**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**










**Form
      10-QSB**





**QUARTERLY
      REPORT PURSUANT SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**







For
      the quarterly period ended September 30, 2006





Commission
      File Number 001-32534








**ZAP**


(Name
      of
      small business issuer in its charter)





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





**501
      Fourth Street**


**Santa
      Rosa, CA 95401**


**(707)
      525-8658**


(Address,
      including zip code, and telephone number, including area code, of


registrant’s
      principal executive offices)







Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities 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 o




Indicate
      by checkmark whether the registrant is a shell company (as defined in Rule
      12b-2
      of the Exchange Act)      Yes o No x




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




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date.





***36,987,365*** ** shares
      of common stock as of November 10, 2006.





Transitional
      Small Business Disclosure
      Format          Yes o No x













**ZAP**





**FORM
      10-QSB**




**INDEX**





**Page
                No.****PART
                I.**
            **Financial
                Information**Item
                1.
            Consolidated
                Financial Statements (unaudited) :Condensed
                Consolidated Balance Sheet as of September 30, 2006
            2Condensed
                Consolidated Statements of Operations for the Three and Nine Months
                Ended
                September 30, 2006 and 2005
            3Consolidated
                Statements of Cash Flows for the Nine Months Ended September 30,
                2006 and
                2005
            4Notes
                     to Condensed Consolidated Financial Statements
            5Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            15Item
                3.
            Controls
                and Procedures
            22**PART
                II.**
            **Other
                Information**Item
                1.
            Legal
                Proceedings
            23Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            24Item
                3.
            Defaults
                Upon Senior Securities
            25Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            25Item
                5.
            Other
                Information
            25Item
                6.
            Exhibits
            25SIGNATURES
            
            26






–
1
          –


Part
      I.     FINANCIAL INFORMATION


Item
      1.    Financial Statements


**ZAP**


**CONDENSED
      CONSOLIDATED BALANCE SHEET (UNAUDITED)**


***(In
      thousands)***




**September
                30,**
              **2006****ASSETS****CURRENT
                ASSETS******Cash
                and cash equivalents
            
            $
            306Accounts
                receivable, net of allowance for doubtful accounts of $213
            
            
            415Inventories
            
            
            2,386Prepaid
                expenses and other current assets
            
            
            614Total
                current assets
            
            
            3,721**PROPERTY
                AND EQUIPMENT,**net
                of accumulated depreciation of $925
            
            
            4,780**OTHER
                ASSETS**Patents
                and trademarks, net
            
            
            33Goodwill
            
            
            175Deposits
                and other assets
            
            
            616Total
                assets
            
            $
            9,325**LIABILITIES
                AND SHAREHOLDERS’ EQUITY****CURRENT
                LIABILITIES**Current
                portion of long-term debt
            
            $
            104Accounts
                payable
            
            
            171Accrued
                liabilities
            
            
            1,602Deferred
                revenue
            
            
            1,206Total
                current liabilities
            
            
            3,083**LONG-TERM
                LIABILITIES**Long-term
                debt, less current portion
            
            
            1,828Total
                liabilities
            
            
            4,911**SHAREHOLDERS’
                EQUITY**PePreferred
                stock, authorized 50 million shares; no par value, no shares issued
                and
                outstanding
            
            
            —Common
                stock, authorized 200 million shares; no par value; 36,161,127 shares
                issued and outstanding
            
            
            87,242Common
                stock issued as loan collateral
            
            
            (2,846
            )Accumulated
                deficit
            
            
            (79,982
            )Total
                shareholders’ equity
            
            
            4,414Total
                liabilities and shareholders’ equity
            
            $
            9,325





See
      accompanying notes to condensed consolidated financial statements
      (unaudited).




–
2
          –


**ZAP**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**


***(Thousands,
      except share amounts)***




**Three
                Months**
              **ended**
              **September
                30, 2006**
            
            **Three
                Months**
              **ended**
              **September
                30, 2005**
            
            **Nine
                Months**
              **ended**
              **September
                30, 2006**
            
            **Nine
                Months**
              **ended**
              **September
                30,****2005****NET
                SALES**
            
            $
            2,640
            
            $
            799
            
            $
            9,928
            
            $
            2,884**COST
                OF GOODS SOLD**
            
            
            2,525
            
            
            694
            
            
            9,101
            
            
            2,614**GROSS
                PROFIT**
            
            
            115
            
            
            105
            
            
            827
            
            
            270**OPERATING
                EXPENSES**Sales
                and marketing
            
            
            370
            
            
            344
            
            
            974
            
            
            836General
                and administrative (non-cash of $3.0 million and $5.9 million and
                $5.9
                million and $7.2 million for the three and nine months ended September
                30,
                2006 and 2005)
            
            
            4,147
            
            
            6,468
            
            
            10,080
            
            
            11,130Impairment
                loss on Smart Car license and equipment
            
            
            2,345
            
            
            —
            
            
            2,345
            
            
            —Research
                and development
            
            
            —
            
            
            —
            
            
            —
            
            
            886,862
            
            
            6,812
            
            
            13,399
            
            
            12,054**LOSS
                FROM OPERATIONS**
            
            
            (6,747
            )
            
            (6,707
            )
            
            (12,572
            )
            
            (11,784
            )**OTHER
                INCOME (EXPENSE)**Gain
                on settlement of Smart Auto liability
            
            
            7,051
            
            
            —
            
            
            7,051
            
            
            —Gain on
                revaluation of warrant and put option liabilities
            
            
            —
            
            
            —
            
            
            304
            
            
            1,437Interest
                expense, net
            
            
            (17
            )
            
            (24
            )
            
            (26
            )
            
            (22
            )Other
                income (expense)
            
            
            18
            
            
            (66
            )
            
            22
            
            
            1417,052
            
            
            (90
            )
            
            7,351
            
            
            1,556**INCOME (LOSS)
                BEFORE INCOME TAXES**
            
            
            305
            
            
            (6,797
            )
            
            (5,221
            )
            
            (10,228
            )**PROVISION
                FOR INCOME TAXES**
            
            
            —
            
            
            —
            
            
            4
            
            
            4**NET
                INCOME (LOSS)**
            
            $
            305
            
            $
            (
                6,797
            )
            $
            (5,225
            )
            $
            (10,232
            )**NET
                INCOME (LOSS) PER COMMON SHARE****BASIC**
            
            $
            0.01
            
            $
            (0.21
            )
            $
            (0.15
            )
            $
            (0.33
            )**DILUTED**
            
            $
            0.01
            
            $
            (0.21
            )
            $
            (015
            )
            $
            (0.33
            )**WEIGHTED
                AVERAGE OF COMMON SHARES OUTSTANDING**
            
            
            35,771
            
            
            31,954
            
            
            34,435
            
            
            31,240**DILUTED**
            
            
            37,317
            
            
            31,954
            
            
            34,435
            
            
            31,240




The
      accompanying notes to condensed consolidated financial statements
      (unaudited).




–
3
          –


**ZAP**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**


***(In
      thousands*** *)*


**Nine
                months ended September 30,****2006**
            
            **2005****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                loss
            
            $
            (5,225
            )
            $
            (10,232
            )Gain
                on settlement of Smart Auto liability
            
            
            (7,051
            )
            
            —Impairment
                loss on Smart Auto license and equipment
            
            
            2,345
            
            
            —Items
                not requiring the use of cash:Amortization
                of note discount
            
            
            —
            
            
            10Stock-based
                compensation for consulting and other services
            
            
            2,950
            
            
            11,271Stock-based
                employee compensation
            
            
            2,962
            
            
            (5,438
            )Gain
                on revaluation of warrant and put option liabilities
            
            
            (365
            )
            
            (1,437
            )Depreciation
                and amortization
            
            
            1,422
            
            
            1,119Loss
                on disposal of equipment
            
            
            4
            
            
            —Allowance
                for doubtful accounts
            
            
            (120
            )
            
            (76
            )Changes
                in other items affecting operations:Receivables
            
            
            (110
            )
            
            31Advances
                on Smart cars
            
            
            1,378
            
            
            188Inventories
            
            
            (514
            )
            
            585Prepaid
                expenses and other assets
            
            
            (770
            )
            
            (95
            )Accounts
                payable
            
            
            (18
            )
            
            149Accrued
                liabilities
            
            
            (386
            )
            
            94Warrant
                liability
            
            
            —
            
            
            890Deferred
                revenue
            
            
            156
            
            
            75Net
                cash used for operating activities
            
            
            (3,342
            )
            
            (2,866
            )**CASH
                FLOWS FROM INVESTING ACTIVITES**Purchase
                of equipment
            
            
            (386
            )
            
            (446
            )Proceeds
                from sale of equipment
            
            
            35
            
            
            —Net
                cash used for investing activities
            
            
            (351
            )
            
            (446
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Repurchase
                of common stock
            
            
            —
            
            
            (500
            )Payments
                on note receivable to stockholder
            
            
            —
            
            
            14Issuance
                of common stock and warrants, net of offering costs
            
            
            2,522
            
            
            2,228Issuance
                of note receivable to Smart Auto
            
            
            —
            
            
            (1,000
            )Borrowings
                and repayments of long-term debt
            
            
            (70
            )
            
            (106
            )Net
                cash provided by financing activities
            
            
            2,452
            
            
            636**NET
                DECREASE IN CASH AND CASH EQUIVALENTS**
            
            
            (1,241
            )
            
            (2,676
            )**CASH
                AND CASH EQUIVALENTS,**beginning
                of period
            
            
            1,547
            
            
            5,354**CASH
                AND CASH EQUIVALENTS,**end
                of period
            
            $
            306
            
            $
            2,678




See
      accompanying notes to condensed consolidated financial statements
      (Unaudited)




–
4
          –


**ZAP**


**NOTES
      TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS**





**(1)**
            **BASIS
                OF PRESENTATION**




The
      accompanying unaudited condensed financial statements have been prepared in
      accordance with U.S. generally accepted accounting principles (“U.S. GAAP”)
      for interim
      financial information and with the instructions to Form 10-Q and Article 10
      of
      Regulation S-X. Accordingly, they do not include all of the information and
      footnotes required by U.S. GAAP for complete financial statements. All
      adjustments (all of which are of a normal recurring nature) considered necessary
      for a fair presentation have been included. Operating results for the three
      and
      nine months ended September 30, 2006 are not indicative of the results that
      may
      be expected for the year ending December 31, 2006 or for any other period.
      These
      condensed financial statements and the notes thereto should be read in
      conjunction with the audited financial statements and notes thereto included
      in
      our Annual Report on Form 10-K for the year ended December 31, 2005 filed with
      the Securities and Exchange Commission (the “SEC”) on March 31, 2006 (our “2005
      10-K”).




Going
      Concern - The accompanying consolidated condensed financial statements have
      been
      prepared assuming we will continue as a going concern. The Company has a history
      of losses and might not achieve profitability. The Company will need to obtain
      additional financing in the future. There can be no assurance that additional
      financing would be available, or if it is available, that it would be on
      acceptable terms. The Company’s future
      liquidity
      and capital requirements will depend on numerous factors, including successful
      development, marketing and sale of advanced technology vehicles, protection
      of
      intellectual property rights, costs of developing its new products, including
      the necessary intellectual property rights, obtaining regulatory approvals
      for
      its new products, market acceptance of all its products, existence of competing
      products in its current and anticipated markets, and its ability to raise
      additional capital in a timely manner. Management expects to be able to raise
      additional capital; however, the Company may not be able to obtain additional
      financing on acceptable terms, or at all.




Other
      risks include, but are not limited to, the following:


We
      face
      intense competition, which could cause us to lose market share. Changes in
      the
      market for electrical or fuel-efficient vehicles could cause our products to
      become obsolete or lose popularity. We cannot assure you that growth in the
      electric vehicle industry or fuel-efficient cars will continue and our business
      may suffer if growth in the electric vehicle industry or fuel-efficient market
      decreases or if we are unable to maintain the pace of industry demands. We
      may
      be unable to keep up with changes in electric vehicle or fuel-efficient
      technology and, as a result, may suffer a decline in our competitive position.
      The failure of certain key suppliers to provide us with components could have
      a
      severe and negative impact upon our business. Product liability or other claims
      could have a material adverse effect on our business. We may not be able to
      protect our Internet address. Our success is heavily dependent on protecting
      our
      intellectual property rights.





The
      Company has relied on other entities such as G&K Automotive to convert or
      Americanize Smart cars for sale in certain states in the United States; and
      as
      well as to provide services under warranties and all other maintenance and
      repair services. If these entities are unable to supply or service Americanized
      Smart cars, and the Company is unable to obtain alternate sources of supply
      for
      these products and services, the Company might not be able to fill existing
      backorders and/or sell more Smart cars. See Note 5 for discussion of the current
      status of Smart Automobile Agreement.





Although
      ZAP has shipped and sold approximately 330 smart cars in the first nine months
      of 2006, the Company no longer intends to distribute Smart Cars Americanized
      by
      ZAP due to the unavailability of Smart Cars and Diamler Chrysler announced
      that
      they will sell the Smart Car in the U.S. commencing in 2008. In addition, due
      to
      the actions by Daimler Chrysler Corporation and others named in ZAP’s suit, ZAP
      cannot predict how many more smart cars the Company will be able to sell in
      the
      future. As part of ZAP’s business plan, ZAP had anticipated that Smart Car
      availability may be uncertain and over the past 18 months was aggressively
      seeking out other advanced transportation vehicles for distribution. The Xebra
      is now under production and sales are accelerating beyond original expectations.
      The pre-production unit for Obvio the gas/ethanol vehicle from Brazil is now
      undergoing road testing and is slated for distribution in 2008. Other vehicles
      are also in the planning phase.




–
5
          –


**(2)**
            **SIGNIFICANT
                ACCOUNTING POLICIES**




**NET
        INCOME (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS**
 Basic
        and
        diluted net loss per share applicable to common shareholders is based on
        net
        loss applicable to common shareholders for the relevant period, divided by
        the
        weighted average number of common shares outstanding during the period. Diluted
        net income per share applicable to common shareholders would give effect
        to all
        potentially dilutive common shares outstanding during the period such as
        options, warrants, convertible debt, and contingently issuable shares. Diluted
        net loss per share applicable to common shareholders has not been presented
        separately for the nine month periods ended September 30, 2006 and 2005 and
        the three month period ended September 30, 2005 as, due to the Company’s net
        loss position, it is anti-dilutive. At September 30, 2006, these
        potentially dilutive securities include options for 7,653,252 shares of common
        stock, warrants for 55,489,687 shares of common stock and debt convertible
        into
        898,605 shares of common stock.


**PRINCIPLES
      OF CONSOLIDATION -** The
      accounts of the Company and its consolidated subsidiaries are included in the
      condensed consolidated financial statements after elimination of significant
      inter-company accounts and transactions.





**REVENUE
      RECOGNITION**


The
      Company records revenues only upon the occurrence of all of the following
      conditions:





-The
      Company has received a binding purchase order or similar commitment from the
      customer or distributor authorized by a representative empowered to commit
      the
      purchaser (evidence of a sale);





-The
      purchase price has been fixed, based on the terms of the purchase
      order;





-The
      Company has delivered the product from its distribution center to a common
      carrier acceptable to the purchaser. The Company’s customary shipping terms are
      FOB shipping point; and





-The
      Company deems the collection of the amount invoiced probable.





The
      Company provides no price protection. Product sales are net of promotional
      discounts, rebates and return allowances.




The
      Company does not recognize sales taxes collected from customers as
      revenue.





**DEFERRED
      REVENUE -** One
      of
      the Company’s subsidiaries, Voltage Vehicles, sold licenses to auto dealerships
      under the ZAP name. The license agreements call for the licensee to purchase
      a
      minimum number of vehicles from ZAP each year. The Company collected $1,230,000
      related to these agreements, which is classified as deferred revenue until
      the
      Company begins delivering a substantial number of vehicles to these dealerships
      on a regular basis. Accordingly, the Company has recognized approximately
      $27,000 of revenue for the nine month period ended September 30, 2006 resulting
      in an ending balance of $1,206,000.





**USE
      OF ESTIMATES -** The
      preparation of financial statements in accordance with U.S. generally accepted
      accounting principles requires management to make estimates and assumptions
      that affect the amounts reported in the Company’s financial statements and
      accompanying notes. Estimates were made relating to the useful lives of fixed
      assets, valuation allowances, impairment of assets and valuation of stock-based
      compensation and contingencies. Actual results could differ materially from
      those estimates. Significant estimates include:





**ACCOUNTS
      RECEIVABLE** -
      The
      Company performs ongoing credit evaluations of its customers’ financial
      condition and generally requires no collateral from its customers. The Company
      maintains allowances for doubtful accounts for estimated losses resulting from
      the inability of its customers to make required payments. If the financial
      condition of the Company’s customers should deteriorate, resulting in an
      impairment of their ability to make payments, additional allowances may be
      required.





**INVENTORY** -
      The
      Company maintains reserves for estimated excess, obsolete and damaged inventory
      based on projected future shipments using historical selling rates, and taking
      into account market conditions, inventory on-hand, purchase commitments, product
      development plans and life expectancy, and competitive factors. If markets
      for
      the Company’s products and corresponding demand were to decline, then additional
      reserves may be deemed necessary.





**LEGAL
      ACCOUNTS** -
      The
      Company estimates the amount of potential exposure it may have with respect
      to
      litigation claims and assessments.




–
6
          –


**RECOVERY
      OF GOODWILL AND LONG-LIVED ASSETS -** The
      Company evaluates the recovery of its goodwill and long-lived assets at least
      annually by analyzing its operating results and considering significant events
      or changes in the business environment.





In
      December 2004, the Company issued 2.9 million common shares as collateral for
      a
      $1 million loan. The $3.529 million market value of these shares at the date
      of
      issuance was recorded in common stock with an offsetting contra equity account.
      These shares were previously issued to Mercatus Partners LLP in January 2003
      as
      collateral for a loan. This agreement was amended to allow the conversion of
      the
      loan to a purchase of stock. The shares were reported as lost to the Company
      in
      December 2003. In December 2004, the shares were reissued to Mercatus Partners
      who then assigned the shares and their interests to Phi-Nest Fund, L.P. as
      collateral for the loan. The Company amended the Loan Agreement allowing them
      to
      purchase 500,000 shares of the 2.9 million for $1.16 per share. On March 30,
      2006, the Company received $500,000 in net proceeds. The collateral was reduced
      to 2,441,176 shares. In September 2006, the Company signed a Settlement
      Agreement with Phi-Nest Fund, L.P. requiring that the common stock being held
      as
      collateral be transferred to an independent third party to January of 2007.
      Additionally, Phi-Nest Fund, L.P., received for consulting services $80,000
      and 150,000 shares of the stock, and a note receivable for $56,000 owed to
      ZAP
      by the cousin of Steve Schneider, ZAP’s CEO, was forgiven
      for
      his assistance in negotiating the Phi-Nest Settlement. The balance in the
      stock held for collateral as of September 30, 2006 is 2,291,176 common
      shares.




In
      September, 500,000 shares of the collateral stock were converted to stock
      purchased with proceeds of $487,500 received by the Company in October
      2006.





**WARRANTY
      -** The
      Company provides 30 to 90 day warranties on its personal electric products
      and
      records the estimated cost of the product warranties at the date of sale. The
      estimated cost of warranties has not been significant to date. Should actual
      failure rates and material usage differ from our estimates, revisions to the
      warranty obligation may be required.




The
      Company also provides a 36 month or 36,000 mile warranty on the Smart Car
      Americanized by ZAP and 6 month warranties for the XebraTM vehicles. At September
      30, 2006, the Company has recorded a warranty liability for $290,000 for
      estimated repair costs.




**CASH
      AND CASH EQUIVALENTS** - The
      Company considers highly liquid investments with maturities from the date of
      purchase of three months or less to be cash equivalents.




**(3)**
            **STOCK-BASED
                COMPENSATION**





We
      have
      stock compensation plans for employees and directors which are described in
      Note
      10 to our consolidated financial statements in our 2005 Annual Report on Form
      10-KSB as filed with the SEC on March 31, 2006. In June 2006, our shareholders
      approved the Company’s 2006 incentive stock plan. Under the 2006 plan, we may
      grant stock options for up to 4 million shares of common stock. We adopted
      Statement of Financial Accounting Standards No. 123 (revised 2004),
“ *Share-Based
      Payment* ,”
(“SFAS
      123R”) effective January 1, 2006. SFAS 123R requires the recognition of the fair
      value of stock compensation in net income (loss). We recognize the stock
      compensation expense over the requisite service period of the individual
      grantees, which generally equals the vesting period. All of our stock
      compensation is accounted for as an equity instrument. Prior to January 1,
      2006, we followed Accounting Principles Board Opinion 25, “ *Accounting
      for Stock Issued to Employees* ”
(“APB
      25”) and related interpretations in accounting for our stock compensation.





We
      elected the modified prospective method in adopting SFAS 123R. Under this
      method, the provisions of SFAS 123R apply to all awards granted or modified
      after the date of adoption. The unrecognized expense of awards not yet vested
      at
      the date of adoption is recognized in net income (loss) in the periods after
      the
      date of adoption using the same valuation method ( *i.e.* Black-Scholes)
      and assumptions determined under the original provisions of SFAS 123, *“* *Accounting
      for Stock-Based Compensation,”* as
      disclosed in our previous filings. In accordance with the modified prospective
      method, the consolidated financial statements for periods prior to 2006 have
      not
      been restated to reflect SFAS 123R. Therefore, the results for the first nine
      months of 2006 are not directly comparable to the same period in the prior
      year.





Under
      the
      provisions of SFAS 123R, we recorded $2,016,000 and $2,962,000 of stock
      compensation, net of estimated forfeitures, in selling, general and
      administrative expenses, in our unaudited condensed consolidated statement
      of
      operations for the three months and nine months ended September 30, 2006 .
      We
      utilized the Black-Scholes valuation model for estimating the fair value of
      the
      stock compensation granted after the adoption of SFAS 123R, with the following
      range of assumptions for the nine months ended September 30, 2006:




2006Expected
                Dividend yield
            
            0%Expected
                volatility
            
            
            149.28
                —154.43%Risk-free
                interest rate
            
            
            4.74
                — 5.21%Expected
                life (in years) from grant date
            
            
            0.875
                — 6.0Exercise
                price
            
            
            $0.68
                — $2.13





–
7
          –


The
      dividend yield of zero is based on the fact that we have never paid cash
      dividends and have no present intention to pay cash dividends. Expected
      volatility is based upon historical volatility of our common stock over the
      period commensurate with the expected life of the options. The risk-free
      interest rate is derived from the average U.S. Treasury Constant Maturity Rate
      during the period, which approximates the rate in effect at the time of the
      grant. Our unvested options vest over the next three years. Our options
      generally have a 10-year term. The expected term is calculated using the
      simplified method prescribed by the SEC’s Staff Accounting Bulletin 107. Based
      on the above assumptions, the weighted-average fair values of the options
      granted under the stock option plans for the three months and nine months ended
      September 30, 2006 was $0.72 and $0.72.  As required by SFAS No. 123R,
      we now estimate forfeitures of employee stock options and recognize compensation
      cost only for those awards expected to vest. Forfeiture rates are determined
      based on historical experience.  Estimated forfeitures are now adjusted to
      actual forfeiture experience as needed.





SFAS
      123R
      requires us to present pro forma information for the comparative period prior
      to
      the adoption as if we had accounted for all our employee stock options under
      the
      fair value method of the original SFAS 123. The following table illustrates
      the
      effect on net loss and loss per share if we had applied the fair value
      recognition provisions of SFAS 123 to stock-based employee compensation in
      the
      prior-year periods (dollars in thousands, except per-share data).





Three
                months
              ended
              September
                30,
            
            Nine
                months
              ended
              September
                30,2005
            
            2005Net loss
                as reported
            
            $
            (6,797
            )
            $
            (10,232
            )Add:
                Stock-based employee/director compensationincluded
                in reported net loss
            
            
            (378
            )
            
            (5,378
            )Deduct:
                total stock-based employee compensationdetermined
                under fair value method for all awards
            
            
            (151
            )
            
            (2,001
            )Pro-forma
                net loss
            
            $
            (7,326
            )
            $
            (17,611
            )Loss
                per share:Basic
                and diluted, as reported
            
            $
            (0.21
            )
            $
            (0.33
            )Basic
                and diluted, as adjusted
            
            $
            (0.23
            )
            $
            (0.56
            )





The
      assumptions used to determine the pro forma expenses under the Black-Scholes
      option model for the three months ended September 30, 2005 under SFAS 123 were
      based on the following assumptions: expected dividend yield: 0; expected
      volatility: 150.36%; expected lives, in years: 5.13; and risk-free interest
      rate: 4.99%. In the pro forma information for periods prior to 2006, we
      accounted for forfeitures as they occurred.




–
8
          –


A
      summary
      of options under the Company’s stock option plans from December 31, 2005 through
      September 30, 2006 is as follows:


Number
                of
              Shares
            
            Weighted
              Average
              Exercise
                Price
            
            Weighted
              Average
              Remaining
              Contractual
              Term
              (in
                years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
                December 31, 2005
            
            
            6,416,350
            
            $
            1.04
            
            
            8.32Options
                granted under the plan
            
            
            150,000
            
            $
            0.68Options
                exercised
            
            
            (196,000
            )
            $
            0.30Options
                forfeited and expired
            
            
            —
            
            
            —Outstanding
                March 31, 2006
            
            
            6,370,350
            
            $
            1.00
            
            
            8.11Options
                granted under the plan
            
            
            12,000
            
            $
            2.13Options
                exercised
            
            
            (239,842
            )
            $
            0.32Options
                forfeited and expired
            
            
            (250,000
            )
            
            (1.27
            )Outstanding
                June 30, 2006
            
            
            5,892,508
            
            $
            1.02
            
            
            8.15
            
            $
            1,453,558





Options
                granted under the plan
            
            
            1,473,772
            
            $
            0.94Options
                exercised
            
            
            (13,028
            )
            $
            0.85Options
                forfeited and expiredOutstanding
                September 30, 2006
            
            
            7,353,252
            
            $
            0.98
            
            
            8.16
            
            $
            1,110,824Options
                vested and exercisable at September 30, 2006
            
            
            5,302,275
            
            $
            1.00
            
            
            8.60
            
            $
            963,212





Aggregate
      intrinsic value is the sum of the amounts by which the quoted market price
      of
      our stock exceeded the exercise price of the options at September 30, 2006,
      for
      those options for which the quoted market  price was in excess of the
      exercise price (“in-the-money-options”). The total intrinsic value of options
      exercised was $9,234 and $0 for the three month period end September 30, 2006
      and 2005, respectively, and $430,152 and $0 for the nine months ended September
      30, 2006 and 2005.





As
      of
      September 30, 2006, total compensation cost of unvested employee stock options
      is $1.9 million. This cost is expected to be recognized through September 2009.
      We recorded no income tax benefits for stock-based compensation expense
      arrangements for the three months and nine months ended September 30, 2006,
      as
      we have cumulative operating losses, for which a valuation allowance has been
      established.




As
      of
      September 30, 2006, total compensation cost of unvested options and warrants
      to
      consultants total $895,000. This cost is expected to be recognized
      through December 2008.




**(4)**
            **INVENTORIES
                —**The****Inventories
                at September 30, 2006 are summarized as follows
                (thousands):





Vehicles
                - conventional
            
            $
            183Advanced
                Transportation vehicles
            
            
            1,154Parts
                and supplies
            
            
            271Finished
                Goods
            
            
            9742,582Less-inventory
                reserve
            
            
            (196
            )$
            2,386




**(5)**
            **LICENSE
                AGREEMENT**





On
        April
        19, 2004, ZAP entered into an Exclusive Purchase, License and Supply Agreement
        (the “License Agreement”) with SmartAutomobile LLC ("Smart Auto"), a California
        limited liability company, to distribute and manufacture Smart Cars. Smart
        Car
        is the brand name for a 3-cylinder gas turbo engine car manufactured by Daimler
        Chrysler AG, which can achieve estimated fuel economy of 40 miles per gallon.
        Smart Auto is not affiliated with Daimler Chrysler, but is a direct
        importer.


–
9
          –


Under
        the
        License Agreement ZAP was Smart
        Auto’s exclusive
        distributor and licensee of the right to manufacture and distribute Smart
        Cars
        in the United States and the nonexclusive distributor and licensee outside
        of
        the United States for a period of ten years. Subject to the terms of the
        License
        Agreement, ZAP was to pay Smart Auto a license and distribution fee of $10
        million: a $1 million payment in cash was made upon execution of the agreement,
        $1 million was to be payable in cash ratably commencing with the delivery
        of the
        first 1,000 Smart Cars, and $8 million was paid in ZAP preferred
        stock.
 
 A
        more
        detailed agreement was signed and completed on October 25, 2004. Under this
        agreement, Smart Auto exchanged their original preferred shares for new
        preferred shares with the designation of SA. These SA preferred shares were
        to
        convert to ZAP common shares under the following formula: For every 1,000
        Smart
        Cars delivered to ZAP in the years 2004, 2005 and 2006 which are fully EPA
        compliant to sell in the United States as new cars, the holder was to convert
        500 shares of preferred SA to $500,000 of common stock, and receive 505,000
        warrants with an exercise price of $2.50 per share exercisable through July
        7,
        2009, or until all the preferred shares have been converted. During 2004,
        ZAP
        allowed Smart Auto to convert 500 preferred shares to $500,000 of common
        stock
        prior to delivering any EPA compliant Smart Cars.
 
 The
        Company recorded the cost of the Smart Auto license at $10.6 million, based
        on:
        1) the $10 million the Company paid to Smart Auto as consideration for the
        License Agreement dated April 19, 2004; and 2) the fair value of five-year
        warrants issued under the Agreement for the purchase of 505,000 common shares
        at
        $2.50 per share and expiring in July 1, 2009. The warrants were valued at
        $1.16
        per share using the Black-Scholes option pricing model with the following
        assumptions: expected dividend yield of 0.0%; risk free interest rate of
        3.08%;
        contractual life of 4.5 years; and volatility of 229.43%.
 
 In
        the
        fourth quarter of 2005, the Company filed a lawsuit against Daimler Chrysler
        Corporation ("Daimler Chrysler") and others alleging that Daimler Chrysler
        has
        engaged in a series of anti-competitive tactics aimed at defaming ZAP and
        disrupting its third party relationships including this arrangement. Shortly
        thereafter, the Company commenced its annual impairment assessment. An
        independent valuation of the Smart Auto license as of December 31, 2005
        estimated the fair value to be $3.1 million with a remaining life of two
        years
        which was less than the $10.6 million recorded cost of the license. The carrying
        cost of the license was $8.8 million prior to the impairment calculation
        and
        accordingly, the Company recorded an impairment charge of $5.7 million for
        the
        year ended December 31, 2005. The valuation of the license was based on the
        Company’s discounted projected cash flows from projected sales of Smart Cars
        over the estimated life of the license agreement.
 
 On
        June
        19, 2006, ZAP agreed in principle to amend its License Agreement with Smart
        Auto
        in regard to payments due to Smart Auto from ZAP. As a result, Smart Auto
        returned to ZAP all of the remaining preferred shares, or 7,500 preferred
        shares valued at $7.5 million, in exchange for 300,000 common shares valued
        at
        approximately $400,000 and 1 million warrants with an exercise price of $1.75
        and valued at $950,000 using the Black-Scholes option pricing model. The
        agreement also provided that Smart Auto would receive 700,000 shares of common
        stock at the rate of 50,000 shares per 100 cars delivered to ZAP. In exchange,
        Smart Auto agreed to transfer to ZAP all ownership interest in the intellectual
        property that helped engineer the Smart Car Americanized for ZAP to meet
        U.S.
        Department of Transportation (“DOT) compliance requirements. In addition, ZAP
        received cancellation of future license fees due under the previous agreements
        totaling $906,000 at June 30, 2006. ZAP also agreed in principle
        to purchase of all the remaining assets and rights of Smart Auto by issuing
        common stock and warrants. This purchase was to include all equipment,
        technologies, licenses and distribution rights (concerning conversions and
        otherwise) of Smart Auto and technical updates to service computers purchased
        earlier by ZAP. The purchase price was to be subject to negotiation and
        arbitration. At June 30, 2006, the Company recorded an estimated liability
        of
        $7.1 million in connection with the ultimate settlement of its agreements
        with
        Smart Auto. See further discussion below in Note 6- Shareholders’
Equity-Preferred Stock.
 
 In
        August
        and September 2006, the Company further amended its agreements with Smart
        Auto,
        due to the unavailability of Smart Cars, and Daimler-Chrysler’s announcement
        that they will be selling Smart Cars in the United States in the near future.
        These amendments released ZAP from any remaining obligations to Smart Auto
        under
        its previous agreements and also released ZAP from any obligation to purchase
        the remaining assets and rights of Smart Auto. As a result, ZAP recorded
        a gain
        of $7 million on the settlement of its remaining obligations under its
        agreements with Smart Auto. ZAP also recognized a $2.3 million impairment
        loss
        on the license with Smart Auto, which is recorded as an operating expense
        in the
        condensed consolidated statements of operations.




**(6)             
      SHAREHOLDERS’ EQUITY-** On July
      1, 2002, ZAP’s stock began trading on the National Association of Securities
      Dealers, Inc. Electronic Bulletin Board (the “OTC Bulletin Board”) under the
      stock symbol of “ZAPZ.” On June 20, 2005, ZAP received approval to list its
      common stock on the Archipelago Exchange (ArcaEx). This exchange was a facility
      of the Pacific Exchange (PCXE) and is the nation’s first totally open,
      all-electronic stock exchange. The Company changed its stock ticker symbol
      used
      on the ArcaEx from “ZAPZ” to “ZP” on July 7, 2005. On March 7, 2006, the ArcaEx
      merged with the New York Stock Exchange (the “NYSE”) creating the NYSE Arca
      electronic trading platform.





On
      October 31, 2006, ZAP received written notice that its common stock would be
      suspended from trading on the NYSE Arca effective at the market opening on
      November 8, 2006. This action was due to ZAP’s inability to satisfy the
      continued listing standards. On November 8, 2006, ZAP’s common stock was
      approved for quotation on the OTC Bulletin Board under the symbol
“ZAAP.”




Preferred
      Stock


On
      June
      19, 2006, Smart Automobile LLC returned to the Company all the remaining shares
      of preferred stock with a carrying value of $7.5 million in exchange for 300,000
      shares of common stock valued at approximately $400,000, one million warrants
      with a strike price of $1.75 valued at approximately $950,000.  See Note 5,
      License and Distribution Fee, for further discussion on this
      transaction.




–
10
          –


The
      Company’s shareholder equity activity for the nine months ended September 30,
      2006 is summarized as follows:


**Common****Shares**
              
              **Amount****Balance
                  at December 31, 2005**
              
              
              **32,584,866**
              
              **$**
              **78,451,000****Issuances
                  of Common Stock for:**Exercise
                  of options and warrants for cash
              
              
              596,000
              
              
              515,276Cash
              
              
              500,000
              
              
              500,000Consulting
              
              
              171,635
              
              
              94,900Employee
                  Compensation
              
              
              42,274
              
              
              24,096**1,309,909**
              
              
              **1,134,272****Stock
                  Option and Warrant Transactions**Reclassification
                  of warrant liability
              
              
              —
              
              
              567,525Fair
                  value of stock-based compensation for consulting and other
                  services
              
              
              —
              
              
              1,113,938Fair
                  value of stock-based employee compensation
              
              
              —
              
              
              493,265—
              
              
              **2,174,728****Reduction
                  in common stock issued as loan collateral**
              
              
              (500,000
              )
              
              (600,000
              )**Reclassification
                  of deferred compensation**
              
              
              —
              
              
              (765,000
              )**Balance
                  at March 31, 2006**
              
              
              **33,394,775**
              
              
              **80,395,000**




**Issuances
                of Common Stock for:**Exercise
                of options and warrants for cash
            
            
            1,444,842
            
            
            1,390,490Consulting
            
            
            178,660
            
            
            252,921Employee
                Compensation
            
            
            3,703
            
            
            5,000Liability
                to Smart Auto
            
            
            300,000
            
            
            405,000**1,927,205**
            
            
            **2,053,411****Stock
                Option and Warrant Transactions**Fair
                value of stock-based compensation for consulting and other
                services
            
            
            —
            
            
            451,210Fair
                value of stock-based employee compensation
            
            
            —
            
            
            423,010Fair
                value of warrants issued related to the liability to Smart
                Auto
            
            
            —
            
            
            949,369—
            
            
            1,832,589**Balance
                at June 30, 2006**
            
            
            **35,321,980**
            
            
            **84,272,000**




**Issuances
                  of Common Stock for:**Exercise
                  of options and warrants for cash
              
              
              113,027
              
              
              126,000Consulting
              
              
              845,684
              
              
              591,000Employee
                  Compensation
              
              
              25,995
              
              
              24,000Asset
                  Purchase
              
              
              4,441
              
              
              3,000**989,147**
              
              
              **744,000****Stock
                  Option and Warrant Transactions**Fair
                  value of stock-based compensation for consulting and other
                  services
              
              
              —
              
              
              414,000Fair
                  value of stock-based employee compensation
              
              
              —
              
              
              1,992,0002,406,000**Reduction
                  in common stock issued as collateral**
              
              
              (150,000
              )
              
              (180,000
              )**Balance
                  at September 30, 2006**
              
              
              **36,161,127**
              
              **$**
              **87,242,000**




–
11
          –


The
      Company issued common stock as consideration under agreements for consulting
      and
      employee services during the three months ended September 30, 2006. The Company
      recorded the cost based on the market value of the stock at the date of grant.
      The cost of consulting services resulting from issuing stock and warrants and
      stock options is being recognized as expense over the term of their
      respective agreements.  Unrecognized compensation on consulting contracts
      at September 30, 2006 is $895,000 and will be recognized as expense through
      2007.




In
        December 2004, the Company issued 2.9 million common shares as collateral
        for a
        $1 million loan. The $3.529 million market value of these shares at the date
        of
        issuance was recorded in common stock with an offsetting contra equity account.
        These shares were previously issued to Mercatus Partners LLP in January 2003
        as
        collateral for a loan. This agreement was amended to allow the conversion
        of the
        loan to a purchase of stock. The shares were reported as lost to the Company
        in
        December 2003. In December 2004, the shares were reissued to Mercatus Partners
        who then assigned the shares and their interests to Phi-Nest Fund, L.P. as
        collateral for the loan. This Loan Agreement was amended to allow conversion
        of
        the loan to a purchase of 500,000 shares for $1.16 per share. On March 30,
        2006,
        the Company received $500,000 in net proceeds.. The collateral was reduced
        to
        2,441,176 shares. In September of 2006 the Company signed a Settlement Agreement
        with Phi-Nest Fund, L.P. requiring that the common stock being held as
        collateral be transferred to an independent third party and extended the
        agreement to January of 2007. Additionally, the collateral agreement
        was amended to allow conversion of the loan for the following transactions:
        to
        allow Phi-Nest Fund, L. P., to receive for consulting services $80,000 and
        150,000 shares of the collateral stock and to allow that a note receivable
        for
        $56,000 owed to ZAP by the cousin of Steven Schneider, ZAP’s CEO, was forgiven
        for his assistance in negotiating the Phi-Nest Settlement. The balance of
        the
        stock held for collateral as of September 30, 2006 is 2,291,176 common
        shares.
 
 In
        September, the Collateral Loan Agreement was amended to allow the conversion
        of
        the loan to a purchase of 500,000 of the collateral stock with proceeds of
        $487,500 received by the Company in October of 2006.




The
      Company also issued options and warrants to consultants for professional
      services.  During the nine months ended September 30, 2006, the Company
      issued warrants to consultants to purchase 3,515,000 shares of common stock
      at prices ranging from $0.32 per share to $2.13 per share, with a contractual
      life ranging from 1 to 2 years. The options and warrants were nonforfeitable
      and
      fully vested at the date of issuance and were valued using the Black-Scholes
      option pricing model with the following range of assumptions:




**Low**
            **High**Exercise
                price per share
            $0.32
            $2.13Market
                price
            $0.32
            $2.13Assumptions:Expected
                dividend yield
            0.0%
            0.0%Risk
                free rate of return
            4.63%
            5.21%Expected
                life
            1.0
                years
            10 yearsVolatility
            140.87%
            154.43%Fair
                market value
            $0.06
            $1.97





Under
      a
      purchase agreement dated February 16, 2005, the Company issued 600,000 shares
      of
      its common stock and 3 warrants for the purchase of 900,000 shares of its common
      stock to Lazarus Investment Partners LLP on February 17, 2005, for an aggregate
      purchase price of $1,260,000. Each of the 3 warrants is exercisable for 5 years,
      and will be exercisable for 300,000 shares of common stock at the initial
      exercise prices of $2.50, $3.25, and $4.00 per share. The Company also issued
      30,000 shares and warrants to purchase 90,000 shares of stock to placement
      agents. The stock purchase agreement contains antidilution provisions under
      which the Company is obligated to issue additional common shares for no
      additional consideration if within 6 months the Company completes certain
      subsequent financing at less than $2.10 per share. No financings were completed
      during the six month period following the agreement.





On
      July
      22, 2004, the Company entered into a stock purchase agreement with Fusion
      Capital Fund II, LLC (Fusion Capital). The stock purchase agreement provided
      for
      the issuance of $24.5 million in common stock over a 40-month period. The
      agreement provided for the immediate issuance of 300,000 common shares as
      commitment and signing shares at no cost and the immediate issuance of 5-year
      warrants for the purchase of 2.5 million shares of common stock at prices
      ranging from $2.50 to $5.50 per share. The stock purchase agreement required
      the
      Company to file a registration statement by August 20, 2004 for the resale
      of
      shares issued or issuable under the stock purchase agreement and have the
      registration statement declared effective within 120 days. The stock purchase
      agreement provided for cash liquidated damages if the Company failed to meet
      the
      registration deadline. The Company did not file the required registration
      statement. Pursuant to EITF 00-19, the warrants issuable under the stock
      purchase agreement were valued using the Black Scholes option pricing model
      and
      recorded as a liability. The warrant liability was revalued at December 31,
      2004
      with the marked to market adjustment recorded in other expense. On February
      22,
      2005, the Company terminated its stock purchase agreement with Fusion Capital.
      The Company revalued the warrant liability on February 22, 2005 and recorded
      the
      marked to market adjustment of $1.5 million in other income. The remaining
      warrant liability of $6.7 million was transferred to equity since the Company
      was no longer required to file a registration statement for the warrant
      shares. **** Under
      the termination agreement, the Company repurchased 200,000 common shares from
      Fusion Capital for the original issuance price of $500,000. Fusion Capital
      retained certain commitment and signing common shares that were previously
      issued, and warrants to purchase up to 2.5 million shares of common
      stock.




–
12
          –


**(7)             
      LITIGATION -** In the
      normal course of business, we may become involved in various legal proceedings.
      Except as stated below, we know of no pending or threatened legal proceeding
      to
      which we are or will be a party which, if successful, might result in a material
      adverse change in our business, properties or financial condition. However,
      as
      with most businesses, we are occasionally parties to lawsuits incidental to
      our
      business, none of which are anticipated to have a material adverse impact on
      our
      financial position, results of operations, liquidity or cash flows.





*ZAP
      v. Daimler Chrysler AG, et al.,* Superior
      Court of California, County of Los Angeles, Case No. BC342211. On October 28,
      2005, ZAP filed a complaint against Daimler Chrysler Corporation and others
      in
      the Los Angeles Superior Court. The complaint includes claims for intentional
      and negligent interference with prospective economic relations, trade libel,
      defamation, breach of contract - agreement to negotiate in good faith, breach
      of
      implied covenant of good faith and fair dealing, and unfair competition. The
      complaint alleges that Daimler Chrysler has engaged in a series of
      anti-competitive tactics aimed at defaming ZAP and disrupting its third-party
      business relationships. As a result of the allegations, the complaint requests
      damages in excess of $500 million and such other relief as the court deems
      just
      and proper. Daimler Chrysler has successfully filed a motion to quash that
      compliant for lack of personal jurisdiction, and the court’s ruling on that
      matter is in the process of being appealed.  Two of the other defendants in
      the action, G&K Automotive Conversion, Inc. and The Defiance LLC, have filed
      a cross-complaint against ZAP in the Los Angeles Superior Court for, among
      other
      things, violations of Section 43(a) of the Lanham Act, statutory and common
      law  unfair competition, and intentional and negligent interference with
      prospective economic advantage.  ZAP has responded to the cross-complaint
      and denied engaging in any wrongful actions.




*Voltage
      Vehicles v. American Electric Power Company, et al.,* Superior
      Court of California, County of Sonoma, Case No. SCV 236 830. On June 1, 2005,
      Voltage Vehicles filed suit against American Electric Power Company, CSW Energy
      Services, Inc., Central and Southwest Corporation, Total EV, Freightquote,
      LLC,
      and Central Freight Lines, Inc. A First Amended Complaint was filed August
      29,
      2005, against the same defendants, asserting causes of action for breach of
      a
      written contract of sale against certain defendants, as well as breach of a
      written contract as a third party beneficiary against all defendants. The
      dispute concerns an alleged contract to purchase certain inventory from the
      defendants consisting of electric bicycles that were never delivered to Voltage
      Vehicles. Voltage Vehicles’ First Amended Complaint seeks compensatory damages
      in the amount of $744,735, prejudgment interest, attorneys’ fees, and costs of
      suit. The parties are currently responding to written discovery and will soon
      begin taking and defending depositions. The court set a trial date of April
      26,
      2007. Voltage Vehicles has recently learned of another party to the transaction
      and will be amending its complaint to add this new defendant. Voltage Vehicles
      is also seeking informal resolution with CSW Energy Services, the party that
      sold the at-issue goods to Voltage Vehicles. CSW has made a settlement offer
      that we have not yet accepted or rejected.





*Marieta
      Cruz Hansell v. Robert Warren Johnson, Jr., ZAP, et. al.,* Superior
      Court of California, Case No. SCV-237645. On October 21, 2005, Marieta Hansell
      filed suit against Robert Johnson (a former employee of ZAP), ZAP and other
      defendants for personal injury, property damage and permanent disability based
      on an alleged automobile collision between the plaintiff and defendant Johnson.
      The Company and Mr. Johnson have both filed answers and case management
      statements containing a general denial of the plaintiff’s entire claim, and the
      Company has agreed to defend Mr. Johnson in this matter. The parties are in
      the
      process of discovery. The plaintiff is claiming permanent disability, and she
      has submitted a Statement of Damages in the amount of $108,727.34, plus
      unspecified amounts of future general damages, future wage loss, diminution
      of
      earning capacity damages, and incidental, consequential and special damages.
      The
      plaintiff has not yet made any demand for settlement. The Company intends to
      vigorously defend both itself and Mr. Johnson against these claims. This matter
      is now being handled by alternative counsel for ZAP.





*First
      Class Auto Sales, Inc. d/b/a First Class Imports v. Voltage Vehicles and
      ZAP* ,
      American Arbitration Association Case No. 74 133 00081 06 NOCA. ** First
      Class Imports is a vehicle dealer that executed a licensing and distributorship
      agreement with Voltage Vehicles, a subsidiary of the Company, in May, 2004.
      On
      January 14, 2006, First Class Imports and its principal, Leon Atkind, filed
      an
      arbitration demand with the American Arbitration Association alleging that
      the
      Company and Voltage Vehicles breached the licensing agreement by not
      delivering new SMART-branded vehicles to First Class Imports and demanded return
      of the $100,000 licensing fee paid to Voltage Vehicles under the agreement,
      plus
      interest. In a separate cause of action, Mr. Atkind alleged the Company breached
      a second contract by failing to timely deliver a stock certificate in exchange
      for a Mercedes vehicle that he sold to the Company. Regarding this second claim,
      Mr. Atkind contends that the late delivery of the certificate caused the shares
      to be restricted for an extra month during which the Company’s stock price
      declined. He seeks as damages the difference in the value of the stock on the
      two subject dates multiplied by 59,999, the number of shares he received.
      Voltage Vehicles filed a counterclaim against both First Class Imports and
      Mr.
      Atkind. The first cause of action in the counterclaim alleges breach of contract
      against First Class Imports for its refusal to accept SMART-branded vehicles
      offered to it pursuant to the parties’ licensing agreement. Voltage Vehicles
      seeks as damages the lost revenue it otherwise would have gained through First
      Class Imports’ purchase of SMART-branded vehicles, as well as damages based on
      the depreciation of a SMART-branded vehicle it loaned to First Class Imports.
      The second cause of action alleges breach of contract against Mr. Atkind based
      on his failure to deliver title to the Mercedes identified above. On this claim,
      Voltage Vehicles seeks as damages the depreciation of the Mercedes during the
      time in which it has been unable to sell the vehicle. An arbitrator has been
      selected, but the arbitration has been continued while the parties discuss
      settlement. However, the court overseeing the arbitration has now scheduled
      a
      case management conference for November 2, 2006, and the arbitration itself
      is
      currently scheduled for November 20 th and
      21st, 2006 in San Francisco.





–
13
          –


*ZAP
      v. Norm Alvis, et al.* ,
      Superior Court of California, County of Sonoma, Case No. SCV-238419, complaint
      filed March 27, 2006. Mr. Alvis was engaged by ZAP as a consultant to
      perform public relations work on behalf of the Company. As consideration for
      Mr.
      Alvis’ consent to the contract, ZAP gave Mr. Alvis a motor home worth at least
      $500,000. ZAP sued Mr. Alvis claiming that he has not performed his obligations
      under the contract and is seeking either the return of the motor home or
      $500,000 in damages. Mr. Alvis did not timely respond to the complaint, and
      the
      court entered a default judgment on May 16, 2006.  At the same time,
      ZAP obtained a writ of possession for the motor home.  On June 18,
      2006, the defendant filed a motion asking the court to set aside the
      default and default judgment and to vacate its order authorizing the issuance
      of
      the writ of possession.  The court agreed to set aside the defaults, but it
      left the writ of possession in place.  In compensation for our efforts to
      take the default and obtain the default judgment, the court ordered the
      defendant to pay ZAP $1,000, and the defendant has paid that amount.  The
      defendant has now filed an answer denying ZAP’s allegations.  Defendant has
      also filed a cross-claim against ZAP, Steve Schneider in his individual
      capacity, and Rotoblock Corporation, alleging two counts of breach of contract,
      one common count of work, labor, and services received, and one count
      of fraud.  All of these claims relate to two contracts that required the
      defendant to provide certain marketing services to ZAP and Rotoblock.  The
      defendant claims he provided these services, but received inadequate or no
      consideration in exchange.  For the fraud claim, defendant claims ZAP,
      Schneider, and Rotoblock executed the contracts with no intent to perform. 
The defendant prays for damages of $2,000,000, interest according to proof,
      punitive damages, and an order directing the cross-defendants to perfect title
      to the motor home in question.  Defendant has also filed a motion to quash
      the writ of possession. The hearing on that motion is set for November 2,
      2006. **** ZAP,
      Rotoblock and Schneider have demurred to the cross-complaint. The hearing on
      that demurrer is scheduled for November 22, 2006.




**(8)**
            **RELATED
                PARTY TRANSACTIONS**





Rental
      agreements





The
      Company rents office space, land and warehouse space from its CEO and major
      shareholder. These properties are used to operate the car outlet and to store
      inventory. Rental expense was approximately $108,500 and $126,000 for the nine
      months ended September 30, 2006 and 2005, respectively.





Consulting
      services and other services





In
      November and December 2003, the Company entered into certain agreements with
      two
      cousins of Steven M. Schneider, the CEO. One cousin received 25,000 B-2
      Restricted warrants and 25 shares of preferred stock, which was later converted
      into 50,000 shares of restricted common stock. The stock and warrants were
      issued for website design services. The other cousin received 200,000 shares
      of
      unrestricted common stock in January 2004. The shares were issued for consulting
      services. In April 2004, the Company issued 2 million B-2 restricted warrants
      and 1 million K-2 restricted warrants to Sunshine 511 Holdings for consulting
      services. The managing partner of Sunshine 511 Holdings is the cousin of the
      CEO
      of ZAP. In the fourth quarter of 2005 the Company expensed approximately $2.2
      million, the carrying value of the prepaid services, since limited services
      had
      been received and there were no assurances that future services would be
      received. Also in 2004, certain leasehold improvements in the amount of $65,000
      made by the Company on rental properties were abandoned in favor of the
      landlord, who is the CEO of ZAP. In September of 2006, the Company canceled
      a
      shareholder note of $56,000 due by the cousin of Steven Schneider in exchange
      for consulting services regarding the negotiation of the Phi-Nest
      settlement.





Inventory
      Purchase





In
      December 2005, the Company purchased inventory from a related entity where
      three
      of ZAP’s officers and Directors are also members of its Board of Directors.
      The transaction resulted in a payable due to the related Company of $204,000
      at
      December 31, 2005 and September 30, 2006. During the second quarter of 2006
      the
      parties agreed that the amount payable will be offset against future outside
      advertising services which will be provided to the related entity by the
      Company.





Sales
      to a related entity




The
      Company also signed in the third quarter of 2006, a Distributor License
      Agreement with a business entity that is wholly owned by the brother of
      Maximilian Scheder- Bieschin, the President of ZAP. The terms of the agreement
      are the same as other distributor licenses signed with ZAP. The total sales
      through September 30, 2006 were $12,500 with a current accounts receivable
      balance due of $3,300.







–
14
          –


**(9)**
            **SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW
                INFORMATION:**





**Nine
                Months Ended****September
                30,****2006**
            
            **2005**Cash
                paid during the period for interest
            
            $
            41
            
            
            20Cash
                paid during the period for income taxes
            
            $
            4
            
            
            4Non-cash
                investing and financing activities:Stock
                and warrants issued for:Partial
                settlement of liability to Smart Auto
            
            $
            1,354
            
            
            —Purchase
                of real property and equipment
            
            $
            3
            
            
            1,200Inventory
                purchases
            
            $
            —
            
            
            54Settlement
                of warrant liability
            
            $
            568
            
            
            6,711Other
                assets
            
            $
            —
            
            
            247


**(10)**
              **SUBSEQUENT
                  EVENT**
  In
        late
        September 2006, the Collateral Loan Agreement was amended to allow the
        conversion of the loan to a purchase of stock. As a result 500,000 shares
        of the
        collateral stock were sold with proceeds of $487,500
        received by the Company in October, 2006.


**Item
      2.** **** **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.**





This
      quarterly report of Form 10-QSB contains forward-looking statements that are
      not
      statements of historical fact and may involve a number of risks and
      uncertainties. These statements relate to analyses and other information that
      are based on forecasts of future results and estimates of amounts not yet
      determinable. These statements may also relate to our future prospects,
      developments and business strategies.




We
      have
      used the words “anticipate,“ “believe,” “could,” “estimate,” “expect,” “intend,”
“may,” “will,” “plan,” “predict,” “project” and similar terms and phrases,
      including references to assumptions, in this quarterly report of Form 10-QSB
      to
      identify forward-looking statements. These forward-looking statements are made
      based on expectations and beliefs concerning future events affecting us and
      are
      subject to uncertainties and factors relating to our operations and business
      environment, all of which are difficult to predict and many of which are beyond
      our control, that could cause our actual results to differ materially from
      those
      matters expressed in or implied by these forward-looking statements. The
      following factors are among those that may cause actual results to differ
      materially from our forward-looking statements:





•   
      general economic and industry conditions;


•   
      our history of losses, deficits and negative operating cash flows;


•   
      our limited operating history;


•   
      industry competition;


•   
      environmental and government regulation;


•   
      protection and defense of our intellectual property rights;


•   
      reliance on, and the ability to attract, key personnel; and


•   
      other factors including those discussed in “Risk Factors” in our annual report
      on Form 10-KSB filed on March 31, 2006.




You
      should keep in mind that any forward-looking statement made by us in this
      quarterly report or elsewhere speaks only as of the date on which we make it.
      New risks and uncertainties arise from time to time, and it is impossible for
      us
      to predict these events or how they may affect us. We have no duty to, and
      do
      not intend to, update or revise the forward-looking statements in this quarterly
      report after the date of filing, except as may be required by law. In light
      of
      these risks and uncertainties, you should keep in mind that any forward-looking
      statement made in this quarterly report or elsewhere might not
      occur.




In
      this
      quarterly report on Form 10-QSB the terms “ZAP,” “Company,” “we,” “us” and “our”
refer to ZAP and its subsidiaries.




–
15
          –


**Overview**





ZAP
      stands for Zero Air Pollution ® .
      With
      its new product offerings, the Company is positioned to become a leading brand
      and distribution portal of advanced technology vehicles. ZAP is committed to
      running its business based on a strong philosophical foundation that supports
      the environment, social responsibility and profitability.





ZAP’s
      strategy is to serve the growing and underrepresented consumer that seeks fuel
      efficient vehicles. With the recent increases in the cost of oil, increasing
      demand on foreign oil and increasing concern about the environment and the
      effects of global warming, we believe there is a large and untapped demand
      in
      the areas of transportation and consumer products. During the energy crisis
      of
      the 1970s, Japanese automobile manufacturers penetrated the United States market
      when domestic automobile manufacturers failed to anticipate changes. ZAP
      believes a similar opportunity is present today, enhanced by heightened
      environmental awareness, climate changes and economic pressures. ZAP has
      assembled a complete line of products to meet the growing demands of the
      environmentally conscious consumer focused on two primary businesses: ZAP
      Automotive and ZAP Power Systems.




**ZAP
      Automotive**





ZAP
      is
      positioned to become a leading distributor of fuel efficient and alternative
      energy vehicles in the United States. ZAP has already established more than
      20
      licensed automotive dealers as customers and intends to grow its distribution
      base significantly over the next several years. Simultaneously, ZAP intends
      to
      secure distribution agreements with two to four other vehicle manufacturers
      whose products fit ZAP’s mission, and distribute those vehicles through its
      dealer network.





ZAP
      began
      building out its automotive business in 2006 by introducing a modified
      version of the European micro-car, the “Smart Car,” in the United States and has
      sold over 330 through the first nine months of 2006. ZAP Automotive is currently
      launching the XEBRA TM ,
      what we
      believe is the first 100% production electric vehicle (“EV”) not designated as a
“low speed vehicle” (“LSV”). In fact, we believe the XEBRA is the only
      production EV available in the United States with a top speed of up to 40
      mph.  Further, the Company’s Chinese manufacturing partner ensures that the
      XEBRA meets all federal, environmental and safety standards.





ZAP
      has
      recently begun its first marketing campaign for the XEBRA vehicles. The XEBRA
      comes in a four-passenger sedan version and a two-passenger utility pickup
      version. According to the Electric Auto Association, there are over 56,000
      EVs
      on the road today. It is estimated that almost all EVs sold to date are LSVs.
      The Company believes the EV market niche will continue to grow rapidly,
      especially with the introduction of affordable vehicles such as the XEBRA that
      will retail for less than $10,000 and deliver features, such as speeds up
      to 40 mph, not currently available among existing EVs. ZAP’s Chinese
      manufacturing partner currently has the manufacturing capacity to produce
      approximately 1,000 vehicles per month.





In
      line
      with ZAP’s goal of growing its automotive offerings, ZAP intends to launch
      an advanced alternative energy vehicle called the OBVIO! in 2008. ZAP entered
      into a license and distribution agreement with Brazilian manufacturer OBVIO!
      in
      September of 2005 that granted us the exclusive North American distribution
      rights for the line of OBVIO! micro-cars. These cars will be designed to run
      on
      ethanol, gasoline, or any combination of the two energy sources and will come
      in
      two models, an economy 828 model and a high performance 012 model. OBVIO!
      anticipates deliveries to ZAP to begin in 2008. According to an article
      published by the Washington Post, there are approximately five million flex-fuel
      vehicles currently on the road in the U.S., with sales expected to increase
      substantially over the next few years. ZAP believes it will capture market
      share
      by offering a vehicle that is stylish, sporty and fun and able to run on 100%
      ethanol.





**ZAP
      Power Systems**





In
      the
      personal transportation market, the ZAP brand is well-known given the over
      90,000 ZAP vehicles sold since the Company’s founding in 1994. With a recently
      renewed focus on leveraging this brand identity, the Company has been upgrading
      its range of vehicles and products that produce zero air pollution and inject
      new energy and style into transportation, recreation and industrial
      applications. ZAP’s new vehicle lineup features high quality 100% electric
      scooters, off-road dirt bikes and all terrain vehicles. The ZAPPY® 3, a
      three-wheel personal transporter, competes in the light electric vehicles
      segment, a category that includes light scooters, bicycles, motor scooters,
      and
      motorcycles. Data provided by Cycle Electric, an international consulting group,
      estimates that over 13 million light electric vehicles were sold in 2005.
      However, the ZAPPY 3 is one of the only products in this segment which spans
      recreation, commercial and industrial applications. Its main competitor, the
      Segway, does not, in the Company’s opinion, have the functionality of the ZAPPY
      3, yet retails for approximately eight times the price. In the off-road segment,
      Powersports Business, an industry publication, estimated that there were
      approximately 800,000 all-terrain vehicles sold in the United States in 2004
      and
      projections indicated that a similar amount were forecast to be sold in 2005.
      ZAP intends to capture a portion of the off-road market share by addressing
      the
      unmet demand for quiet, zero emission electric vehicles among consumers who
      previously could only purchase gasoline-powered versions of such vehicles.





ZAP
      also
      offers a new line of portable energy devices which feature advanced
      lithium-based battery and charge control devices that can power a wide range
      of
      mobile electronics such as cell phones, digital cameras, laptops and iPods.
      Rechargeable battery sources using lithium-ion and lithium polymer technology
      provide significantly more charge time than other currently available
      technologies. With its portable energy devices, ZAP is targeting a market which
      it estimates to include over two billion users of mobile electronic devices
      by
      the year 2007.





In
      summary, ZAP is a one-stop portal for quality, affordable advanced automotive
      technologies, and our goal is to become the largest and most complete
      distribution portal in the United States for advanced technology vehicles.
      We
      are focused on creating a distribution channel for our automobile and consumer
      products by establishing qualified automobile-dealers and developing
      relationships with specialty dealers throughout the United States. We currently
      market and sell our automobile products through qualified automotive dealers
      including our subsidiary, Voltage Vehicles. We currently market and sell our
      consumer products directly to consumers through our Internet Web site,
      independent dealers and representatives, retail outlets as well as through
      our
      qualified automobile dealers. We continue to develop new products independently
      and through development and acquisition agreements with companies and
      manufacturers, and by the purchase of products manufactured to our
      specifications. We have grown from a single product line to a full product
      line
      of electric vehicle and advanced transportation products.





ZAP
      was
      incorporated under the laws of the State of California, on September 23, 1994,
      as “ZAP Power Systems.” The name of the Company was changed to “ZAPWORLD.COM” on
      May 16, 1999 in order to increase our visibility in the world of electronic
      commerce. We subsequently changed our name to ZAP on June 18, 2001 in order
      to
      reflect our growth and entry into larger, more traditional markets. Our
      principal executive offices are located at 501 Fourth Street Santa Rosa,
      California, 95401. Our telephone number is (707) 525-8658. Our website is www.zapworld.com please
      refer to it for further information on ZAP.





**Subsidiaries**





We
      have
      the following wholly owned subsidiaries: Voltage Vehicles, a Nevada company
      (“Voltage Vehicles”), RAP Group, Inc., a California company (“RAP Group”), ZAP
      Rental Outlet, a California company (“ZAP Rentals”), ZAPWorld Stores, Inc., a
      California company (“ZAP Stores”), and ZAP Manufacturing, Inc., a Nevada company
      (“ZAP Manufacturing”). Voltage Vehicles is engaged primarily in the distribution
      and sale of advanced technology and conventional automobiles. RAP Group is
      engaged primarily in the sale and liquidation of conventional automobiles.
      ZAP
      Stores is engaged primarily in consumer sales of ZAP products. ZAP Manufacturing
      is not currently an operating subsidiary.





–
16
          –


**Recent
      Developments**





Some
      of
      the significant events for the Company that occurred during the third quarter
      of
      2006 and through the date of this report are as follows:




1.
              Growing
                  interest in electric micro cars and an expanding dealer network
                  have
                  fueled revenues at ZAP pushing unaudited sales to approximately
                  $10
                  million for the first nine months of 2006. This surpasses a record
                  set
                  back in fiscal year 2000 when the Company posted sales of $8.1
                  million for the same period. Fiscal 2000 was the year ZAP reported
                  record
                  annual sales of $12.4
                  million.




2.
              ZAP
                  is negotiating an agreement to form a joint venture with a Chinese
                  auto
                  manufacturer Shandong Jindalu Vehicle Company Ltd. The joint venture
                  will
                  involve designing and manufacturing a new generation of low cost
                  advanced transportation vehicles that run efficiently on gas, electricity,
                  ethanol and other advanced technologies and fuels. ZAP has established
                  an
                  office in Dezhou, China, to facilitate the joint venture
                  negotiations.  Zap will receive a 25 percent ownership interest in
                  the joint venture in exchange for investing $350,000 in cash or
                  stock in
                  Zap.**“Our
                  work with ZAP’s various micro-cars like the cost effective electric XEBRA
                  has shown that new approaches to transportation are possible,” said Gary
                  Starr, Chairman of ZAP. “Visionary dealers are taking the pioneering steps
                  to offer our new lines of vehicles. Scientists, climate and pollution
                  data
                  and the current state of affairs as well as the price of oil are
                  telling
                  us that we must change our ways. What is needed is real leadership.
                  We are
                  proud to be part of a true collaboration between the USA and China
                  in the
                  manufacturing, design and distribution of our first generation
                  of ZAP
                  cars.”




3.
              At
                  a special meeting of shareholders, which was held on October 31,
                  2006, the
                  approval was obtained for the issuance and sale of up to 20,000,000
                  shares
                  of common stock and up to 6,000,000 securities exercisable or convertible
                  into shares of common stock at below-market prices to private investors.
                  It is estimated that the issuance and sale of these securities
                  may
                  potentially raise between $5 and $15 million in the financing transaction.
                  The estimated proceeds will be used for working capital and to
                  achieve the
                  objectives of ZAP’s business
                  plan.




4.
              ZAP
                  introduced the new XEBRA, a “City Car,” a unique design ideal for urban,
                  daily driving. The Company also displayed a new pickup design,
                  the XEBRA
                  PK, which can be used as a standard truck, a flat bed, delivery
                  or dump
                  truck. ZAP is setting sales records this year with its micro-car
                  strategy
                  for auto dealers and the introduction of the all-electric XEBRA.
                  Studies
                  show that electric cars are less expensive to fuel, costing 2 to
                  3 cents
                  per mile versus 15 cents/mile and more for gas. They also reduce
                  greenhouse gas emissions by more than 90 percent over internal
                  combustion,
                  including power plant emissions. “The popularity of ZAP’s XEBRA is a
                  strong reason behind our extraordinary growth,” says ZAP CEO Steve
                  Schneider. “It is the only affordable electric car available but it is the
                  XEBRA PK electric truck design that is sparking interest. There
                  is no
                  place else in America that you can get an electric truck and we have
                  it.”




5.
              During
                  the third quarter of 2006, the Company renegotiated its agreement
                  with
                  Smart Automobile LLC for the Smart Car that was originally signed
                  in April
                  of 2004. This negotiation supersedes all previous license and other
                  distribution or asset agreements between ZAP and Smart
                  Automobile.In
                  the third quarter ended September, 2006 ZAP was released from any
                  liability by Smart Auto (due to the unavailability of Smart Cars)
                  and
                  recognized other income of $7 million together with the write-off
                  of the
                  license with Smart Auto of $2.3 million. The Company no longer
                  intends to
                  distribute Smart Cars Americanized by ZAP due to the unavailability
                  of
                  Smart Cars. The Company recorded a net profit of $305,000 for the
                  quarter
                  ended September 30,
                  2006.




**CRITICAL
      ACCOUNTING POLICIES**





*Share-Based
      Payments.* We
      grant
      options and warrants to purchase our common stock to our employees and
      directors under our stock option plans. The benefits provided under these plans
      are share-based payments subject to the provisions of revised Statement of
      Financial Accounting Standards No. 123 (“SFAS 123(R)”), *Share-Based
      Payment* .
      Effective January 1, 2006, we use the fair value method to apply the provisions
      of SFAS 123(R) with a modified prospective application which provides for
      certain changes to the method for valuing share-based compensation. The
      valuation provisions of




–
17
          –


SFAS
      123(R) applies to new awards and to awards that are outstanding on the effective
      date and subsequently modified or cancelled. Under the modified prospective
      application, prior periods are not revised for comparative purposes. Share-based
      compensation expense recognized under SFAS 123(R) for the three and nine months
      ended September 30, 2006 was $2,016,000 and $2,962,000, respectively. At
      September 30, 2006, total unrecognized estimated compensation expense related
      to
      non-vested stock options granted prior to that date was $1.9 million, which
      is
      expected to be recognized through September, 2009.





Upon
      adoption of SFAS 123(R), we continued estimating the value of stock option
      awards on the date of grant using Black-Scholes option pricing model
      (Black-Scholes Model). The determination of the fair value of share-based
      payment awards on the date of grant using an option pricing model is affected
      by
      our stock price as well as assumptions regarding a number of complex and
      subjective variables. These variables include, but are not limited to, our
      expected stock price volatility over the term of the awards, actual and
      projected employee stock option exercise behaviors, risk-free interest rate
      and
      expected dividends.





If
      factors change and we employ different assumptions in the application of SFAS
      123(R) in future periods, the compensation expense that we record under SFAS
      123(R) may differ significantly from what we have recorded in the current
      period. Therefore, we believe it is important for investors to be aware of
      the
      high degree of subjectivity involved when using option pricing models to
      estimate share-based compensation under SFAS 123(R). Option-pricing models
      were
      developed for use in estimating the value of traded options that have no vesting
      or hedging restrictions, are fully transferable and do not cause dilution.
      Because our share-based payments have characteristics significantly different
      from those of freely traded options, and because changes in the subjective
      input
      assumptions can materially affect our estimates of fair values, in our opinion,
      existing valuation models, including the Black-Scholes and lattice binomial
      models, may not provide reliable measures of the fair values of our share-based
      compensation. Consequently, there is a risk that our estimates of the fair
      values of our share-based compensation awards on the grant dates may bear little
      resemblance to the actual values realized upon the exercise, expiration, early
      termination or forfeiture of those share-based payments in the future. Certain
      share-based payments, such as employee stock options, may expire worthless
      or
      otherwise result in zero intrinsic value as compared to the fair values
      originally estimated on the grant date and reported in our financial statements.
      Alternatively, value may be realized from these instruments that are
      significantly in excess of the fair values originally estimated on the grant
      date and reported in our financial statements. There is currently no
      market-based mechanism or other practical application to verify the reliability
      and accuracy of the estimates stemming from these valuation models, nor is
      there
      a means to compare and adjust the estimates to actual values. Although the
      fair
      value of employee share-based awards is determined in accordance with SFAS
      123(R) and the Securities and Exchange Commission’s Staff Accounting Bulletin
      No. 107 (SAB 107) using an option-pricing model, that value may not be
      indicative of the fair value observed in a willing buyer/willing seller market
      transaction.





Estimates
      of share-based compensation expenses are significant to our financial
      statements, but these expenses are based on option valuation models and will
      never result in the payment of cash by us. For this reason, and because we
      do
      not view share-based compensation as related to our operational performance,
      we
      exclude estimated share-based compensation expense when evaluating the business
      performance of our operations.





The
      guidance in SFAS 123(R) and SAB 107 is relatively new, and best practices are
      not well established. The application of these principles may be subject to
      further interpretation and refinement over time. There are significant
      differences among valuation models, and there is a possibility that we will
      adopt different valuation models in the future. This may result in a lack of
      consistency in future periods and materially affect the fair value estimate
      of
      share-based payments. It may also result in a lack of comparability with other
      companies that use different models, methods and assumptions.





Theoretical
      valuation models and market-based methods are evolving and may result in lower
      or higher fair value estimates for share-based compensation. The timing,
      readiness, adoption, general acceptance, reliability and testing of these
      methods is uncertain. Sophisticated mathematical models may require voluminous
      historical information, modeling expertise, financial analyses, correlation
      analyses, integrated software and databases, consulting fees, customization
      and
      testing for adequacy of internal controls. Market-based methods are emerging
      that, if employed by us, may dilute our earnings per share and involve
      significant transaction fees and ongoing administrative expenses. The
      uncertainties and costs of these extensive valuation efforts may outweigh the
      benefits to investors.




–
18
          –


**Results
      of Operations**


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





**Three
                months ended**
              **September
                30,**
            
            
            **Nine
                months ended**
              **September
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005****Statements
                of Operations Data:**Net
                sales
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %Cost
                of sales
            
            
            95.6
            
            
            
            86.9
            
            
            
            91.7
            
            
            
            90.6Operating
                expenses
            
            
            260.0
            
            
            
            852.6
            
            
            
            135.0
            
            
            
            418.0Loss
                from operations
            
            
            (255.6
            )
            
            
            (839.5
            )
            
            
            (126.6
            )
            
            
            (408.6
            )Net
                income (loss)
            
            
            11.59
            
            
            
            (850.8
            )
            
            
            (56.2
            )
            
            
            (354.8
            )






**Quarter
      Ended September 30, 2006 Compared to Quarter Ended September 30,
      2005**





**Net
      sales** for the
      quarter ended September 30, 2006 were $2.6 million compared to $799,000 in
      2005.
      RAP’s net sales for the period accounted were $365,000 versus $ 481,000 in 2005.
      The net sales for ZAP (including Voltage Vehicles) were $2.3 million versus
      $316,000 in 2005. The sales for RAP for gas automobiles were less than last
      year
      while ZAP experienced an increase of $2 million primarily due to the sales
      of
      the Smart Cars Americanized by ZAP, XebraTM vehicles and various models of other
      electric vehicles.





**Gross
      profit** was
      $115,000 for the third quarter ended September 30, 2006 compared to $105,000
      for
      the quarter ended September 30, 2005. The RAP Group accounted for $92,000 of
      the
      gross profit for the quarter ended September 30, 2006 versus $69,000 in 2005.
      ZAP’s gross profit, excluding the RAP Group, decreased from $37,000 in 2005
      to $23,000 in 2006. The increase in gross profit was due to higher sales of
      the
      Smart Cars Americanized by ZAP and XebraTM vehicles.





**Sales**  **and
      marketing expenses** in the
      third quarter of 2006 were $370,000 as compared to $344,000 in 2005. RAP’s
      expenses were $24,000 in 2006 and $37,000 in 2005 and ZAP’s expenses were
      $346,000 versus $307,000 in 2005. As a percentage of sales, total selling
      expenses decreased from 43% of sales to 14% due to a higher sales base this
      quarter (see net sales above).  The higher expenses for ZAP were primarily
      due to higher attendance at trade shows and marketing expenses to promote the
      Company’s products.





**General
      and administrative**  **expenses** for 2006
      were $4.1 million for the quarter ended September 30, 2006 as compared to $6.5
      million in 2005. RAP’s portion of the expenses was $110,000 in 2006 versus
      $58,000 in 2005. RAP’s increase of $52,000 was primarily due to higher bad debt
      expenses in the 2006 third quarter. For ZAP, the expenses decreased from $6.4
      million to $4.0 million. As a percentage of sales, general and administration
      expenses decreased from 814% of sales to 157% of sales. ZAP’s net decrease of
      $2.4 million in general and administration expenses was due to less legal
      and consulting expenses offset by increases in stock-based compensation
      expense due to the adoption of SFAS 123R .





**Impairment
      of Smart Auto license and equipment** resulted
      from the limited future supply of Smart Cars and Daimler Chrysler’s recent
      announcements to sell the Smart Car in the U.S. in the near future. The expense
      of $2.3 million represents the write-off of the net book value of the Smart
      Automobile license and related equipment for Smart Cars at September 30,
      2006.





**Gain
      on settlement of Smart Auto liability** resulted from the
      Company recognizing a
      gain of
      $7.1 million resulting from the settlement of the liability from Smart Auto
      during the quarter. The agreement with Smart Auto was previously amended in
      the
      second quarter of 2006 resulting in a liability of $7.1 million at June 30,
      2006. The settlement was largely due to Smart Auto’s inability to supply
      Smart Cars for ZAP to convert to Smart Cars Americanized by ZAP and Daimler
      Chrysler’s
      recent announcement to sell Smart Cars in the U.S. in the near
      future.





**Interest expense,
      net** decreased from
      $24,000 in third quarter 2005 to $17,000 expense in third quarter
      2006. The resulting decrease was due to more interest income in the quarter
      to
      offset interest expense. The Company’s cash investment balances were higher in
      third quarter of 2006.





**Other
      expense, net** increased
      from other expense of $66,000 for the third quarter of 2005 to other income
      of $18,000 in the third quarter of 2006. The other income increase resulted
      from
      the change in the value of the put option liabilities.





**Net
      Income (Loss)** for the
      Company was a net profit of $305,0000 for the quarter ended September 30, 2006
      as compared to a net loss of $6.8 million for period ended September 30, 2005.
      The increase was primarily due to the gain on the settlement of the Smart Auto
      liability of $7.1 million during the quarter.




–
19
          –


**Nine
      Months Ended September 30, 2006 Compared to Nine Months Ended September 30,
      2005**





**Net
      sales** for the
      nine months ended September 30, 2006, were $9.9 million compared to $2.9 million
      for the nine months ended September 30, 2005. RAP accounted for $1.3 million
      of
      overall net sales for the nine months ended September 30, 2006 versus $2.1
      million for the nine months ended September 30, 2005. The net sales for ZAP,
      excluding the RAP Group, were $8.5 million and $743,000 for the nine months
      ended September 30, 2006 and 2005, respectively. RAP experienced a decline
      in the sales of traditional automobiles due to less demand for pre-owned
      automobiles and higher interest rates. ZAP, including Voltage Vehicles, has
      experienced significant growth due to sales of the Smart Car Americanized by
      ZAP, Xebra vehicles and other various models of electric vehicle sales. The
      Company has shipped approximately 330 Smart Cars Americanized by ZAP, and 80
      Xebra vehicles through September 30, 2006.





**Gross
      profit** was
      $827,000 for the nine months ended September 30, 2006 compared to $270,000
      for
      the nine months ended September 30, 2005. The RAP Group accounted for $388,000
      of the gross profit for the nine months ended September 30, 2006 versus $227,000
      for the nine months ended September 30, 2005. ZAP’s gross profit, excluding the
      RAP Group, increased from $416,000 in 2005 to $439,000 in 2006. The
      increase in RAP’s profits reflect better margins on car sales. ZAP’s
      increase in gross profits was due to higher sales of Smart Cars Americanized
      by
      ZAP and Xebra vehicles.





**Sales
      and marketing expenses** in the
      first nine months of 2006 were 974,000 as compared to $836,000 in 2005. RAP’s
      expenses were $88,000 in 2006 which is comparable to $102,000 for the nine
      months ended September 30, 2005. As a percentage of sales of the Company,
      sales and marketing expenses decreased from 28.9% to 9.8% for the nine months
      ended September 30, 2006. ZAP’s portion of selling expenses was $886,000 in 2006
      compared to $734,000 in 2005. This was an increase of $152,000 or 21% from
      2005
      to 2006. The higher expenses were primarily for higher sales salaries, more
      personnel, higher commissions due to higher sales volume, trade shows due to
      more attendance and marketing promotion of new XebraTM vehicles and new consumer
      products.





**General
      and administrative**  **expenses** for
      the
      nine months ended September 30, 2006 were $10.1 million as compared to $11.1
      million in the nine months ended September 30, 2005. As a percentage of sales,
      general and administrative expenses decreased from 386% to 101%. RAP’s portion
      of the expenses was $295,000 in 2006 versus $622,000 in 2005. General and
      administrative expenses for ZAP, excluding the RAP Group, decreased from $10.5
      million to $9.8 million, this is a decrease of $700,000 or 7% from 2005.
      The decrease in general and administrative expense is primarily due to less
      legal and consulting expenses, with no large credit offset to expenses for
      variable warrant accounting as in 2005.





**Research
      and development expenses** decreased
      from $88,000 for the nine months ended September 30, 2005 to zero for the same
      period in 2006. The primary focus of the Company in 2006 was the production
      of
      existing models of various electric vehicles and consumer products.





**Impairment
      of Smart Auto license and equipment.** See
      discussion for the quarter above.




**Gain
      on settlement of Smart Auto liability.** See
      discussion for the quarter above.




**Gain
      on revaluation of warrant and put option liabilities** decreased
      from $1.4 million in 2005 to $304,000 in 2006. For last year’s period ended
      September 30, 2005 a one-time transaction accounted for $1.4 million
      representing the difference between the fair market value of the warrant
      liability at December 31, 2004 and the fair market value on February 22, 2005,
      the date when the warrant liability was settled and transferred to equity. 
The balance for the nine months ended September 30, 2006 resulted from favorable
      changes in the value of warrant and put option liabilities.





**Interest
      expense, net** of
      $26,000 for the nine months ended September 30, 2006 was comparable to $22,000
      in the same period of 2005.




**Other
      income, net** decreased from
      $141,000 of income in the first nine months of 2005 to $22,000 in 2006. The
      primary reason was due to lower charges to expense for equity based
      liabilities.





**Net
      Loss** was
      $5.2
      million for the nine months ended September 30, 2006 as compared to a net loss
      of $10.2 million for period ended September 30, 2005. The decrease was
      primarily due to the gain on the settlement of the Smart Auto liability of
      $7.1 million during the period. However, the gain was offset by the write-off
      of
      the Smart License and related equipment and the expensing of stock options
      and warrants in accordance with FAS 123R.




–
20
          –


**Liquidity
      and Capital Resources**


In
      the
      first nine months of 2006 net cash used for operating activities was $ 3.3
      million. In the first nine months of 2005, the Company used cash for operations
      of $2.9 million. Cash used in the first nine months of 2006 was comprised of
      the
      net loss incurred for the first nine months of $5.2 plus net non-cash expenses
      of $2.1 million plus the net change in operating assets and liabilities of
      $(264,000). Cash used in operations in the first nine months of 2005 was
      comprised of the net loss of $10.2 million plus net non-cash expenses of $5.4
      million, and the net change in operating assets and liabilities resulting in
      a
      use of cash of $1.9 million.





Investing
      activities used cash of $351,000 in the first nine months ended September 30,
      2006 and used $446,000 during the first nine months ended September 30, 2005.




Financing
      activities provided cash of $2.4 million and $0.6 million during the first
      nine
      months ended September 30, 2006 and 2005, respectively.





In
      September 2005, the Company signed a $425 million revolving financing facility
      with Surge Capital II, LLC that, subject to certain conditions can be used
      by
      ZAP to import Smart Cars Americanized by ZAP and other advanced transportation
      vehicles for ZAP dealers. The financing agreement has a term of one year, but
      may be extended upon agreement by both parties. The financing is based on orders
      ZAP receives from dealers who must be approved in advance by Surge Capital
      II,
      LLC and is secured by a first lien on substantially all of ZAP’s assets. In
      September of 2006 the financing facility expired with neither party wishing
      to
      continue the agreement. No amounts were outstanding and due under the
      agreement.





At
      September 30, 2006 the Company had cash of $306,000 compared to $2.7 million
      at
      September 30, 2005. At September 30, 2006, the Company had working capital
      of $638,000, as compared to working capital of $4.1 million at September 30,
      2005. The decrease was due to the following: cash used in operations, the
      liability to Smart Auto, and the expensing of prepaid non-cash professional
      fees. The Company, at present, does not have a credit facility for working
      capital in place with a bank or other financial institution.





We
      do not
      have a bank operating line of credit, and there can be no assurance that any
      required or desired financing will be available through bank borrowings, debt,
      or equity offerings, or otherwise, on acceptable terms. If future financing
      requirements are satisfied through the issuance of equity securities, investors
      may experience significant dilution in the net book value per share of common
      stock and there is no guarantee that a market will exist for the sale of the
      Company’s shares.





At
      a
      special meeting of shareholders, scheduled for October 17, 2006 and subsequently
      adjourned to October 31, 2006, shareholders approved the issuance and sale
      of up
      to 20,000,000 shares of common stock and up to 6,000,000 securities exercisable
      or convertible into shares of common stock at below-market prices in future
      private financing transactions. At present, the Company needs additional capital
      to continue expanding its current operations.





The
      Company’s primary capital needs are: (i) to purchase XebraTM vehicles, both sedan
      and utility trucks from ZAP’s Chinese partner to fulfill the increasing demand
      for 100% electric vehicles in the United States, and (ii) to continue building
      our dealer network and expanding ZAP’s market initiatives. ZAP also requires
      financing to purchase consumer product inventory for the continued roll-out
      of
      new products, to add qualified sales and professional staff to execute on ZAP’s
      business plan, and to expand ZAP’s efforts in the research and development of
      advanced technology vehicles, such as the ethanol-driven OBVIO! Automobiles
      and
      other fuel efficient vehicles.





**Seasonality
      and Quarterly Results**


The
      Company’s business is subject to seasonal influences for consumer products.
      Sales volumes in this industry typically slow down during the winter months,
      November to March in the U.S. The Company’s auto distribution network is
      affected by the availability of cars ready to sell to dealers.





**Inflation**


Our
      raw
      materials and finished products and automobiles are sourced from stable,
      cost-competitive industries. As such, we do not foresee any material
      inflationary trends for our product sources.




–
21
          –


**Item
      3.** **** **Controls and Procedures**





**Conclusion
      Regarding the Effectiveness of Disclosure Controls and
      Procedures**





Under
      supervision and with the participation of our management, including our Chief
      Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we conducted an
      evaluation of the effectiveness of the design and operation of our disclosure
      controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
      the
      Securities Exchange Act of 1934 (“the Exchange Act”). Based on this evaluation,
      our management, including our CEO and our CFO, concluded that our disclosure
      controls and procedures were effective as of September 30, 2006, to ensure
      that
      information required to be disclosed by us in the reports filed or submitted
      by
      us under the Exchange Act (i) is recorded, processed, summarized and reported
      within the time periods specified in the SEC rules and forms, and (ii) is
      accumulated and communicated to the Company’s management, including our CEO and
      CFO, as appropriate to allow timely decisions regarding required disclosure.




**Changes
      in Internal Control over Financial Reporting**





There
      were no changes in our internal control over financial reporting that occurred
      during the quarter ended September 30, 2006 that have materially affected,
      or
      are reasonably likely to materially affect, our internal control over financial
      reporting.

























–
22
          –


**PART
      II — OTHER
      INFORMATION**




Item
      1.  Legal
      Proceedings


In
      the
      normal course of business, we may become involved in various legal proceedings.
      Except as stated below, we know of no pending or threatened legal proceeding
      to
      which we are or will be a party which, if successful, might result in a material
      adverse change in our business, properties or financial condition. However,
      as
      with most businesses, we are occasionally parties to lawsuits incidental to
      our
      business, none of which are anticipated to have a material adverse impact on
      our
      financial position, results of operations, liquidity or cash flows.





*ZAP
      v. Daimler Chrysler AG, et al.,* Superior
      Court of California, County of Los Angeles, Case No. BC342211. On October 28,
      2005, ZAP filed a complaint against Daimler Chrysler Corporation and others
      in
      the Los Angeles Superior Court. The complaint includes claims for intentional
      and negligent interference with prospective economic relations, trade libel,
      defamation, breach of contract - agreement to negotiate in good faith, breach
      of
      implied covenant of good faith and fair dealing, and unfair competition. The
      complaint alleges that Daimler Chrysler has engaged in a series of
      anti-competitive tactics aimed at defaming ZAP and disrupting its third-party
      business relationships. As a result of the allegations, the complaint requests
      damages in excess of $500 million and such other relief as the court deems
      just
      and proper. Daimler Chrysler has successfully filed a motion to quash that
      compliant for lack of personal jurisdiction, and the court’s ruling on that
      matter is in the process of being appealed.  Two of the other defendants in
      the action, G&K Automotive Conversion, Inc. and The Defiance LLC, have filed
      a cross-complaint against ZAP in the Los Angeles Superior Court for, among
      other
      things, violations of Section 43(a) of the Lanham Act, statutory and common
      law  unfair competition, and intentional and negligent interference with
      prospective economic advantage.  ZAP has responded to the cross-complaint
      and denied engaging in any wrongful actions.




*Voltage
      Vehicles v. American Electric Power Company, et al.,* Superior
      Court of California, County of Sonoma, Case No. SCV 236 830. On June 1, 2005,
      Voltage Vehicles filed suit against American Electric Power Company, CSW Energy
      Services, Inc., Central and Southwest Corporation, Total EV, Freightquote,
      LLC,
      and Central Freight Lines, Inc. A First Amended Complaint was filed August
      29,
      2005, against the same defendants, asserting causes of action for breach of
      a
      written contract of sale against certain defendants, as well as breach of a
      written contract as a third party beneficiary against all defendants. The
      dispute concerns an alleged contract to purchase certain inventory from the
      defendants consisting of electric bicycles that were never delivered to Voltage
      Vehicles. Voltage Vehicles’ First Amended Complaint seeks compensatory damages
      in the amount of $744,735, prejudgment interest, attorneys’ fees, and costs of
      suit. The parties are currently responding to written discovery and will soon
      begin taking and defending depositions. The court set a trial date of April
      26,
      2007. Voltage Vehicles has recently learned of another party to the transaction
      and will be amending its complaint to add this new defendant. Voltage Vehicles
      is also seeking informal resolution with CSW Energy Services, the party that
      sold the at-issue goods to Voltage Vehicles. CSW has made a settlement offer
      that we have not yet accepted or rejected.





*Marieta
      Cruz Hansell v. Robert Warren Johnson, Jr., ZAP, et. al.,* Superior
      Court of California, Case No. SCV-237645. On October 21, 2005, Marieta Hansell
      filed suit against Robert Johnson (a former employee of ZAP), ZAP and other
      defendants for personal injury, property damage and permanent disability based
      on an alleged automobile collision between the plaintiff and defendant Johnson.
      The Company and Mr. Johnson have both filed answers and case management
      statements containing a general denial of the plaintiff’s entire claim, and the
      Company has agreed to defend Mr. Johnson in this matter. The parties are in
      the
      process of discovery. The plaintiff is claiming permanent disability, and she
      has submitted a Statement of Damages in the amount of $108,727.34, plus
      unspecified amounts of future general damages, future wage loss, diminution
      of
      earning capacity damages, and incidental, consequential and special damages.
      The
      plaintiff has not yet made any demand for settlement. The Company intends to
      vigorously defend both itself and Mr. Johnson against these claims. This matter
      is now being handled by alternative counsel for ZAP.





*First
      Class Auto Sales, Inc. d/b/a First Class Imports v. Voltage Vehicles and
      ZAP* ,
      American Arbitration Association Case No. 74 133 00081 06 NOCA. ** First
      Class Imports is a vehicle dealer that executed a licensing and distributorship
      agreement with Voltage Vehicles, a subsidiary of the Company, in May, 2004.
      On
      January 14, 2006, First Class Imports and its principal, Leon Atkind, filed
      an
      arbitration demand with the American Arbitration Association alleging that
      the
      Company and Voltage Vehicles breached the licensing agreement by not
      delivering new SMART-branded vehicles to First Class Imports and demanded return
      of the $100,000 licensing fee paid to Voltage Vehicles under the agreement,
      plus
      interest. In a separate cause of action, Mr. Atkind alleged the Company breached
      a second contract by failing to timely deliver a stock certificate in exchange
      for a Mercedes vehicle that he sold to the Company. Regarding this second claim,
      Mr. Atkind contends that the late delivery of the certificate caused the shares
      to be restricted for an extra month during which the Company’s stock price
      declined. He seeks as damages the difference in the value of the stock on the
      two subject dates multiplied by 59,999, the number of shares he received.
      Voltage Vehicles filed a counterclaim against both First Class Imports and
      Mr.
      Atkind. The first cause of action in the counterclaim alleges breach of contract
      against First Class Imports for its refusal to accept SMART-branded vehicles
      offered to it pursuant to the parties’ licensing agreement. Voltage Vehicles
      seeks as damages the lost revenue it otherwise would have gained through First
      Class Imports’ purchase of SMART-branded vehicles, as well as damages based on
      the depreciation of a SMART-branded vehicle it loaned to First Class Imports.
      The second cause of action alleges breach of contract against Mr. Atkind based
      on his failure to deliver title to the Mercedes identified above. On this claim,
      Voltage Vehicles seeks as damages the depreciation of the Mercedes during the
      time in which it has been unable to sell the vehicle. An arbitrator has been
      selected, but the arbitration has been continued while the parties discuss
      settlement. However, the court overseeing the arbitration has now scheduled
      a
      case management conference for November 2, 2006, and the arbitration itself
      is
      currently scheduled for November 20 th and
      21st, 2006 in San Francisco.





*ZAP
      v. Norm Alvis, et al.* ,
      Superior Court of California, County of Sonoma, Case No. SCV-238419, complaint
      filed March 27, 2006. Mr. Alvis was engaged by ZAP as a consultant to
      perform public relations work on behalf of the Company. As consideration for
      Mr.
      Alvis’ consent to the contract, ZAP gave Mr. Alvis a motor home worth at least
      $500,000. ZAP sued Mr. Alvis claiming that he has not performed his obligations
      under the contract and is seeking either the return of the motor home or
      $500,000 in damages. Mr. Alvis did not timely respond to the complaint, and
      the
      court entered a default judgment on May 16, 2006.  At the same time,
      ZAP obtained a writ of possession for the motor home.  On June 18,
      2006, the defendant filed a motion asking the court to set aside the
      default and default judgment and to vacate its order authorizing the issuance
      of
      the writ of possession.  The court agreed to set aside the defaults, but it
      left the writ of possession in place.  In compensation for our efforts to
      take the default and obtain the default judgment, the court ordered the
      defendant to pay ZAP $1,000, and the defendant has paid that amount.  The
      defendant has now filed an answer denying ZAP’s allegations.  Defendant has
      also filed a cross-claim against ZAP, Steve Schneider in his individual
      capacity, and Rotoblock Corporation, alleging two counts of breach of contract,
      one common count of work, labor, and services received, and one count
      of fraud.  All of these claims relate to two contracts that required the
      defendant to provide certain marketing services to ZAP and Rotoblock.  The
      defendant claims he provided these services, but received inadequate or no
      consideration in exchange.  For the fraud claim, defendant claims ZAP,
      Schneider, and Rotoblock executed the contracts with no intent to perform. 
The defendant prays for damages of $2,000,000, interest according to proof,
      punitive damages, and an order directing the cross-defendants to perfect title
      to the motor home in question.  Defendant has also filed a motion to quash
      the writ of possession. The hearing on that motion is set for November 2,
      2006. **** ZAP,
      Rotoblock and Schneider have demurred to the cross-complaint. The hearing on
      that demurrer is scheduled for November 22, 2006.


–
23
          –


Item
      2.  Unregistered
      Sales of Equity Securities and Use of Proceeds





During
      the third quarter of 2006, we sold the following securities in private
      transactions pursuant to exemptions from the registration requirements of the
      Securities Act of 1933, as amended (“Securities Act”) under Section 4(2) of the
      Securities Act or pursuant to Rule 506 of Regulation D promulgated under Section
      4(2) of the Securities Act:





**Unregistered
                Sales to Directors, Employees and Consultants as
                Compensation****Purchaser/Recipient
                of Securities**
            
            **Date**
            
            **Terms
                of**
              **Exercise,
                if**
              **Convertible**
            
            **Title
                of Security**
            
            **Number**
              **Sold
                or**
              **Granted**
            
            **Consideration**
              **Received**Executive
                Officer
            
            July
                25, 2006
            
            $0.89
            
            Options
            
            100,000
            
            (1)Executive
                Officer
            
            July
                25, 2006
            
            $1.00
            
            Warrants
            
            100,000
            
            (1)Three
                Executive Officers
            
            August
                11, 2006
            
            $0.91
            
            Options
            
            1,066,272
            
            (2)Three
                Executive Officers
            
            August
                11, 2006
            
            $1.00
            
            Warrants
            
            1,066,272
            
            (2)Non-Employee
                Directors
            
            September
                15, 2006
            
            NA
            
            Common
                Stock
            
            3,720
            
            (3)Executive
                Officer
            
            September
                15, 2006
            
            $1.03
            
            Options
            
            100,000
            
            (4)Executive
                Officer
            
            September
                15, 2006
            
            $1.00
            
            Warrants
            
            100,000
            
            (4)





(1)
            The
                Company issued options and warrants to an executive officer as
                compensation for services rendered to ZAP.(2)
            The
                Company issued options and warrants to three separate executive officers
                as compensation for services as provided for in each executive’s
                employment agreement where such executive is entitled to the issuance
                of
                options totaling 1% of total outstanding shares and warrants totaling
                1%
                of total outstanding shares.(3)
            The
                Company issued shares of common stock to three outside directors
                as
                compensation for their attendance at board meetings valued at $1,500
                per
                director.(4)
            The
                Company issued options and warrants to an executive officer as a
                bonus for
                services rendered to ZAP.




**Other
                Unregistered Sales****Purchaser/Recipient
                of Securities**
            
            **Date**
            
            **Terms
                of**
              **Exercise,
                if**
              **Convertible**
            
            **Title
                of Security**
            
            **Number**
              **Sold
                or**
              **Granted**
            
            **Consideration**
              **Received**Service
                Provider
            
            July
                19, 2006
            
            NA
            
            Common
                Stock
            
            17,857
            
            (1)Service
                Provider
            
            July
                19, 2006
            
            NA
            
            Common
                Stock
            
            7,700
            
            (2)Inventory
            
            July
                19, 2006
            
            NA
            
            Common
                Stock
            
            2,941
            
            (3)Rental
                Properties
            
            August
                11, 2006
            
            NA
            
            Common
                Stock
            
            42,231
            
            (4)Inventory
            
            August
                11, 2006
            
            NA
            
            Common
                Stock
            
            1,500
            
            (5)Real
                Property
            
            August
                11, 2006
            
            NA
            
            Common
                Stock
            
            294,444
            
            (6)Service
                Provider
            
            August
                11, 2006
            
            $1.20
            
            Warrants
            
            500,000
            
            (7)Service
                Provider
            
            September
                15, 2006
            
            $1.50
            
            Warrants
            
            130,000
            
            (8)Phi-Nest
                Fund, L.P.
            
            September
                5, 2006
            
            NA
            
            Common
                Stock
            
            150,000
            
            (9)Qualified
                Investor
            
            September
                27, 2006
            
            NA
            
            Common
                Stock
            
            500,000
            
            $487,500
                (10)





(1)
            The
                Company issued 17,857 shares of common stock as payment for sponsorship
                fees valued at $12,500.(2)
            The
                Company issued 7,700 shares of common stock as payment for sponsorship
                fees valued at $5,000.(3)
            The
                Company issued 2,941 shares of common stock as payment for a trailer
                valued at $2,000.(4)
            The
                Company issued 42,231 shares of common stock as payment for leases
                for
                apartments valued at $38,430.(5)
            The
                Company issued 1,500 shares of common stock for the purchase of a
                trailer
                valued at $1,230.(6)
            The
                Company issued 294,444 shares of common stock as payment for the
                cash
                shortfall for the purchase of property located at 44720 Main Street
                in
                Mendocino, California.(7)
            The
                Company issued a warrant for the purchase of 500,000 shares at $1.20
                per
                share for real estate consulting services.(8)
            The
                Company issued a warrant for the purchase of 130,000 shares at $1.50
                per
                share for consulting services.(9)
            The
                Company issued 150,000 shares of common stock for consulting services
                valued at in connection with a Settlement Agreement dated September
                5,
                2006. The shares were issued out of shares that are being held as
                collateral pursuant to a previously executed loan agreement. See
                Item 5 of
                this report below.(10)
            The
                shares were issued out of shares that are being held as collateral
                pursuant to a previously executed loan agreement. See Item 5 of this
                report below.




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Item
      3.  Defaults Upon Senior Securities





Not
      Applicable




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





A
      special
      meeting of shareholders was held on October 17, 2006 to approve the issuance
      and
      sale of up to 20,000,000 shares of common stock and up to 6,000,000 securities
      exercisable or convertible into shares of common stock at below-market prices
      to
      private investors. It is estimated that the issuance and sale of these
      securities may potentially raise between $5 and $15 million in the financing
      transaction. At present, the Company needs additional capital to continue
      expanding its current operations. Due to the lack of a quorum of the
      shareholders at the special meeting on October 16, 2006 the meeting was
      adjourned and rescheduled for October 31, 2006 where the proper quorum existed
      and the proposal was approved by 88% of the shareholders.





When
      the
      estimated proceeds are received by the Company, the capital will be used
      primarily: (i) to purchase XebraTM vehicles, both sedan and utility trucks from
      ZAP’s Chinese partner to fulfill the increasing demand for 100% electric
      vehicles in the United States, and (ii) to continue building our dealer network
      and expanding ZAP’s market initiatives. ZAP will also use the proceeds to
      purchase consumer product inventory for the continued roll-out of new products,
      to add qualified sales and professional staff to execute on ZAP’s business plan,
      and to expand ZAP’s efforts in the research and development of advanced
      technology vehicles, such as the ethanol-driven OBVIO! Automobiles and other
      fuel efficient vehicles.




Item
      5.  Other Information





On
      September 5, 2006, the Company entered into a Settlement Agreement with Phi-Nest
      Fund, L.P. in order to settle the outstanding claims that existed among the
      parties related to the Collateral Loan Agreement dated December 18, 2002 in
      the
      amount of $1,000,000. The cousin of Steve Schneider, the Chief Executive Officer
      of the Company received forgiveness for a note payable due Zap for assistance
      in
      negotiating the Phi-Nest settlement. The Settlement Agreement provides for
      the
      full release and discharge by both parties of any and all claims and obligations
      that had existed between the parties. Pursuant to the Settlement
      Agreement:





·
            The
                Company amended the agreement to allow for Phi-Nest to receive
                $80,000 in cash for consulting services


·
            The
                Company amended the agreement to allow for Phi-Nest to receive
                150,000 shares of common stock for consulting services. The shares
                were
                issued out of the 2,441,176 shares held by Phi-Nest as collateral
                pursuant
                to the Collateral Loan Agreement;


·
            Phi-Nest
                assigned all its rights and obligations under the Collateral Loan
                Agreement to an outside entity and Phi-Nest assigned all its rights,
                title
                and interest in and to the remaining 2,291,176 shares of common stock
                being held as collateral pursuant to the Collateral Loan Agreement
                to the
                outside entity.




Item
      6.  Exhibits




10.36
            Agreement
                dated July 14, 2006 between ZAP, Thomas Heidemann and Smart Automobile
                (incorporated by reference from our Current Report on Form 8-K filed
                on
                July 20, 2006)10.37
            Amendment
                Agreement Dated August 30, 2006 between ZAP and Smart Automobile
                LLC
                (incorporated by reference from our Current Report on Form 8-K filed
                on
                September 6, 2006)10.38
            Exclusive
                Distribution Agreement dated May 1, 2005, as supplemented by a letter
                dated June 9, 2006 (incorporated by reference from our Current Report
                on
                Form 8-K filed on November 6, 2006)10.39
            ZAP
                Guarantee (incorporated by reference from our Current Report on Form
                8-K
                filed on November 6, 2006)10.40
            Shandong
                Jindalu Vehicle Co., Ltd. Guarantee (incorporated by reference from
                our
                Current Report on Form 8-K filed on November 6, 2006)10.41
            Joint
                Venture Negotiations dated September 21, 2006 (incorporated by reference
                from our Current Report on Form 8-K filed on November 6,
                2006)


31.1
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act.31.2
            Certification
                of Principal Financial and Accounting Officer Pursuant to Section
                302 of
                the Sarbanes-Oxley Act.


32.1
            Certification
                of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
                Act.32.2
            Certification
                of Principal Financial and Accounting Officer Pursuant to Section
                906 of
                the Sarbanes-Oxley Act.




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**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**Dated 
              November 13, 2006
            By:
            /s/ Steven
              SchneiderName:  
                Steven SchneiderTitle:    
                Chief Executive Officer (Principal Executive Officer)






**ZAP**Dated 
                November 13, 2006
              By:
              /s/ William
                HartmanName:  
                  William HartmanTitle:    
                  Chief Financial Officer (Principal Financial and Accounting
                  Officer)













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