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


                                   Form 10-QSB


(Mark One)


[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the quarterly period ended September 30, 1998
                                                  --------

[ ]     TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934

                      For the transition period from       to       
                                                    -------  -------

                      Commission file number  333-05744-LA
                                            ------------------------------------


                                ZAP POWER SYSTEMS
--------------------------------------------------------------------------------
        (Exact name of small business issuer as specified 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)

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

         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
                                                                      ---
                     (APPLICABLE ONLY TO CORPORATE ISSUERS)

         State the number of shares  outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.  2,639,622 shares of common
stock as of October 27, 1998


          Transitional Small Business Disclosure Format Yes [ ] No [x]

<PAGE>

Part I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         ZAP POWER SYSTEMS
         CONDENSED BALANCE SHEET

                                                                   September 30,
                                                                        1998
--------------------------------------------------------------------------------
                                   ASSETS
CURRENT ASSETS
     Cash                                                           $   556,400
     Receivables                                                        467,700
     Inventories                                                        606,400
     Prepaid expenses and other assets                                  106,000
                                                                    -----------
         Total current assets                                         1,736,500
                                                                    -----------

PROPERTY AND EQUIPMENT                                                  188,400
                                                                    -----------

OTHER ASSETS
      Intangibles, net of accumulated amortization
          of $6,100                                                      44,800
      Deposits                                                           11,900
                                                                    -----------
          Total other assets                                             56,700
                                                                    -----------

          Total assets                                              $ 1,981,600
                                                                    ===========

          LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable                                               $   408,800
     Accrued liabilities and other expenses                              43,000
     Customer Deposits                                                   37,600
     Notes payable                                                      533,400
     Current maturities of long-term debt                                 1,200
     Current maturities of obligations under capital leases               4,200
                                                                    -----------
          Total current liabilities                                   1,028,200
                                                                    -----------

OTHER LIABILITIES
     Obligations under capital leases, less current maturities           10,900
     Long-Term Debt, less current maturities                             16,200
     Notes Payable, less current maturities                              60,000
                                                                    -----------
          Total other liabilities                                        87,100
                                                                    -----------

STOCKHOLDERS' EQUITY
     Common stock, no par value; 10,000,000 shares
          authorized, 2,639,422 shares issued and
          outstanding                                                 3,733,800
     Accumulated deficit                                             (2,867,500)
                                                                    -----------
          Total stockholders' equity                                    866,300
                                                                    -----------

Total liabilities and stockholders' equity                          $ 1,981,600
                                                                    ===========


The accompanying notes are an integral part of these financial statements

                                       2

<PAGE>

<TABLE>
ZAP POWER SYSTEMS
CONDENSED STATEMENTS OF OPERATIONS

<CAPTION>
                                  Quarter ended September 30,   Nine Months ended September 30,
                                      1998           1997            1998              1997
-------------------------------------------------------------------------------------------

<S>                               <C>            <C>            <C>            <C>        
NET SALES                         $ 1,229,700    $   501,000    $ 2,554,600    $ 1,327,100

COST OF GOODS SOLD                    778,500        328,400      1,684,900      1,035,100
                                  -----------    -----------    -----------    -----------

GROSS PROFIT                          451,200        172,600        869,700        292,000
                                  -----------    -----------    -----------    -----------

OPERATING EXPENSES
     Selling                          255,700        159,500        665,400        424,900
     General and administrative       225,600        136,700        608,000        500,900
     Research and development          51,500         66,500        131,400        185,000
                                  -----------    -----------    -----------    -----------
                                      532,800        362,700      1,404,800      1,110,800
                                  -----------    -----------    -----------    -----------

LOSS FROM OPERATIONS                  (81,600)      (190,100)      (535,100)      (818,800)
                                  -----------    -----------    -----------    -----------

OTHER INCOME (EXPENSE)
     Interest expense                  (4,500)        (6,400)       (10,800)       (22,200)
     Other                             (5,000)         4,200         (4,600)         9,500
                                  -----------    -----------    -----------    -----------
                                       (9,500)        (2,200)       (15,400)       (12,700)
                                  -----------    -----------    -----------    -----------

NET LOSS                          $   (91,100)   $  (192,300)   $  (550,500)   $  (831,500)
                                  ===========    ===========    ===========    ===========

NET LOSS PER COMMON SHARE,
BASIC AND DILUTED                 $     (0.03)   $     (0.08)   $     (0.21)   $     (0.37)
                                  ===========    ===========    ===========    ===========


WEIGHTED AVERAGE OF COMMON
      SHARES OUTSTANDING            2,633,500      2,319,300      2,592,400      2,233,400
                                  ===========    ===========    ===========    ===========

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

                                       3

<PAGE>

<TABLE>
ZAP POWER SYSTEMS
CONDENSED STATEMENTS OF CASH FLOWS

<CAPTION>
                                                            Nine months ended September 30,
                                                                  1998            1997  
--------------------------------------------------------------------------------------------

<S>                                                           <C>            <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                 $  (550,600)   $  (831,400)
     Adjustments to reconcile net loss to net cash
       used by operating activities
         Depreciation and amortization                             58,300         46,000
         Allowance for doubtful accounts                                          (2,500)
         Issuance of common stock for services rendered             3,000         67,800
       Changes in:
         Receivables                                             (346,000)      (140,300)
         Inventories                                             (339,900)       (23,600)
         Prepaid expenses                                         (40,400)        29,200
         Deposits                                                 (67,300)       166,000
         Accounts payable                                         245,700       (107,800)
         Accrued liabilities and other expenses                   (35,200)       (27,500)
                                                              -----------    -----------
              Net cash used by operating activities            (1,072,400)      (824,100)
                                                              -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
     Purchases of equipment                                       (80,100)       (80,600)
     Investment in subsidiaries                                                  (13,900)
     Patent Defense                                               (27,100)       (13,100)
                                                              -----------    -----------
              Net cash used by investing activities              (107,200)      (107,600)
                                                              -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from notes payable                                                  30,000
     Increase in loans payable                                    517,500
     Decrease in restricted cash                                                  10,000
     Sale of common stock, net of stock offering costs            558,000      1,000,400
     Principal repayments on long-term debt                        (4,700)        (9,400)
     Payments on obligations under capital leases                 (11,800)        (9,500)
     Principal repayments on note payable                         (13,500)      (122,000)
                                                              -----------    -----------
              Net cash provided by financing activities         1,045,500        899,500
                                                              -----------    -----------

NET INCREASE/(DECREASE) IN CASH                                  (134,100)       (32,200)

CASH, beginning of period                                         690,500        161,600
                                                              -----------    -----------

CASH, end of period                                           $   556,400    $   129,400
                                                              ===========    ===========

<FN>
The accompanying notes are an integral part of these financial statements
</FN>
</TABLE>
                                       4

<PAGE>

ZAP POWER SYSTEMS
NOTES TO THE INTERIM UNAUDITED CONDENSED FINANCIAL STATEMENTS

(1)   Basis of Presentation

The financial  statements included in this Form 10-QSB have been prepared by the
Company,  without audit, pursuant to the rules and regulations of the Securities
and Exchange  Commission.  Certain information and footnote disclosures normally
included in financial  statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, pursuant to such rules and
regulations,  although  management believes the disclosures are adequate to make
the  information  presented not  misleading.  The results of operations  for any
interim period are not necessarily  indicative of results for a full year. These
statements  should be read in  conjunction  with the  financial  statements  and
related  notes  included in the  Company's  Annual Report on Form 10-KSB for the
year ended December 31, 1997.

The financial  statements presented herein as of September 30, 1998, and for the
three months and nine months ended  September  30, 1998 and  September  30, 1997
reflect, in the opinion of management,  all material adjustments consisting only
of  normal  recurring  adjustments  necessary  for a  fair  presentation  of the
financial position, results of operations and cash flow for the interim periods.

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 securities would be anti-dilutive.

(2) -  RECEIVABLES

                                                              September 30, 1998
                                                              ------------------
Trade accounts receivable                                       $     472,700
Less allowance for doubtful accounts                                   (5,000)
                                                                -------------

                                                                $     467,700
                                                                =============

(3) - INVENTORIES

                                                              September 30, 1998
                                                              ------------------
Raw materials                                                   $     445,500
Work-in-process                                                        95,100
Finished goods                                                         65,800
                                                                -------------

                                                                $     606,400
                                                                =============

(4) - PROPERTY AND EQUIPMENT

                                                              September 30, 1998
                                                              ------------------
Demonstration items                                             $      91,700
Machinery and equipment                                                72,900
Equipment under capital leases                                         45,900
Office furniture and fixtures                                          38,900
Computers                                                              34,900
Leasehold improvements                                                 25,400
Vehicle                                                                56,200
                                                                -------------
                                                                      365,900
Less accumulated depreciation and amortization                       (177,500)
                                                                -------------
                                                                $     188,400
                                                                =============

                                       5


<PAGE>

(5) - NOTES PAYABLE

                                                              September 30, 1998
                                                              ------------------

Notes  to  stockholders,  with interest at 10%; interest and
         principal  due when the notes  mature  in  December
         1999. The note holders have been issued warrants to
         purchase, in the aggregate, 21,800 shares of common
         stock at $5.25 per share through October, 1999.        $    93,600

Convertible secured  promissory notes, with interest at 12%,
         principal and interest is due when the notes mature
         in March  1999.  The note  holders  have the right,
         upon  completion  of the term, to convert the notes
         and any accrued interest into shares of the maker's
         common  stock at the  average bid and ask price for
         the ten (10) trading days immediately preceding the
         completion   of  the  Term;  or  $4.00  per  share,
         whichever is lower.                                    $   500,000
                                                                -----------

                                                                $   593,600
                                                                ===========

(6) - COMMON STOCK

In November of 1996 the Company commenced a direct public offering of its Common
Stock,  offering for sale 500,000 shares at $5.25. During 1996, the Company sold
3,800 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.

The Company has in process a second direct  public  offering of its Common stock
for sale 500,000 shares at $6.00 per share. The Company  commenced this offering
in January  1998 and as of October 27, 1998 has sold 84,747  shares and realized
gross  proceeds of $508,482.  On February 27, 1998,  the Company's  Common stock
commenced trading on the OTC Bulletin Board under the stock symbol "ZAPP".

Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

Special Note Regarding Forward-Looking Statements

     Certain  statements in this Form 10-QSB,  including  information  set forth
under this Item 2. "Management's  Discussion and Analysis of Financial Condition
and Results of Operations"  constitute  "forward-looking  statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "ACT"). ZAP
Power Systems (the  "Company")  desires to avail itself of certain "safe harbor"
provisions of the Act and is therefore including this special note to enable the
Company to do so.  Forward-looking  statements  included  in this Form 10-QSB or
hereafter  included  in  other  publicly  available  documents  filed  with  the
Securities and Exchange  Commission,  reports to the Company's  stockholders and
other publicly  available  statements  issued or released by the Company involve
known and unknown risks, uncertainties,  and other factors which could cause the
Company's actual results,  performance  (financial or operating) or achievements
to differ from the future  results,  performance  (financial  or  operating)  or
achievements  expressed  or implied by such  forward  looking  statements.  Such
future results are based upon  management's  best  estimates  based upon current
conditions and the most recent 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 50% kits, 30% electric bicycles, and 20% electric scooters. Dollar
sales have been 30% kits, 35% electric bicycles, and 35% electric scooters.

                                        6

<PAGE>

         The Company sells its electric  bicycles,  kits, and scooters 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.

         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  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 from U.S. and Taiwan sources. 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 are
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  vendor  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 and security
industries for power  interrupt  systems.  The  electronic  system uses standard
electronic  components.  Additionally,  the Company produces a scooter, known as
the ZAPPY(TM), which is manufactured by the Company, using parts manufactured by
various  subcontractors.   The  Company  is  also  a  U.S.  distributor  of  the
Electricycle(TM) scooter that is imported from China.

         The Company as of September 30, 1998 had a $309,166 sales backlog.  The
company expects to fill these orders within the next 45 days. Additionally,  the
Company received a contract to purchase one million dollars of ZAP products from
Central &  Southwest  Services,  Inc.  Of the  total  order,  $275,000  has been
fulfilled  and the  remaining  $725,000,  which is not  included  in the backlog
amount,  is  intended to be  fulfilled  over the next year.  The  products to be
shipped will vary based upon the requests of the customer during each month.

     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 is also  working on  setting up  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 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

<TABLE>
         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) for the periods indicated:

<CAPTION>
                                                          Quarter ended September 30,  Nine months ended September 30,
                                                                 1998           1997         1998          1997 
                                                                -----           -----        -----        ----- 
     Statements of Income Data:
<S>                                                             <C>             <C>          <C>          <C>   
         Net sales........................................      100.0%          100.0%       100.0%       100.0%
         Cost of sales....................................       63.3            65.6         66.0         78.0
         Gross profit (Loss)..............................       36.7            34.4         34.0         22.0
         Operating  expenses..............................       43.3            72.4         55.0         83.7
         Loss from operations.............................       (6.6)          (38.0)       (21.0)       (61.7)
         Other  income (expense)..........................       (0.8)           (0.4)        (0.6)        (1.0)
         Loss before income taxes.........................       (7.4)          (38.4)       (21.6)       (62.7)
         Provision for income taxes.......................        0.0             0.0          0.0          0.0
         Net loss.........................................       (7.4)          (38.4)       (21.6)       (62.7)

</TABLE>
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30, 1997

     Net sales  for the  quarter  ended  September  30,  1998,  were  $1,229,700
compared to $501,000  in the prior  year,  an increase of $728,700 or 145%.  The
increase  in sales in 1998  over the same  period  in 1997 was due to  increased

                                       7

<PAGE>

international sales together with the production and demand of the new ZAPPY(TM)
scooter.  Sales of the ZAPPY(TM) scooter were $435,200 or 36% of total sales for
the quarter.  This product was introduced  into the marketplace in the beginning
of 1998.  Additionally,  international  sales rose to over  $210,000 for the 3rd
quarter of 1998 compared to $15,000 for the 3rd quarter of 1997.

     Gross profit  increased  as a percentage  of net sales to 37% from 34%. The
total gross  profit  increased  $278,600 or 161%.  The  increase in gross margin
dollars  can be  attributed  to  margins  generated  from  the  sales of the new
ZAPPY(TM)  scooter.  The increase in gross margin percentage is primarily due to
reductions  in cost of raw  materials  to produce the  products  and  efficiency
increases in the manufacturing in the current quarter as compared to the quarter
ended  September  30, 1997.  Direct  Materials  were 52% of net sales in the 3rd
quarter of 1998 as compared to 64% of net sales in the 3rd quarter of 1997. This
is mainly due to improved  control of material  costs in 1998.  Direct labor and
overhead  were 11% of net sales in the 3rd  quarter of 1998 as compared to 2% in
the 2nd  quarter  of 1997.  This is  mainly  due to  increased  labor  effort in
producing the new ZAPPY(TM) Scooter.

     Selling  expenses in the quarter ended  September 30, 1998 were $255,700 as
compared to $159,500  for the quarter  ended  September  30,  1997.  This was an
increase of $96,200 or 60% from 1997 to 1998. As a percentage of sales,  selling
expenses  decreased  from 32% of sales to 21% of sales.  The increase in selling
expenses  was a result of  increased  promotional  activity to enhance  customer
demand and travel costs incurred for sales activity.

     General and  administrative  expenses for the quarter  ended  September 30,
1998 were  $225,600.  This was an  increase  of $88,900  or 65% from 1997.  As a
percentage of sales,  general and  administrative  expense decreased to 18% from
27% of net sales.  Expense  increases during the 3rd quarter of 1998 as compared
to the 3rd quarter of 1997 resulted from  increased  personnel  costs of $33,000
and the cumulative  increased  amount of $45,000 for supplies,  consulting fees,
printing, insurance, and rent.

     Research and development  decreased  $15,000 or 23% from the 3rd quarter of
1997 as  compared to the 3rd quarter of 1998.  As a  percentage  of net sales it
decreased  to 4% of sales in the 3rd quarter of 1998 as compared to 13% of sales
in the 3rd  quarter of 1997.  Extensive  efforts  in  developing  the  ZAPPY(TM)
scooter and single speed low-cost  motor system  resulted in higher costs in the
3rd quarter of 1997 that were not duplicated in the 3rd quarter of 1998.

Nine Months Ended  September 30, 1998  Compared to Nine Months Ending  September
30, 1997

     Net sales for the nine months  ended  September  30,  1998 were  $2,554,600
compared  with  $1,327,100  in the nine months  ended  September  30,  1997,  an
increase of  $1,227,500  or 92%. The increase in sales is attributed to sales of
the new ZAPPY(TM) scooter and a greater  acceptance of the Company's products in
the marketplace. ZAPPY(TM) scooters accounted for $742,300 of sales in the first
nine months of 1998.

     Gross profit  increased as a percentage of net sales,  to 34% from 22%. The
total gross  profit  increased  $577,700 or 198%.  The  increase in gross margin
dollars can be attributed to the gross margins  realized on the sales of the new
ZAPPY(TM)  scooters.  The increase in gross margin  percentage was the result of
greater cost controls and improved  efficiencies in the manufacturing process of
all  products  in the current  nine months as compared to the nine months  ended
September  30, 1997.  Direct  materials  were 57% of net sales in the first nine
months of 1998 as compared to 70% of net sales in the first nine months of 1997.

     Selling expenses for the nine months ended September 30, 1998 were $665,400
as compared to $424,900 for the nine months ended  September 30, 1997.  This was
an  increase of $240,500  or 57% from 1997 to 1998.  As a  percentage  of sales,
selling  expenses  decreased  from  32% of  sales  to 26%  of  sales.  Increased
promotion of the products to enhance demand caused these increases.

     General and administrative expenses for the nine months ended September 30,
1998 were  $608,000.  This is an increase  of  $107,100  or 21% from 1997.  As a
percentage of sales,  general and  administrative  expense decreased to 24% from
38% of net sales.  Expense  increases  during  the first nine  months of 1998 as
compared to the first nine months of 1997  occurred due to  increased  personnel
needs,  insurance costs, and additional use of outside  consultants for business
purposes.

                                       8

<PAGE>

     Research  and  development  decreased  $53,600  or 29% from the first  nine
months of 1997 as compared to the first nine months of 1998.  As a percentage of
net sales,  research and development  decreased to 5% of sales in the first nine
months of 1998 as  compared  to 14% of sales in the first  nine  months of 1997.
Extensive  efforts in developing the ZAPPY(TM) scooter and single speed low-cost
motor system resulted in higher costs in the first nine months of 1997 that were
not duplicated in the first nine months of 1998.

Liquidity and Capital Resources

     The Company used cash from operations of $1,072,400 and $824,100 during the
nine  months  ended  September  30,  1998 and 1997  respectively.  Cash  used in
operations  in the  first  nine  months  of 1998 was the  result of the net loss
incurred for the period of $550,600, offset by net non cash expenses of $61,300,
and the net change in operating  assets and  liabilities  resulting in a further
use of cash of $583,100.  Cash used in  operations  for the first nine months of
1997 was the  result  of the net loss  incurred  for the  first  nine  months of
$831,400,  offset by net non cash  expenses of  $111,300,  and the net change in
operating assets and liabilities resulting in further use of cash of $104,000.

     Investing  activities  used cash of $107,200 and $107,600  during the first
nine months ended  September  30, 1998 and 1997  respectively.  The uses of cash
were for the purchase of fixed assets and defense of the company's patents.

     Financing  activities  provided cash of $1,045,500 and $899,500  during the
first nine months ended September 30, 1998 and 1997  respectively.  In 1998, the
cash provided by financing  activities  included an increase in loans payable of
$517,500 and the sales of common stock, $558,000 offset by principal payments on
outstanding  debt. In 1997, the cash provided by financing  activities  resulted
from the sales of common  stock,  $1,000,400  for the first  nine  months  ended
September 30, 1997 offset by principal payments on outstanding debt.

     At  September  30,  1998,  the  Company  had cash and cash  equivalents  of
$556,400 as compared to $129,400 at September  30, 1997.  At September 30, 1998,
the Company had  working  capital of $708,300 as compared to working  capital of
$128,900 at September 30, 1997.  The increase in both cash and cash  equivalents
and working  capital in the first nine months of 1998 over the first nine months
of 1997 are  primarily due to the proceeds  received  from the Company's  direct
public  offering  and the  secured  promissory  notes which more than offset the
Company's net losses during the same period. 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 for the nine months
ended  September  30,  1998 of its common  stock with  maximum  potential  gross
proceeds of $3,000,000  before expenses.  The Company believes that the cash and
cash equivalents on hand at September 30, 1998 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 the remainder of the
year.

         The Company's  primary  capital needs are to fund its growth  strategy,
which  includes  increasing  its net sales,  increasing  distribution  channels,
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.

                                       9

<PAGE>

Seasonality and Quarterly Results

     The Company's business is subject to seasonal 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.

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.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

      The  company  has  become  aware  that a  company  named  Omni  under  the
leadership of an individual  named Joseph  Stevenson  has been  advertising  and
selling an  electric  system for  bicycles  called EROS  (electric  regenerative
operating  system).  The  Company's  management,  in  consultation  with  patent
counsel,  has  determined  after  analysis  that the EROS system  infringes  the
Company's  patents  and has  filed  suit  against  Omni for  such  infringement.
Although the Company believes its claims are meritorious and the patents for the
ZAP system are valid,  it is possible,  as in any suit,  that the Company may be
unable to prove  infringement  or that Mr.  Stevenson may  establish,  either in
litigation or in a re-examination  proceeding  before the Patent Office that the
Company's  patents  are not  valid.  If the  Company's  patents  are  held to be
invalid,  the Company's  ability to prevent  competitors  from  manufacturing or
selling  bicycles with the patented system will be  significantly  reduced.  The
loss of the patents or a significant damage award against the Company could have
a  material  adverse  effect  upon the  business  and  financial  condition  and
prospects of the Company.

Item 2.  Changes in Securities

      There were no changes in rights of securities holders.

Item 3.  Defaults Upon Senior Securities

      There were no defaults upon senior securities.

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

      There were no matters submitted to the vote of security holders.

Item 5.  Other Information

     There were no major contracts signed during the period.

Item 6.  Exhibits and Reports on Form 8-K

       No reports on Form 8-K were filed during the quarter.

                                       10
<PAGE>


                                   SIGNATURES

     In accordance  with the  requirements  of the Exchange Act, the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                  ZAP POWER SYSTEMS                 
----------------------------------------------------
                    (Registrant)


Date                                                                
    ------------------      ----------------------------------------------
                                James McGreen - President and Director


Date                                                              
    ------------------      ----------------------------------------------
                                Gary Starr - Managing Director

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