's experience in the electric vehicle industry came from his work at U.S.
Electricar where he held various management positions.

         Jessalyn Nash,  Masters in Business,  is an environmental  and business
consultant to rapid growth  entrepreneurial  companies.  She has  specialized in
marketing,  distributor  relations and sales programs.  Ms. Nash previously held
positions  with  NeXT,  Inc.  and in  National  Sales and  Marketing  with Apple
Computer,  Inc. Ms. Nash has been an  environmental  advocate for over 20 years.
She has operated her consulting business since 1989.

         Lee  Sannella,  M.D.  has been an active  researcher  in the  fields of
alternative  transportation,  energy and  medicine  for more than 25 years.  Dr.
Sannella has been a founding  shareholder in many start up high tech  companies.
He was a Director  of U.S.  Electricar  from 1983 to 1992.  A  graduate  of Yale
University,  he  maintained  an  active  medical  practice  for  many  years  in
ophthalmology  and  psychiatry.  He worked  with the Sonoma  Medical  Society on
improving  radiation  standards and is a best-selling  author.  He has served on
advisory boards of the City of Petaluma,  California,  on the Board of Directors
of the San Andreas Health  Council of Palo Alto,  the Veritas  Foundation of San
Francisco, and the AESOP Institute.

         Nancy K. Cadigan assisted Jim McGreen in managing McGreen  Development,
the research  organization that developed the original ZAP Power System. She has
broad experience in sales,  trade show events,  and office  management.  With an
educational  background in  Recreation  and Leisure,  Ms.  Cadigan has worked in
public and commercial recreation for more than twenty years. She has also worked
on women's health issues and has counseled women in crisis  situations.  She has
conducted public education classes on recycling, reuse and composting practices.
Currently,  Ms. Cadigan is involved in organic farming.  In all of her work, she
looks for  environmentally  sound solutions to ordinary  problems and has been a
strong  advocate of the ZAP mission since its inception.  In the past five years
she has  worked  for the  Oakland  Parks and  Recreation  Department  (1990-92),
Alameda Waste  Management  Authority  (1992-93),  Urban Ore  (1993-94),  McGreen
Development  (1994),  ZAP  Power  Systems  (1994-present),  and  Women's  Health
Specialists (1995-present).

Indemnification of Directors and Officers

         The Company's  Articles of Incorporation  provide that the liability of
the  directors  for  monetary  damages  shall be limited to the  fullest  extent
permissible  under  California law. Insofar as  indemnification  for liabilities
arising  under  the  federal  securities  laws may be  permitted  to  directors,
officers and controlling  persons of the Company pursuant to that provision,  or
otherwise,  the Company has been advised  that in the opinion of the  Securities
and  Exchange  Commission  such  indemnification  is  against  public  policy as
expressed in those laws and is, therefore, unenforceable.

Director Term of Office and Compensation

         All  directors  terms of office  expire at the next  annual  meeting of
shareholders.  The Company's  directors do not receive any cash compensation for
their  service on the Board of Directors,  but  directors may be reimbursed  for
certain expenses in connection with their attendance at Board meetings.


                                       13

<PAGE>
<TABLE>

Item 10.                                   EXECUTIVE COMPENSATION
<CAPTION>
                                            Summary Compensation Table

                                                           Long Term Compensation
                                                           -----------------------------------------
                             Annual Compensation           Awards                            Payouts
                             ------------------------------------------------------------------------
   (a)             (b)       (c)        (d)       (e)        (f)          (g)                  (h)        (I)
                                                Other      Rest-         Secur-
Name                                            Annual     ricted        ities                          All other
and                                             Compen-    Stock         Underlying          LTIP       Compensa-
Principal                   Salary    Bonus     sation     Award(s)      Options/            Payouts      tion
Position         Year        ($)       ($)       ($)         ($)         SARs (#)             ($)          ($)
--------------------------------------------------------------------------------------------------------------

<S>               <C>      <C>                               <C>          <C>
Gary Starr        1994     $     0
Managing          1995     $21,000                                        72,000
Director          1996     $31,000                           $3,750       60,000

James McGreen     1994     $     0
President         1995     $33,000                                         72,000
                  1996     $33,000                           $3,750        60,000

</TABLE>

                      Option/SAR Grants in Last Fiscal Year
                                Individual Grants
--------------------------------------------------------------------------------
   (a)         (b)             (c)            (d)                   (e)
            Number of        % of Total
             securities    Options/SARs
            Underlying       Granted to       Exercise
          Options/SARs        Employees        or Base
Name        Granted (#)    in Fiscal Year    Price ($/sh)     Expiration Date
----        -----------    --------------    ------------     ---------------
Gary
Starr          60,000          13%            $1.00             7/31/2006

James
McGreen        60,000          13%            $1.00             7/31/2006


Item 11.  Security Ownership and Certain Beneficial Owners and Management

         The following table sets forth certain information known to the Company
regarding the beneficial  ownership of the Company's Common Stock as of February
28, 1997 for each  shareholder  known by the Company to own  beneficially  5% or
more of the outstanding  shares of its Common Stock.  The Company  believes that
the  beneficial  owners of the Common Stock listed below,  based on  information
furnished by them,  have sole  investment and voting power with respect to their
shares, subject to community property laws where applicable.

                                       14
<PAGE>


                                    Shares         Percentage of Common Shares
                                    Beneficially   at February 28, 1997
       5% Shareholders:             Owned          (2,546,220 shares)
------------------------------------------------------------------------------

James McGreen                       674,702*                 27% 
                                                          
Gary Starr                          519,752**                20%
                                                          
David Workman                       197,905***                8%
                                                          
All directors and executive         1,490,137                59%
officers as a group                                       
                                                   
* Includes  74,252  shares of Common Stock  issuable  upon exercise of currently
exercisable  incentive  stock options but excludes 57,748 shares of Common Stock
issuable under options but not currently exercisable.

** Includes  74,252  shares of Common Stock  issuable upon exercise of currently
exercisable  incentive  stock options but excludes 57,748 shares of Common Stock
issuable under options but not currently exercisable.

*** Includes  47,424 shares of Common Stock  issuable upon exercise of currently
exercisable  incentive  stock options but excludes 84,576 shares of Common Stock
issuable under options but not currently exercisable.

                              CERTAIN TRANSACTIONS

         On September 23, 1994, the date the Company commenced  business,  James
R. McGreen,  the Company's  President,  transferred  various assets,  subject to
certain liabilities,  to the Company, receiving in exchange 900,000 shares (post
split) of the Company's  common stock.  The net amount recorded on the Company's
accounting  records was $9,000.  Mr.  McGreen's net cost of those  assets,  less
prior amortization of cost for tax purposes, was $10,691. On the same date, Gary
Starr paid $6,000 for 600,000 shares (post split) of the Company's common stock.

         There  have  been no  other  transactions,  nor  are  any  transactions
proposed,  in which the Company was or is to be a party,  in which any member of
its management or director had any direct or indirect material interest.


Item 13. Exhibits and Reports on Form 8-k

Exhibit 11.       Statement regarding computation of per share loss

                  Loss per share was  calculated  based on the weighted  average
                  common shares  outstanding during 1996. The Company had a Loss
                  for  the  year  so  common  stock  options  were  not  used to
                  calculate fully dilutive earnings per share.

Exhibit 21.       Subsidiaries of the Company

                  Electricycle Incorporated
                  ZAP (China) LLC

Exhibit 27.       Financial Data Schedule

                                       15
<PAGE>




99.      Additional Exhibits - Subsequent events

         January 1997 ZAP China signed an agreement with Forever Company to sell
         up to 5,000 motor units.  Forever Company will assemble these motors on
         their bicycles to be sold in China.

         March 1997 the Company signed a letter of intent to purchase the assets
         of Movity S.r.L.  for a  combination  of common stock and cash totaling
         $500,000. Movity  manufactures and sells an electric motor scooter into
         the European market.


                                       16