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, 1997

     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
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

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

117 Morris Street, Sebastopol, California                           95472
-----------------------------------------                         ----------
(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
-------------------------------             -------------------------------

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


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

                  None
--------------------------------------------------------------------------------
                                (Title of class)


--------------------------------------------------------------------------------
                                (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. $1,640,200
                                                                  ----------

         The aggregate market value of the Company's voting common stock held by
non-affiliates  as of March 27, 1998,  based on the average Bid and Ask price on
that date was $8,839,423.


                   (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.  2,568,331 shares of common
stock as of March 27, 1998.                           --------------------------
---------------------------

                                       2

<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


     ZAP Power Systems (the "Company" or "ZAP") was incorporated  under the laws
of the state of California, on September 23, 1994. At its Sebastopol facilities,
the Company designs,  assembles,  manufactures and distributes  electric bicycle
power kits,  electric  bicycles  and  tricycles,  electric  scooters,  and other
low-power electric transportation vehicles.

     The Company objective is to leverage its technology and name recognition to
serve a number of high  potential  markets in the electric  bicycle and electric
scooter industry.  ZAP desires to establish  distribution  systems for these and
other low powered  electric  vehicles.  On February 10,  1998,  NASD cleared ZAP
Power  Systems  common stock for  quotation on the OTC Bulletin  Board under the
symbol  "ZAPP".  Initially,  the Company's  revenue was  primarily  derived from
development contracts from a foreign private entity and from domestic government
agencies.  Now the Company is focusing on the  manufacturing and distribution of
commercialized products.

     During the second half of 1995 the Company began to develop a marketing and
production strategy for the United States. It started selling electric bikes and
kits through bicycle dealers. In the first quarter of 1996 the Company developed
a Web Site on the World Wide Web  (www.zapbikes.com)  allowing  customers to buy
the ZAP products 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  electric  bicycles.  In April of 1996 the Company
began  selling  electric  bicycles  and  electric  motor kits through mail order
catalogs.  During 1997,  ZAP increased its emphasis on the overseas  market with
approximately 15% of its sales being generated from foreign  entities.  In March
of 1997,  the Company  entered into a contract  agreement  with a large  bicycle
manufacturer  in North  America to  distribute  its bicycles  and motor  systems
through  retail  stores.  That  agreement  was  completed at the end of 1997. In
December 1997, the Company unveiled its electric vehicle outlet store concept.

     The Company was issued its first United  States Patent on February 13, 1996
on its electric motor power system for bicycles, tricycles, and scooters (Patent
#5,491,390).  On  September  30,1997,  the Company was issued its second  United
States Patent on its electric motor system (Patent #5,671,821).  A third Patent,
for its ZAPPY(TM) Scooter is currently  pending.  A Trademark for the name "ZAP"
was issued to James McGreen on September 28, 1993 and assigned to the Company on
September 23, 1994.


          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  that the Company  designs and has  manufactured  under
contract.  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 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 ZAPPY scooter is  manufactured by the Company,  using parts  manufactured by
various subcontractors.

                                        4

<PAGE>


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

     The electric bicycle industry has three (3) major manufacturers and a large
group of small  manufacturers.  The major  manufacturers are Honda,  Suzuki, and
Yamaha.  They  mainly  sell  products  into Japan and China.  The other group of
manufacturers is 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 facilities,  consisting of
9,500 square feet,  at 111 & 117 Morris  Street,  Sebastopol,  CA. The Company's
property  consists  primarily of  manufacturing  equipment,  and office computer
systems. The monthly lease payments total $6,114.40 per month. The landlords are
Daniel O.  Davis and  Robbin  H.  Davis.  It is  management's  opinion  that the
Company's  insurance policies cover all insurance  requirements of the landlord.
The  lease  expires  June 1,  1998  with a  renewal  option  for two  additional
five-year periods.  The Company owns the basic tools and equipment necessary for
the conduct of its production, research and development, and vehicle prototyping
activities.

      As of  December  31, 1997 the  Company  has 32  full-time  and 6 part-time
employees.  Most of the employees work at the Company's  Sebastopol,  California
locations except for one employee who oversees a Company seasonal factory outlet
store in Santa Rosa, CA.

      Item 3.     Legal Proceedings

     There were no material  proceedings pending in 1997 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  November 29, 1997. A
total of 1,590,911  shares  (63.0%) 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  1,590,811  Against 100
         Abstained 0

         Ratify all  actions  previously  taken by the Board of  Directors.  For
         1,577,385 Against 100 Abstained 13,426


                                     Part II

Item 5.  Market for Common Equity and Related Stockholder Matters

         The  number of shares  issued of  record  as of  December  31,  1997 is
2,542,700.  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 1996 the Company  sold  328,300  shares of common stock in a private
placement  at a price per share of  $1.67.  Net  proceeds  to the  Company  were
$504,600 after deducting expenses of $41,500. The Company also converted $55,000
of notes  payable into 33,000 shares of Common Stock and issued 10,000 shares of
Common  Stock at a fair  value of $5.25 per share as its  investment  in a joint
venture. In addition the Company issued 57,400 shares for payment of current and
future services at an average price of $3.15 per share.

                                        5

<PAGE>


      In November of 1996 the Company  commenced a direct public offering of its
Common Stock,  offering for sale 500,000 shares at $5.25 per share. During 1996,
the Company sold 3800 shares and  received  $19,900 in  proceeds.  In 1997,  the
Company sold an additional  415,100 shares in connection  with the direct public
offering  and  realized  net  proceeds of  $1,990,900,  net of offering  related
expenses of $188,400.  In total,  the Company sold 84% of the shares offered for
sale and  realized  net proceeds of  $2,010,600.  The offering was  completed in
November 1997. In addition, in 1997, the Company 1) realized $12,600 in proceeds
from the  exercise  of stock  options and issued  21,600  shares,  2)  converted
$77,800 in notes  payable and accrued  interest  into 14,800  shares  ($5.25 per
share), 3) issued 19,700 shares in payment for current and future services at an
average  price  per  share of  $4.81  and,  4)  cancelled  5,000  of the  shares
originally  issued in  connection  with its  investment  in the joint venture in
settlement of that activity.

     The Company has in process a second  direct  public  offering of its Common
Stock offering for sale 500,000 shares at $6.00 per share. The company commenced
this  offering in January  1998 and as of March 27, 1998 has sold 19,967  shares
and realized gross proceeds of $119,802. On March 11, 1998, the Company's Common
Stock commenced trading on the OTC Bulletin Board under the stock symbol "ZAPP".

      As of December 31, 1997 the Company had 1,771 holders of the common stock.

      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  55% kits and 45%  electric  bicycles.  Dollar sales have been 50%
kits and 50% electric bicycles.

     The  Company  sells its  electric  bicycles  and kits to retail  customers;
international   distributors,   law  enforcement   agencies,   electric  utility
companies,  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.  Many of the 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.  In addition,  the
Company worked on the development of an electric  police bicycle.  The Company's
work to develop  offshore  manufacturing  abilities for the domestic and foreign
markets  involved  private and public  foundations  in Thailand  and other Asian
countries. Late in the fourth quarter of 1995 the Company began to sell bicycles
to retail and wholesale customers as its core business.

     The  Company's  growth  strategy  is to  increase  net sales by  increasing
distribution  channels through retail  organizations and wholesale  distributors
both  domestically  and  overseas  as well as setting up Company  and  franchise
stores to assist in the  retail  sales  arena.  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 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

Year Ended December 31, 1996 Compared to Year Ended December 31, 1997

         Net sales for the year ended December 31, 1997 were $1,640,200 compared
to $1,170,900 in the prior year, an increase of $469,300 or 40%. The increase in
sales is  attributed  to an  increased  demand for complete  electric  bicycles,
electric  motor  kits,  and  scooters.  Much of the  increase  was in dealer and
international  sales. During the year ended December 31, 1997, $430,000 in sales
representing  26% of total net sales were with one customer.  The company ceased
selling  products to this  customer in late 1997 and is not expected to have any
material  sales to this  customer in 1998.  The loss of this one customer is not
expected  to  have a  material  adverse  affect  on  the  company's  results  of
operations in future periods. In 1996, no one customer accounted for 10% of more
of the company's net sales.

                                        6

<PAGE>


         Gross profit. Gross profit decreased as a percentage of net sales, from
26% to 22%. Early year liquidation of 1996 models and up-front costs incurred in
developing  the  new  ZAPPY(TM)   scooter  resulted  in  a  lower   gross-margin
percentage.  The total gross profit increased $57,300 or 19% due to the increase
in net sales from 1996 to 1997.

         Selling.  Selling expenses in 1997 were $633,000.  This was an increase
of $156,200 or 33% from 1996 to 1997. As a percentage of sales, selling expenses
decreased  from 41% of sales to 39% of  sales.  This was due to an  increase  in
sales  dollars  as  well  as a  reduction  in  marketing  efforts  towards  auto
dealerships  and other  dealer  outlets.  There was minimal  change in sales and
marketing personnel.

         General and administrative expense. General and administrative expenses
in 1997 were  $820,400.  This was an  increase  of  $265,600 or 48% from 1996 to
1997.  As a  percentage  of  net  sales,  General  and  Administrative  expenses
increased  from  47% in 1996  to 50% in  1997.  This  result  was  due to  added
employees in General and Administrative areas and administrative supplies.

         Research and development expense.  Research and development expenses in
1997 were  $246,100,  an  increase  of 145,700  or 145% from 1996 to 1997.  As a
percentage of sales,  research and development expenses increased from 9% to 15%
respectively.  These increases were due to the heightened  efforts in developing
the new  ZAPPY(TM)  Scooter,  the  single  speed  lower  cost  motor-system  for
bicycles, and a low cost "Z-Bike" for overseas markets. Also, additional patents
were filed. In 1997, the increase in funds available for research resulting from
the  Company's  Direct  Public  Offering  also  contributed  to the  increase in
research and development expenses in 1997 over 1996 levels.

         Other income (expense).  Interest expense increased to $84,800 in 1997,
an increase of $73,400  over 1996.  The  increase  can be  attributed  to 1) the
amortization  of the fair value of warrants  issued in connection  with previous
debt  financings  of  $56,300  and,  2) the  increase  in  interest  expense  on
outstanding loans in 1997 of approximately  $17,000.  Such increase results from
the loans  being  outstanding  for a longer  time  period in 1997 as compared to
1996.

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 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 Company established  sales/distribution  agreements
with three foreign distributors. 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. 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.

                                        7

<PAGE>


     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 were 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.


Liquidity and Capital Resources

      The Company used cash from  operations of $1,263,000  and $618,600  during
the years ended December 31, 1997 and 1996 respectively. Cash used in operations
in 1997 was the  result  of the net loss  incurred  for the year of  $1,409,300,
offset by net non cash  expenses of  $231,200,  and the net change in  operating
assets and liabilities  resulting in a further use of cash of $84,900. Cash used
in  operations  in 1996 was the result of the net loss  incurred for the year of
$817,300,  offset  by non cash  expenses  of  $182,200,  and the net  change  in
operating assets and liabilities resulting in a source of cash of $16,500.

     Investing  activities  used cash of $143,500  and $80,500  during the years
ended  December  31, 1997 and 1996  respectively.  The uses of cash were for the
purchase of fixed assets and additional capitalized patent costs.

     Financing  activities  provided cash of $1,935,400 and $838,900  during the
years ended  December 31, 1997 and 1996  respectively.  In both years,  the cash
provided by  financing  activities  resulted  from the sales of common stock and
issuance of notes payable,  $2,037,300 and $861,400 for the years ended December
31, 1997 and 1996  respectively,  offset by  principal  payments on  outstanding
debt.

     At December 31, 1997 the Company had cash and cash  equivalents of $690,500
as compared to $161,600 at December 31, 1996. At December 31, 1997,  the Company
had working  capital of $726,800,  as compared to a working  capital  deficit of
$44,800 at December 31, 1996.  The  increases in both cash and cash  equivalents
and working capital in 1997 over 1996 are primarily due to the proceeds received
from the Company's  direct public  offering which more than offset the Company's
net loss for the year. The Company, at present,  does not have a credit facility
in place with a bank or other  financial  institution.  The Company does have in
process a second  direct  public  offering  of its  common  stock with a maximum
potential gross proceeds of $3,000,000  before  expenses.  The Company  believes
that the cash and cash  equivalents on hand at December 31, 1997, along with the
expected proceeds from the Company's direct public offering,  will be sufficient
to allow the Company to continue its expected  level of operations  for at least
12 months.

     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.

Dates following December 31, 1999 and beyond (the "Year 2000 Problem")

     Many existing  computer systems and  applications,  and other devices,  use
only two digits to identify a year in the date field,  without  considering  the
impact of the  upcoming  change in the century.  Such  systems and  applications
could fail or create erroneous results unless  corrected.  The Company relies on
its internal financial systems and external systems of business enterprises such
as  customers,   suppliers,   creditors,   and  financial   organizations   both
domestically  and globally,  directly and  indirectly  for accurate  exchange of
data. The Company has evaluated such systems and believes the cost of addressing
the Year 2000 Problem will not have a material  adverse  affect on the result of
operations  or  financial  position  of the  Company.  However,  even though the
internal  systems of the  Company are not  materially  affected by the Year 2000
issue the Company could be affected  through  disruption in the operation of the
enterprises with which the Company interacts.


Seasonality and Quarterly Results

     The Company's business is subject to seasonality influences.  Sales volumes
in the bicycle industry  typically slow 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.

                                        8

<PAGE>


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.

                                        9

<PAGE>


Item 7                        FINANCIAL STATEMENTS


                                                                            Page
                                                                            ----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ......................    3

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ......................    4


FINANCIAL STATEMENTS

     Consolidated Balance Sheet .........................................    5

     Consolidated Statements of Operations ..............................    6

     Consolidated Statement of Stockholders' Equity .....................    7

     Consolidated Statements of Cash Flows ..............................    8

     Notes to Consolidated Financial Statements .........................   10



<PAGE>


               Report of Independent Certified Public Accountants


To the Board of Directors
ZAP Power Systems and Subsidiary

We have audited the accompanying consolidated balance sheet of ZAP Power Systems
and Subsidiary as of December 31, 1997, and the related  consolidated  statement
of  operations,  stockholders'  equity and cash flows for the  year 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 audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of ZAP Power Systems
and  Subsidiary as of December 31, 1997, and the  consolidated  results of their
operations  and their cash flows for the year then  ended,  in  conformity  with
generally accepted accounting principles.

                                                 /s/ GRANT THORNTON LLP

San Jose, California
March 27, 1998

                                       -3-

<PAGE>


                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors
ZAP Power Systems and Subsidiary


We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity and cash flows of ZAP Power Systems and Subsidiary for the
year ended December 31, 1996. 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.

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


                                                              /s/ MOSS ADAMS LLP

Santa Rosa, California
February 14, 1997

                                       -4-

<PAGE>


<TABLE>
                                                  ZAP Power Systems and Subsidiary

                                                     CONSOLIDATED BALANCE SHEET

                                                          December 31, 1997


<CAPTION>
                                                               ASSETS
<S>                                                                                                                     <C>        
CURRENT ASSETS
   Cash                                                                                                                 $   690,500
   Accounts receivable, net of allowance for doubtful accounts of $5,000                                                    121,700
   Inventories                                                                                                              267,300
   Prepaid expenses and other assets                                                                                         65,600
                                                                                                                        -----------
             Total current assets                                                                                         1,145,100

PROPERTY AND EQUIPMENT                                                                                                      163,200

OTHER ASSETS
   Intangibles, net of accumulated amortization of $3,600                                                                    20,200
   Deposits                                                                                                                  13,500
                                                                                                                        -----------
                                                                                                                             33,700
                                                                                                                        -----------

             Total assets                                                                                               $ 1,342,000
                                                                                                                        ===========

                                                LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable                                                                                                     $   161,600
   Accrued liabilities and customer deposits                                                                                189,100
   Notes payable                                                                                                             51,600
   Current maturities of obligations under capital leases                                                                    16,000
                                                                                                                        -----------
             Total current liabilities                                                                                      418,300

OTHER LIABILITIES
   Long-term debt                                                                                                            60,000
   Obligations under capital leases, less current maturities                                                                 10,900
                                                                                                                        -----------
                                                                                                                             70,900
STOCKHOLDERS' EQUITY
   Common stock, no par value; 10,000,000 shares authorized, 2,542,700
     shares issued and outstanding                                                                                        3,168,900
   Accumulated deficit                                                                                                   (2,316,100)
                                                                                                                        -----------
                                                                                                                            852,800
                                                                                                                        -----------

             Total liabilities and stockholders' equity                                                                 $ 1,342,000
                                                                                                                        ===========


<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>

                                                                 -5-

<PAGE>


                        ZAP Power Systems and Subsidiary

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                            Years ended December 31,


                                                         1997           1996
                                                     -----------    -----------

NET SALES                                            $ 1,640,200    $ 1,170,900

COST OF GOODS SOLD                                     1,274,700        862,700
                                                     -----------    -----------

             GROSS PROFIT                                365,500        308,200

OPERATING EXPENSES
   Selling                                               633,000        476,800
   General and administrative                            820,400        554,800
   Research and development                              246,100        100,400
                                                     -----------    -----------
                                                       1,699,500      1,132,000
                                                     -----------    -----------

LOSS FROM OPERATIONS                                  (1,334,000)      (823,800)

OTHER INCOME (EXPENSE)
   Interest expense                                      (84,800)       (11,400)
   Miscellaneous                                          11,100         19,500
                                                     -----------    -----------
                                                         (73,700)         8,100
                                                     -----------    -----------

             LOSS BEFORE INCOME TAXES                 (1,407,700)      (815,700)

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

             NET LOSS                                $(1,409,300)   $  (817,300)
                                                     ===========    ===========

NET LOSS PER COMMON SHARE
   Basic                                             $     (0.62)   $     (0.45)
                                                     ===========    ===========
   Diluted                                           $     (0.62)   $     (0.45)
                                                     ===========    ===========

WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING          2,289,165      1,805,317
                                                     ===========    ===========


The accompanying notes are an integral part of these statements.

                                       -6-

<PAGE>


<TABLE>
                                                  ZAP Power Systems and Subsidiary

                                           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                                               Years ended December 31, 1997 and 1996

<CAPTION>
                                                                             Common Stock                      Accumulated
                                                                     ----------------------------      ----------------------------
                                                                       Shares           Amount           Deficit           Total
                                                                     -----------      -----------      -----------      -----------
<S>                                                                    <C>            <C>              <C>              <C>
Balance, January 1, 1996                                               1,644,000      $   149,900      $   (89,500)     $    60,400

   Issuance of common stock through
      private placement at $1.66 per share
      net of expenses of $41,500                                         328,300          504,600             --            504,600

   Issuance of common stock in connection
      with direct public offering at $5.25 per share                       3,800           19,900             --             19,900

   Conversion of notes payable into common
      stock at $1.66 per share                                            33,000           55,000             --             55,000

   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

   Issuance of common stock in connection
      with direct public offering at $5.25 per share,
      net of expenses of $188,400                                        415,100        1,990,900             --          1,990,900

   Exercise of stock options                                              21,600           12,600             --             12,600

   Conversion of notes payable and accrued
      interest into common stock at $5.25
      per share                                                           14,800           77,800             --             77,800

   Recission of shares issued to joint venture                            (5,000)         (26,300)            --            (26,300)

   Stock issued for current and future services                           19,700           94,700             --             94,700

   Net loss                                                                 --               --         (1,409,300)      (1,409,300)
                                                                     -----------      -----------      -----------      -----------

Balance, December 31, 1997                                             2,542,700      $ 3,168,900      $(2,316,100)     $   852,800
                                                                     ===========      ===========      ===========      ===========

<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>

                                                                 -7-

<PAGE>


<TABLE>
                                                  ZAP Power Systems and Subsidiary

                                                CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                      Years ended December 31,

<CAPTION>
                                                                                                  1997                     1996
                                                                                               -----------              -----------
<S>                                                                                            <C>                      <C>         
Cash flows from operating activities:
   Net loss                                                                                    $(1,409,300)             $  (817,300)
   Adjustments to reconcile net loss to net cash used in
      operating activities:
        Depreciation and amortization                                                               67,700                   47,400
        Allowance for doubtful accounts                                                            (11,400)                   7,400
        Issuance of common stock for services rendered                                              92,400                  127,400
        Loss on abandonment of subsidiary                                                           26,200                     --
        Amortization of fair value of warrants                                                      56,300                     --
        Changes in:
          Receivables                                                                              (49,400)                 (37,600)
          Inventories                                                                              (20,700)                (188,200)
          Prepaid expenses and other
                                                                                                    (4,100)                  (6,400)
          Deposits
                                                                                                     2,000                   (9,500)
          Accounts payable                                                                        (139,600)                 207,000
          Accrued liabilities and customer deposits                                                126,900                   53,900
          Income taxes payable
                                                                                                      --                     (2,700)
                                                                                               -----------              -----------
             Net cash used in operating activities                                              (1,263,000)                (618,600)

Cash flows from investing activities:
   Purchases of equipment                                                                         (128,600)                 (80,500)
   Patent costs capitalized                                                                        (14,900)                    --
                                                                                               -----------              -----------
             Net cash used in investing activities                                                (143,500)                 (80,500)

Cash flows from financing activities:
   Proceeds from issuance of notes payable                                                          33,800                  336,900
   Sale of common stock, net of stock offering costs                                             2,003,500                  524,500
   Principal repayments on notes payable                                                           (98,800)                  (7,500)
   Payments on obligations under capital leases                                                    (13,100)                  (5,000)
   Cash restricted to payment of certain notes payable                                              10,000                  (10,000)
                                                                                               -----------              -----------
             Net cash provided by financing activities                                           1,935,400                  838,900
                                                                                               -----------              -----------

             NET INCREASE IN CASH                                                                  528,900                  139,800

Cash, beginning of year                                                                            161,600                   21,800
                                                                                               -----------              -----------

Cash, end of year                                                                              $   690,500              $   161,600
                                                                                               ===========              ===========

<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>

                                                                 -8-

<PAGE>


                        ZAP Power Systems and Subsidiary

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Years ended December 31,


                                                              1997        1996
                                                            --------    --------
Supplemental cash flow information:

   Cash paid during the year for:
      Interest                                              $ 84,763    $ 11,400
      Income taxes
                                                               1,600       1,600

   Non-cash investing and financing activities:
      Conversion of notes payable and accrued interest
        into common stock                                     77,800      55,000
      Stock issued for future services                         2,400      53,600
      Stock issued (cancelled) to joint venture              (26,300)     52,500
      Warrants issued for financing fees                        --        56,300


The accompanying notes are an integral part of these statements.

                                       -9-

<PAGE>


                        ZAP Power Systems and Subsidiary

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1997 and 1996



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    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.

    The  Company  consolidates  the  accounts  of its  wholly-owned  subsidiary,
    Electricycle   Corporation   ("Electricycle").   All  material  intercompany
    balances and transactions are eliminated.

    1. 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.

    2. 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 betterments 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 or life of lease,
                                                         whichever is shorter

    3. Intangibles

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

    4. Income Taxes

       The  Company  accounts  for  income  taxes  using an asset and  liability
       approach for financial accounting and reporting purposes.

                                      -10-

<PAGE>


                        ZAP Power Systems and Subsidiary

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    5. Recent Issued Accounting Standards

       In June 1997, the Financial  Accounting  Standards  Board issued SFAS No.
       130,  Reporting  Comprehensive  Income,  which  requires  that an  entity
       report,  by major components and as a single total, the change in its net
       assets from non-shareholder  sources during the period; and SFAS No. 131,
       Disclosures  About  Segments of an  Enterprise  and Related  Information,
       which establishes annual and interim reporting  standards for an entity's
       business segments and related  disclosures about its products,  services,
       geographic areas and major  customers.  Adoption of these statements will
       not impact the  Company's  financial  position,  results of operations or
       cash flows.  Both  statements  are effective  for fiscal years  beginning
       after December 15, 1997, with earlier application permitted.

    6. Use of Estimates

       The  preparation  of financial  statements in conformity  with  generally
       accepted accounting principles requires management of the Company to make
       estimates and  assumptions  affecting the reported  amounts of assets and
       liabilities  and disclosure of contingent  assets and  liabilities at the
       date of the financial statements, as well as revenues and expenses during
       the  reporting  period.  The amounts  estimated  could differ from actual
       results.

    7. 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 the bank
       note payable  approximates fair value as current interest rates available
       to the Company  for similar  debt are  approximately  the same.  The fair
       value of related party debt is impracticable to determine.

    8. Net Loss Per Common Share

       In February 1997, the Financial  Accounting  Standards  Board issued SFAS
       No. 128,  Earnings  Per Share.  The Company has adopted  SFAS 128 for all
       periods  presented.  The  adoption of SFAS 128 did not impact  previously
       reported  loss per share for the year ended  December 31, 1996.  SFAS 128
       replaces  current earnings per share ("EPS")  reporting  requirements and
       requires a dual presentation of basic and diluted EPS. Basic EPS excludes
       dilution and is computed by dividing net income  (loss)  attributable  to
       common  stockholders by the weighted average of common shares outstanding
       for the period.  Diluted EPS reflects the  potential  dilution that could
       occur  if  securities  or other  contracts  to issue  common  stock  were
       exercised or converted into common stock.  In 1997 and 1996,  outstanding
       stock  options to purchase  875,000 and 1,179,000  shares,  respectively,
       with  weighted  average  exercise  prices  per  share of $1.12  and $.74,
       respectively, plus warrants to purchase 13,900 and 37,800 shares in 1997,
       and 1996,  respectively,  at $5.25 per share,  have been omitted from the
       diluted computation as their inclusion would be anti-dilutive.

                                      -11-

<PAGE>


                        ZAP Power Systems and Subsidiary

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1997 and 1996


NOTE B - INVENTORIES

    Inventories consist of the following at December 31, 1997:

         Raw materials                                         $144,100
         Work-in-process                                         70,200
         Finished goods                                          53,000
                                                               --------
                                                               $267,300
                                                               ========


NOTE C - PROPERTY AND EQUIPMENT

    Property and equipment consist of the following at December 31, 1997:

         Machinery and equipment                               $ 54,300
         Equipment under capital leases                          45,900
         Demonstration bicycles                                  77,500
         Office furniture and equipment                          57,900
         Leasehold improvements                                  14,900
         Vehicle                                                 34,400
                                                               --------
                                                                284,900
         Less accumulated depreciation and amortization         121,700
                                                               --------

                                                               $163,200
                                                               ========


NOTE D - NOTES PAYABLE

         Unsecured notes to stockholders, with interest
         at 12%; due on demand.  The  noteholders  have
         been  issued  warrants  to  purchase,  in  the
         aggregate,  2,500  shares of  common  stock at
         $5.25 per share through October, 1999.                $  46,900

         Note to bank, with interest at 15%;  principal
         and interest due in monthly  installments  and
         maturing in March, 1998;  collateralized by an
         interest in other checking or savings accounts
         in the bank and held by the Company.                      4,700
                                                               ---------

                                                               $  51,600
                                                               =========

                          -12-

<PAGE>


                        ZAP Power Systems and Subsidiary

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1997 and 1996


NOTE E - LONG-TERM DEBT

         Unsecured note to a stockholder, with interest
         at 10%; principal and interest is due when the
         notes mature in December  1999. The noteholder
         has been issued  warrants  to purchase  11,400
         shares  of  common  stock at $5.25  per  share
         through December 1999.                                $  60,000
                                                               =========


NOTE F - CAPITAL LEASES

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

    Year ending December 31,
    ------------------------

            1998                                                 $    19,900
            1999                                                      10,900
            2000                                                         900
                                                                 -----------
            Total minimum lease payments                              31,700
            Less amounts representing interest                         4,800
                                                                 -----------
            Present value of minimum lease payments                   26,900
            Less current maturities                                   16,000
                                                                 -----------
                                                                 $    10,900
                                                                 ===========


NOTE G - PROVISION FOR INCOME TAXES


                                                   1997         1996
                                                ---------    ---------
         Current tax liability
             Federal                            $    --      $    --
             State                                  1,600        1,600
                                                ---------    ---------

                                                $   1,600    $   1,600
                                                =========    =========

         Deferred tax assets (liabilities)
             Federal tax loss carryforward      $ 695,000    $ 297,000
             State tax loss carryforward          132,600       79,000
             Other, net                              --        (19,600)
                                                ---------    ---------
                                                  827,600      356,400
         Less valuation allowance                (827,600)    (356,400)
                                                ---------    ---------

                Net deferred tax asset          $    --      $    --
                                                =========    =========

                                      -13-

<PAGE>

                        ZAP Power Systems and Subsidiary

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1997 and 1996


NOTE G - PROVISION FOR INCOME TAXES (continued)

    The Company has  available for  carryforward  approximately  $2,176,000  and
    $1,500,000 of federal and state net operating losses, respectively, expiring
    through 2012. 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 utilization, a
    full valuation allowance is recorded against these deferred tax assets.


NOTE H - COMMON STOCK

    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
    January 1, 1996  increased from 548,000 to 1,644,000  shares.  All share and
    per share data, including stock options, have been adjusted retroactively to
    reflect the  three-for-one  stock split. The number of shares the Company is
    authorized to issue was also increased from 1 million to 10 million shares.


NOTE I - STOCK OPTIONS AND WARRANTS

    Options to purchase common stock are granted by the Board of Directors under
    two Stock  Option  Plans,  referred to as the 1996 and 1995  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
    available  for grant 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 over a two year period, and
    expire ten years after the date of grant.  Options  totaling  769,285 shares
    were vested under both plans at December 31, 1997.

                                      -14-

<PAGE>


                        ZAP Power Systems and Subsidiary

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1997 and 1996



NOTE I - STOCK OPTIONS AND WARRANTS (continued)

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

<CAPTION>
                                                                            1996 Plan                      1995 Plan
                                                                     -----------------------         -----------------------
                                                                    Number of        Weighted       Number of        Weighted
                                                                    Exercise          Average       Exercise          Average
                                                                     Shares            Price         Shares            Price
                                                                     ------            -----         ------            -----
<S>                                                                 <C>               <C>           <C>               <C>
         Outstanding at  December 31, 1995                           501,000          $   1.00       360,000          $   0.40
            Granted                                                     --             --            318,000          $   0.73
            Exercised                                                   --             --               --             --
            Canceled                                                    --             --               --             --
                                                                     -------                         -------

         Outstanding at  December 31, 1996                           501,000          $   1.00       678,000          $   0.55
            Granted                                                  110,500          $   4.39          --            $   0.40
            Exercised                                                 (7,300)         $   1.00       (15,000)         $   0.40
            Canceled                                                (174,700)         $   1.13      (216,700)         $   0.55
                                                                     -------                         -------

         Outstanding at  December 31, 1997                           429,500          $   1.70       446,300          $   0.56
                                                                     =======                         =======
</TABLE>

     The weighted  average fair value of options granted during the years ending
     December 31, 1997 and 1996 was $3.23 and $.42, respectively.

<TABLE>
     The following  information  applies to options  outstanding at December 31,
     1997:

<CAPTION>
<S>                                                                       <C>              <C>
          Range of exercise prices                                        $.40 - $1.00     $3.68 - $5.25
                                                                          ------------     -------------

          Options outstanding                                                787,800          88,000
          Weighted average exercise price                                     $.75             $4.42
          Weighted average remaining contractual life (years)                   8                9
          Options exercisable                                                748,527          20,758
          Weighted average exercise price                                     $.74             $3.98
</TABLE>


     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 1997 and 1996. 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:

                                      -15-

<PAGE>


                        ZAP Power Systems and Subsidiary

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1997 and 1996



NOTE I - STOCK OPTIONS AND WARRANTS (continued)

                                                 1997            1996
                                            --------------   ------------ 
         Net loss - as reported             $   (1,409,300)  $   (817,300)
         Net loss - pro forma                   (1,696,300)      (981,000)
         Loss per share - as reported                 (.62)          (.45)
         Loss per share - pro forma                   (.73)          (.54)


    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:

                                                     1997          1996
                                                     ----          ---- 
         Dividends                                    None          None
         Expected volatility                           30%           30%
         Risk free interest rate                     6.38%         6.28%
         Expected life                            10 years      10 years


    Warrants to acquire stock were issued to certain  stockholders as additional
    consideration for providing financial  assistance,  in the form of notes, to
    the  Company.  The fair value of the  warrants at time of issuance  $56,300,
    have been amortized to operations during 1997.


NOTE J - JOINT VENTURE

    In December  1996,  the Company  joined with MW McWong  International,  Inc.
    ("McWong"),  to form ZAP (China), a limited liability corporation registered
    in California. The Company issued 10,000 shares of its common stock at $5.25
    per share to McWong as its  investment  in the joint  venture.  The  Company
    became a 50% owner of ZAP (China) LLC.

    During 1997, by mutual agreement between the parties,  the joint venture was
    dissolved prior to the commencement of any business activity. In settlement,
    the Company  cancelled  5,000 of the original 10,000 shares issued to McWong
    and wrote off the balance of the investment, $26,250.


NOTE K - MAJOR CUSTOMER

    During 1997, one customer accounted for $430,000 or 26% of the Company's net
    sales.  The Company  ceased selling to this customer in late 1997 and is not
    expected to have any material  sales to this  customer in 1998.  The loss of
    this  customer is not  expected to have a material  impact on the  Company's
    financial  position and results of  operations  for the coming year.  No one
    customer accounted for 10% or more of the Company's net sales for 1996.

                                      -16-

<PAGE>


                        ZAP Power Systems and Subsidiary

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1997 and 1996


NOTE L - COMMITMENT

    The Company rents  warehouse and office space under an operating  lease that
    expires in June 1998. The monthly rent of $6,114.40 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 $22,000 in 1998.  Rent expense under this lease
    was $63,300 and $52,800 in 1997 and 1996, respectively.


NOTE M - SUBSEQUENT EVENTS

    In January 1998, the Company  commenced its second direct public offering of
    its common stock. The Company has offered 500,000 shares at $6.00 per share.
    The  offering is being  conducted on a best  efforts  basis  directly by the
    Company.   The  proceeds   from  the  offering  will  be  used  to  increase
    manufacturing  capacity,  expand  marketing  efforts and for general working
    capital.

    On March 11, 1998, the Company's  common stock commenced  trading on the OTC
    Bulletin Board under the stock symbol ZAPP.

                                      -17-

<PAGE>


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

     On  January  26,  1998,  the  Company  engaged  Grant  Thornton  LLP as the
principal accountants to audit the Company's financial statements.  Prior to the
engagement of Grant  Thornton,  the Company did not consult with Grant  Thornton
regarding the  application of accounting  principals to a specific  completed or
contemplated transaction, or the type of audit opinion that might be rendered.

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


                                   MANAGEMENT


              Name                    Age                      Position
              ----                    ---                      --------
         Gary Starr                    42                Managing Director

         James McGreen                 44                President and Director

         Andrew Hutchins               37                General Manager

         Sanford Theodore              34                Controller

         Jessalyn Nash                 38                Director

         Lee S. Sannella, M.D.         81                Director

         Nancy K. Cadigan              39                Director and Secretary

         Richard Balzhiser             65                Member, Advisory Board

         Hal Larson                    73                Member, Advisory Board

         Jack Guy                      65                Member, Advisory Board


         Gary Starr is Managing  Director of the Company.  He has been  building
and driving  electric cars for more than 20 years. In addition to overseeing the
marketing  of more than 9,000  electric  bicycles  and  vehicles,  Mr. Starr has
invented  several solar electric  products and conservation  devices.  Mr. Starr
founded U.S.  Electricar's  electric  vehicle  operation  in 1983.  That Company
recently signed a licensing agreement with Hyundai.

         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

                                        9

<PAGE>


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  sailboats.  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,  (2 granted,  1 pending,  2 expired),  in the  resource
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.

         Andrew  Hutchins,  General  Manager  has been  involved  in the  retail
bicycle  industry  since he was 11 years old,  when he worked  for his  family's
retail bicycle shop. He  successfully  started,  managed,  and operated a retail
bicycle  store for 11 years  prior to selling it for  several  times his initial
investment.  He has also worked in the  insurance  industry  for three years and
served on the  Transportation  advisory  board for the city of Rohnert Park. Mr.
Hutchins received a degree in Business Economics and Communication  Studies from
the University of California at Santa Barbara in 1982.

         Sanford Theodore, Controller has been involved in various financial and
accounting positions for over 10 years. Well versed with computerized accounting
and auditing processes,  he has worked with Optical Coating Laboratory,  Western
Dairy Products,  and Blue Cross.  Mr. Theodore  received a bachelor's  degree in
Business   Administration  from  San  Diego  State  University  in  1985  and  a
certificate for Human Resource Management from Sonoma State University in 1996.

         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).

         Advisory Board.

         Dr.  Richard E.  Balzhiser,  President  Emeritus of the Electric  Power
Research Institute (EPRI) served as President and CEO of EPRI from 1988-1996. He
joined EPRI in 1973 at the time of its founding after serving as Deputy Director
for Energy and  Environment in the White House Office of Science and Technology.
Dr.  Balzhiser  currently  serves on the Houston  Industries  and  Electrosource
Boards as well as Advisory boards to Mobil, MIT,  University of Michigan and the
University of Wisconsin.  He is chairing committees for the World Bank and World
Energy Council. Dr. Balzhiser earned his Ph.D. from the University of Wisconsin.

                                       10

<PAGE>


         Hal Larson was the  Executive  Creative  Director  for the  advertising
agency Tatham,  Laird & Kudner.  He has been responsible for the advertising for
Kraft Cheese,  Sears,  Quaker, 7-UP, and Oscar Meyer. He also served as Creative
Director of J. Walter Thompson and West Coast Creative  Director of Cunningham &
Walsh. Mr. Larson has directed advertising for the Republican National Committee
and has written several books and lectured at several  Universities.  Mr. Larson
earned his B.S.  degree from the  University of Oregon and his M.S.  degree from
Boston University.

         Jack Guy has been  employed by the Electric  Power  Research  Institute
(EPRI) since 1974. He is responsible for commercializing EPRI's new products and
technologies  in  Electric  Transportation.  From  1956 to 1974,  Mr.  Guy was a
manager for General  Electric Co. Mr. Guy has also served as a special agent for
the U.S. Army Counterintelligence Corps.

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.

                                       11

<PAGE>


Item 10.                                   EXECUTIVE COMPENSATION


<TABLE>
                                           Summary Compensation Table

<CAPTION>
                                                             Long Term Compensation
                                                             ----------------------------------
                                 Annual Compensation         Awards                     Payouts
                               ----------------------------------------------------------------
   (a)            (b)          (c)       (d)       (e)        (f)           (g)            (h)         (I)
                                                  Other       Res-         Secur-
Name                                              Annual    tricted        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
                  1997     $35,000                           $2,250

James McGreen     1994     $     0
President         1995     $33,000                                          72,000
                  1996     $33,000                           $3,750         60,000
                  1997     $38,000                           $2,250
</TABLE>


<TABLE>
<CAPTION>
                               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
----           -----------          --------------           ------------         ---------------
<S>            <C>                  <C>                      <C>                  <C>
None

</TABLE>


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 March 27,
1998 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.


                                       Shares        Percentage of Common Shares
                                    Beneficially     at March 27, 1998
   5% Shareholders:                    Owned         (2,568,331 shares)
--------------------------------------------------------------------------------

     James McGreen                    703,850*            28%

     Gary Starr                       522,028*            20%

     All directors and executive    1,225,878             48%
     officers as a group


Includes  114,500  shares of Common Stock  issuable  upon  exercise of currently
exercisable  incentive  stock options but excludes 17,500 shares of Common Stock
issuable under options but not currently exercisable.

                                                12