**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 March 31, 2006
 
 Commission
        File Number 0-303000
 
 
 **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.
 
 **34,719,945** shares
          of common stock as of May 5, 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 ofMarch 31, 2006
              2Condensed
                  Consolidated Statements of Operations for theThree
                  Months Ended March 31, 2006 and 2005
              3Consolidated
                  Statements of Cash Flows for the Three MonthsEnded
                  March 31, 2006 and 2005
              4Notes
                    to Condensed Consolidated FinancialStatements
              5Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Conditionand
                  Results of Operations
              11Item
                  3.
              Controls
                  and Procedures
              14**PART
                  II.**
              **Other
                  Information**Item
                  1.
              Legal
                  Proceedings
              15Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              15Item
                  3.
              Defaults
                  Upon Senior Securities
              15Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              15Item
                  5.
              Other
                  Information
              15Item
                  6.
              Exhibits
              15SIGNATURES
              
              16
 
 
  
 Part
        I.  FINANCIAL
        INFORMATION
 Item
        1.  Financial
        Statements
  **ZAP**
 **CONDENSED
        CONSOLIDATED BALANCE SHEET (UNAUDITED)**
 ***(In
        thousands)***
  **March
                  31,**
                **2006****ASSETS****CURRENT
                  ASSETS******Cash
                  and cash equivalents
              
              $
              2,610Accounts
                  receivable, net of allowance for doubtful accounts of $317
              
              
              343Advances
                  on Smart Car inventory
              
              
              143Inventories
              
              
              2,060Prepaid
                  expenses and other current assets
              
              
              294Total
                  current assets
              
              
              5,450**PROPERTY
                  AND EQUIPMENT,**net
                  of accumulated depreciation of $889
              
              
              4,905**OTHER
                  ASSETS**Smart
                  Automobile license, net
              
              
              2,703Patents
                  and trademarks, net
              
              
              62Goodwill
              
              
              175Deposits
                  and other
              
              
              430Total
                  assets
              
              $
              13,725**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY****CURRENT
                  LIABILITIES**Current
                  portion of long-term debt
              
              $
              104Accounts
                  payable
              
              
              177Accrued
                  liabilities
              
              
              2,176License
                  fee payable
              
              
              906Deferred
                  revenue
              
              
              1,100Total
                  current liabilities
              
              
              4,463**LONG-TERM
                  LIABILITIES**Long-term
                  debt, less current portion
              
              
              1,880Total
                  liabilities
              
              
              6,343**SHAREHOLDERS’
                  EQUITY**PrPreferred
                  stock, authorized 50 million shares; no par value,7,500
                  shares issued and outstanding
              
              
              7,500Common
                    stock, authorized 100 million shares;no par value; 33,394,775
                    shares issued and outstanding
              
              
              80,395Common
                  stock issued as loan collateral
              
              
              (2,929
              )Notes
                  receivable from shareholders, net
              
              
              (56
              )Accumulated
                  deficit
              
              
              (77,528
              )Total
                  shareholders’ equity
              
              
              7,382Total
                  liabilities and shareholders’ equity
              
              $
              13,725
  See
        accompanying notes to condensed consolidated financial statements
        (unaudited).
 
 
 2
 **ZAP**
 **CONDENSED
          CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**
 ***(Thousands,
          except share amounts)***
 
 **Three
                    Months ended**
                  **March
                    31,**
                
                **Three
                    Months ended**
                  **March
                    31,****2006**
                
                **2005****NET
                    SALES**
                
                $
                2,929
                
                $
                1,162**COST
                    OF GOODS SOLD**
                
                
                2,505
                
                
                1,128**GROSS
                    PROFIT**
                
                
                424
                
                
                34**OPERATING
                    EXPENSES**Sales
                    and marketing
                
                
                251
                
                
                193General
                    and administrative (non-cash of $1,792 and $1,180 for the three
                    months
                    ended March 31, 2006 and 2005)
                
                
                3,068
                
                
                2,860Research
                    and development
                
                
                —
                
                
                403,319
                
                
                3,093**LOSS
                    FROM OPERATIONS**
                
                
                (2,895
                )
                
                (3,059
                )**OTHER
                    INCOME (EXPENSE)**Gain on
                    revaluation of warrant and put option liabilities
                
                
                135
                
                
                1,519Interest
                    expense,net
                
                
                (6
                )
                
                (7
                )Other
                
                
                (3
                )
                
                —126
                
                
                1,512**LOSS
                    BEFORE INCOME TAXES**
                
                
                (2,769
                )
                
                (1,547
                )**PROVISION
                    FOR INCOME TAXES**
                
                
                4
                
                
                4**NET
                    LOSS**
                
                $
                (
                    2,773
                )
                $
                (1,551
                )**NET
                    LOSS PER COMMON SHARE****BASIC
                    AND DILUTED**
                
                $
                (0.08
                )
                $
                (0.05
                )**WEIGHTED
                      AVERAGE****OF****COMMON SHARES
                      OUTSTANDING --****BASIC
                    AND DILUTED**
                
                
                32,747
                
                
                30,590
 
 
 See
          accompanying notes to condensed consolidated financial statements
          (unaudited).
  3
 **ZAP**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**
 ***(In
        thousands*** *)*
  **Three
                  months ended March 31,****2006**
              
              **2005****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  loss
              
              $
              (2,773
              )
              $
              (1,551
              )Items
                  not requiring the use of cash:Amortization
                  of note discount
              
              
              —
              
              
              10Stock-based
                  compensation for consulting and other services
              
              
              1,283
              
              
              2,792Stock-based
                  employee compensation
              
              
              518
              
              
              (1,645
              )Gain
                  on revaluation of warrant and put option liabilities
              
              
              (135
              )
              
              (1,519
              )Depreciation
                  and amortization
              
              
              494
              
              
              371Loss
                on disposal of fixed asset
              
              
              4
              
              
              —Allowance
                  for doubtful accounts
              
              
              (16
              )
              
              22Changes
                  in other items affecting operations:Receivables
              
              
              (142
              )
              
              (259
              )Note
                  recievable from Smart Auto
              
              
              —
              
              
              (1,000
              )Inventories
              
              
              (188
              )
              
              376Smart
                  car inventory
              
              
              1,235
              
              
              —Prepaid
                  expenses and other assets
              
              
              (213
              )
              
              (55
              )Accounts
                  payable
              
              
              (12
              )
              
              17Accrued
                  liabilities
              
              
              (40
              )
              
              342Deferred
                  revenue
              
              
              50
              
              
              —Net
                  cash provided by (used in) operating activities
              
              
              65
              
              
              (2,099
              )**CASH
                  FLOWS FROM INVESTING ACTIVITES**Purchase
                  of equipment
              
              
              (24
              )
              
              (158
              )Proceeds
                from sale of equipment
              
              
              35
              
              
              —Net
                  cash provided by (used in) investing activities
              
              
              11
              
              
              (158
              )**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
              
              
              1,005
              
              
              1,955Borrowings
                  and repayments of long-term debt
              
              
              (18
              )
              
              13Net
                  cash provided by financing activities
              
              
              987
              
              
              1,482**NET
                  INCREASE ( DECREASE) IN CASH AND CASH EQUIVALENTS**
              
              
              1,063
              
              
              (775
              )**CASH
                  AND CASH EQUIVALENTS,**beginning
                  of period
              
              
              1,547
              
              
              5,354**CASH
                  AND CASH EQUIVALENTS,**end
                  of period
              
              $
              2,610
              
              $
              4,579
 
 See
        accompanying notes to condensed consolidated financial statements
        (Unaudited)
 
  4
 **ZAP**
 **NOTES
        TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS**
 
 **(1)** **** **BASIS
        OF PRESENTATION**
 
 The
        financial statements included in this Form 10-QSB have been prepared by us,
        and
        have not been audited. Certain information and footnote disclosures normally
        included in financial statements prepared in accordance with U.S. generally
        accepted accounting principles have been condensed or omitted, although
        management believes the disclosures are adequate to make the information
        presented not misleading. The results of operations for any interim period
        are
        not necessarily indicative of results for a full year. These statements should
        be read in conjunction with the financial statements and related notes included
        in the Company’s Annual Report on Form 10-KSB for the year ended December 31,
        2005.
 
 The
        financial statements presented herein, for the three months ended March 31,
        2006
        and 2005 reflect, in the opinion of management, all material adjustments
        consisting only of normal recurring adjustments necessary for a fair
        presentation of the financial position, results of operations and cash flow
        for
        the interim periods.
 
 The
        risks
        related to our business. The Company has a history of losses, and the Company
        might not achieve profitability. The Company will need additional capital
        to achieve its business plan. There can be no assurance that additional capital
        will be available, or if it is available, that it will be on acceptable terms.
        A
        substantial portion of the Company’s growth in the past four years has come
        through acquisitions and the Company may not be able to identify, complete
        and
        integrate future acquisitions.
 
 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 relies on other entities such as G&K Automotive to convert or
        americanize Smart cars for sale in certain states in the United States; and
        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.
 
  **(2)** **** **SIGNIFICANT
        ACCOUNTING POLICIES**
  
 5
 
 **NET
        LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS**
 Basic
        and
        diluted loss per common share is based on the weighted average number of
        common
        shares outstanding in each period. Potential dilutive securities associated
        with
        stock options, warrants and convertible preferred stock and debt have been
        excluded from the diluted per share amounts, since the effect of these
        securities would be anti-dilutive. At March 31, 2006, these potentially dilutive
        securities include options for 6,820,350 shares of common stock, warrants
        for
        52,958,415 shares of common stock, debt convertible into 930,000 shares of
        common stock and preferred shares that can be converted into 4.14 million
        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.
 
 
 **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 $1,100,000
        related to these agreements, which is classified as deferred revenue until
        such
        time as the Company begins delivering a substantial number of vehicles to
        these
        dealerships on a regular basis.
 
 **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. 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.
 
 **RECOVERY
        OF LONG-LIVED ASSETS** **-** The
        Company evaluates the recovery of its long-lived assets at least annually
        by
        analyzing its operating results and considering significant events or changes
        in
        the business environment.
 
 **STOCK
        ISSUED AS COLLATERAL** **-** 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 that never funded. 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 $1 million loan commitment. The Company amended the
        Loan
        Agreement allowing them to purchase 500,000 shares for $1.16 per share. On
        March
        30, 2006, the Company received $500,000 in net proceeds from the sale. The
        collateral was reduced to 2,441,176 shares and the loan is still pending.
  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 has an agreement with an outside company to provide a 36 month
        or
        36,000 mile warranty on the Smart Car Americanized by ZAP. At March 31, 2006,
        the Company has recorded a warranty liablility for $77,000.
  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. All cash equivalents
        are in money market funds and commercial paper. The fair value of the funds
        approximated cost.
  6
 
  **(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. 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
            quarter
            of 2006 are not directly comparable to the same period in the prior year.
 
 Under
            the
            provisions of SFAS 123R, we recorded $493,265 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
            ended March 31, 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 weighted-average assumptions:
  2006Dividend
                      yield
                  
                  —Expected
                      volatility
                  
                  
                  140.87
                  %Risk-free
                      interest rate
                  
                  
                  4.63
                  %Expected
                      life (in years)
                  
                  
                  6.0
 
 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 ended March 31,
            2006 was $0.61. 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 income (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).
  7
  
 Three
                      months
                    ended
                      March
                    31,2005Net
                      loss as reported
                  
                  $
                  (1,551
                  )Add:
                      Stock-based employee/director compensationincluded
                      in reported net loss
                  
                  
                  (1,645
                  )Deduct:
                      total stock-based employee compensationdetermined
                      under fair value method for all awards
                  
                  
                  (417
                  )Proforma
                      net loss
                  
                  $
                  (3,613
                  )Loss
                      per share:Basic
                      and diluted, as reported
                  
                  $
                  (0.05
                  )Basic
                      and diluted, as adjusted
                  
                  $
                  (0.12
                  )
 
 The
            assumptions used to determine the pro forma expenses under the Black-Scholes
            option model for the three months ended March 31, 2005 under SFAS 123
            were based
            on the following assumptions: expected dividend yield: 0; expected volatility:
            141%; expected lives, in years: 5; and risk-free interest rate: 4.0%.
            In the pro
            forma information for periods prior to 2006, we accounted for forfeitures
            as
            they occurred.
 
 A
            summary
            of options under the Company’s stock option plans as of December 31, 2005 and
            changes during the quarter ended March 31, 2006 are 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
                  
                  
                  8.11
                  
                  $
                  5,159,984Options
                      vested and exercisableat
                      March 31, 2006
                  
                  
                  3,675,418
                  
                  $
                  1.00
                  
                  
                  7.84
                  
                  $
                  2,977,089
 
 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 March 31, 2006,
            for
            those options for which the quoted market
  8
  price
            was
            in excess of the exercise price (“in-the-money-options”). The total intrinsic
            value of options exercised was $222,590 and $8,000 for the three month
            period
            end March 31, 2006 and 2005, respectively.
 
 As
            of
            March 31, 2006, total compensation cost of unvested options is $2.65
            million. This cost is expected to be recognized through November 2008.
            We
            recorded no income tax benefits for stock-based compensation expense
            arrangements for the three months ended March 31, 2006, as we have cumulative
            operating losses, for which a valuation allowance has been established.
 **(4)** **** **INVENTORIES-** The **** Inventories
        at March 31, 2006 are summarized as follows (thousands):
 
 Vehicles
                  - conventional
              
              $
              452Advanced
                Transportation vehicles
              
              
              660Parts
                  and supplies
              
              
              285Finished
                  Goods
              
              
              8582,255Less-inventory
                  reserve
              
              
              (195
              )$
              2,060
 
 **(5)** **** **LICENSE
        AND DISTRIBUTION FEE**
 
 On
        April
        19, 2004, ZAP entered into an Exclusive Purchase, License and Supply Agreement
        with Smart-Automobile LLC ("SA"), a California limited liability company,
        to
        distribute and manufacture Smart cars. Smart is the brand name for a 3-cyclinder
        gas turbo engine car manufactured by Daimler Chrysler AG, which can achieve
        estimated fuel economy of 40 miles per gallon. SA is not affiliated with
        Daimler
        Chrysler, but is a direct importer.
 
 Under
        the
        agreement ZAP will be SA’s exclusive distributor and licensee of the right to
        manufacture and distribute Smart cars in the United States and the non-exclusive
        distributor and licensee outside of the United States for a period of ten
        years.
        Subject to the terms of the agreement, ZAP will pay SA a license and
        distribution fee of $10,000,000: a $1 million payment in cash was made upon
        execution of the agreement, $1 million will 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, SA exchanged their original Preferred Shares for new Preferred
        Shares
        with the designation of SA. These SA preferred shares convert to ZAP common
        shares under the following formula: For every 1,000 Smart vehicles 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 shall convert 500 shares of preferred
        stock SA to $500,000 of common stock, and allow the holder to receive 505,000
        warrants with an exercise price of $2.50 per share exercisable through July
        7,
        2009, or when all the preferred have been converted. During 2004, ZAP allowed
        SA
        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 Automobile license at $10.6 million,
        based on: 1) the $10 million the Company paid to Smart Automobile LLC as
        consideration for a Purchase, License and Supply 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%.
 
 During
        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 Automobile 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 $5.721 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.
        The remaining value of the license is being amortized using the straight-line
        method over the next two years, which is the revised estimated life of the
        license. License amortization for the period ended March 31,2006 was
        $387,500.
 
 
 
 9
 **(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
        Archipelago Exchange (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. ZAP’s stock now trades on the NYSE
        Arca, however, the PCXE rules still apply to all stock listed on the NYSE
        Arca,
        and all prior actions taken by the Arca or the PCXE apply to our listing
        on the
        NYSE Arca.
 
 The
        Company’s shareholder equity activity for the three months ended March 31, 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 warrantsfor 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 warrantliability
                
                
                
                
                
                567,525Fair
                        value of warrants issuedfor consulting and other
                        services
                
                
                
                
                
                1,113,938Fair
                      value of options and warrantsissued to
                      employees
                
                
                
                
                
                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**
  The
        Company issued common stock as consideration under agreements for consulting
        and
        employee services during the three months ended March 31, 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 March 31, 2006 is $765,000 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 that never funded. 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 $1 million loan commitment. The Company amended the
          Loan
          Agreement allowing them to purchase and sell 500,000 shares for $1.16 per
          share.
          On March 30, 2006, the Company received $500,000 in net proceeds from the
          sale.
          The collateral was reduced to 2,441,176 shares and the loan is still pending.
 The
        Company also issued options and warrants to consultants for professional
        services.  During the three months ended March 31, 2006, the Company issued
        warrants to consultants to purchase 1,725,000 shares of common stock at
        prices ranging from $0.32 per share to $1.50 per share, with a contractual
        life
        ranging from 1 to 10 years. With the exception of one warrant grant of 100,000
        shares, the warrants and options 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
              $1.50Market
                  price
              $0.32
              $1.23Assumptions:Expected
                  dividend yield
              0.0%
              0.0%Risk
                  free rate of return
              4.63%
              4.63%Expected
                  life
              1.0
                  years
              10 yearsVolatility
              140.87%
              140.87%Fair
                  market value
              $0.06
              $1.08
 
 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.
 
 10
 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.
  **(7)** **** **LITIGATION
        -** Other
        than the following, we are not party to any pending material legal proceedings
        and are not aware of any threatened or contemplated proceedings by any
        government authority against us.
 
 A
        dormant
        complaint filed in 2002 against the RAP Group and Steve Schneider the CEO
        of
        ZAP, individually was reactivated by the plaintiff (Jim Arnold Trucking).
        The
        Compliant alleges breach of contract, promissory estoppel and fraud and seeks
        contract damages in the amount $71,000 plus monthly storage fees and punitive
        damages of $750,000. The Company has cross-claimed against Plaintiffs seeking
        compensatory damages, attorneys' fees and equitable relief for breach of
        oral
        contract, common count for goods sold and delivered, conversion, liability
        of
        surety, violation of statue, and violation of the Unfair Practices Act. On
        February 17, 2005, the court referred the matter to non-binding arbitration.
        The
        non binding arbitration hearing was held on July 27, 2005 where the arbritrator
        awarded the plaintiff damages in the amount of $68,290 plus prejudgement
        interest of 7%. On May 2, 2006 a trial was held with the parties agreeing
        to
        settle the matter for $40,000 and execute mutual releases of all claims arising
        out of the subject matter of the litigation.
 
 On
        October 28, 2005, we filed a complaint against DaimlerChrysler Corporation
        and
        others in the Los Angeles Superior Court, under the title *ZAP
        v. DaimlerChrysler AG, et al* **.** 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
        DaimlerChrysler 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. DaimlerChrysler has
        not
        yet filed a response to our complaint.
  **(8)   
          RELATED PARTY TRANSACTIONS**
 
 Rental
          agreements
 
 The
          Company leases 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 under these leases was approximately $39,500
          and
          $37,100 for the quarter ended March 31, 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
          not 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.
 
 Inventory
          Purchase
 
 In
          December 2005, the Company purchased inventory from a related entity where
          three
          of ZAP’s officers and or 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 March 31, 2006.
  **(9)** **** **SUPPLEMENTAL
        DISCLOSURE OF CASH FLOW INFORMATION:**
 
 **Three
                  Months Ended****March
                  31,****2006**
              
              **2005**Cash
                  paid during the period for interest
              
              $
              20
              
              
              —Cash
                  paid during the period for income taxes
              
              $
              —
              
              
              —Non-cash
                  investing and financing activities:Stock
                  and warrants issued for:Purchase
                  of real property and equipment
              
              $
              —
              
              
              4Inventory
                  purchases
              
              $
              —
              
              
              49Settlement
                  of warrant liability
              
              $
              568
              
              
              6,711Other
                  assets
              
              $
              —
              
              
              247
   11
 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;
 •   
          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 annual
        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 annual report or elsewhere might not
        occur.
  In
        this
        quarterly report on Form 10-KSB the terms “ZAP,” “Company,” “we,” “us” and “our”
refer to ZAP and its subsidiaries.
 
 
 **Overview**
 
 ZAP
        stands for Zero Air Pollution(R). ZAP was founded on September 23, 1994,
        during
        an era when government and industry were debating how to solve the country's
        growing transportation problems. ZAP began to invent, design, manufacture,
        and
        market innovative products like its zero-emission ZAP(R)electric bicycle
        and
        ZAPPY(R) electric scooter that were cost-effective and practical for world
        markets. Today, ZAP is moving forward with a campaign to stay at the forefront
        of fuel-efficient transportation with new technologies, including energy
        efficient gas systems, hydrogen, electric, alcohol, hybrid and other innovative
        power systems. ZAP is also investing in advanced energy solutions, utilizing
        advanced batteries, trybrid technology and fuel cell designs.
 
 In
        the
        process of building ZAP, the Company has pioneered a growing niche for
        alternative transportation. In 1995, ZAP began marketing electric transportation
        on the Internet through the website at www.zapworld.com. From 1996 through
        1998,
        we continued to add to our product line; in 1999, ZAP added electric motorbikes;
        in 2001 ZAP added electric dive scooters; in 2003, ZAP announced its first
        electric automobiles, including the first-ever production electric automobile
        imported from its manufacturing partner in China; in 2004 ZAP introduced
        electric all-terrain vehicles and the fuel-efficient Smart Car; and in 2005
        ZAP
        introduced multi-fuel vehicles, capable of running on ethanol and/or gasoline
        and in 2006 all electric cars.
 
 12
 Today,
        ZAP is a one-stop portal for a diverse lineup of quality, affordable advanced
        automotive technologies. ZAP has delivered more than 90,000 vehicles to
        customers in more than 75 different countries. 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 representatives, retail outlets and 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. Most of our domestic manufacturing has been transferred
        to lower-cost overseas contract manufacturers.
 
 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.
   **Subsidiaries**
 
 We
        have
        the following wholly owned subsidiaries : RAP Group, Inc., a California company
        ("RAP Group"), Voltage Vehicles, a Nevada company ("Voltage Vehicles"),ZAP
        Rental Outlet, a Nevada company ("ZAP Rentals"), ZAP Stores, Inc., a California
        company ("ZAP Stores"), ZAP Manufacturing, Inc., a Nevada company ("ZAP
        Manufacturing") and ZAP World Outlet, Inc., a California company ("ZAP World").
        RAP Group is engaged primarily in the sale and liquidation of conventional
        automobiles; Voltage Vehicles is engaged primarily in the distribution and
        sale
        of advanced technology and conventional automobiles; ZAP Stores is engaged
        primarily in consumer sales of ZAP products and ZAP Manufacturing is not
        currently an operating subsidiary. ZAP World Outlet is not currently an
        operating subsidiary. RAP Group and Voltage Vehicles were acquired by the
        Company in July 2002.
 
 
 **Recent
        Developments**
 
 Some
        of
        the significant events for the Company that occurred during the first quarter
        of
        2006 and through the date of this report are as follows:
  1.
              ZAP
                  reported a record month in March for over $2 million in sales for
                  various
                  models of the Smart Car Americanized by ZAP. The autos were shipped
                  to ZAP
                  Dealers in various states.
  2.
              ZAPconducted
                  the first cross-country rally of the Smart Car Americanized by
                  ZAP. The
                  tour of six cars started in Santa Rosa California and stopped at
                  the New
                  York International Auto Show in New York City, and ended back in
                  Santa
                  Rosa, CA. The event was held to raise awareness about advanced
                  technology
                  vehicles.
  3.
              ZAP
                  became listed on the Archipelgo Stock exchange which is now a wholly
                  owned
                  subsidiary of the
                NYSE
                  Group. At the same time ZAP changed its trading symbol to
                  “ZP”.
  4.
              ZAPintroduced
                  its new line of Lithium Battery Systems for powering hand-held
                  electronic
                  devices at a recent trade show in
                  California.
 
 5.
              ZAP
                  has also scheduled for production a new and improved line of electric
                  scooters such as the ZAPPY ® 3 Pro and the ZAPPY® 3 mobility. In addition,
                  the ZAP BUZZZ All Terrain Vehicle and the ZAP MUD’E Trail Bike have also
                  been added to the electric vehicle production
                  line.
 
  
 13


**CRITICAL
      ACCOUNTING POLICIES**





*Share-Based
      Payments.* We
      grant
      options to purchase our common stock to our employees and directors under our
      stock option plan. The benefits provided under this plan 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 SFAS 123(R) apply 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 first three months of 2006 was $493,265. At March 31, 2006,
      total
      unrecognized estimated compensation expense related to non-vested stock options
      granted prior to that date was $2.65 million, which is expected to be recognized
      through December, 2008.





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.




**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 March 31,**2006
              
              
              **2005****Statements
                  of Operations Data:**Net
                  sales
              
              
              100
              %
              
              100
              %Cost
                  of sales
              
              
              (85.5
              )
              
              (97.1
              )Operating
                  expenses
              
              
              113.3
              
              
              266.2Loss
                  from operations
              
              
              (98.8
              )
              
              (263.3
              )Net
                  loss
              
              
              (94.7
              )
              
              (133.5
              )




**Quarter
      Ended March 31, 2006 Compared to Quarter Ended March 31,
      2005**





**Net
      sales** for the
      quarter ended March 31, 2006 were $2.9 million compared to $1.2 million in
      2005.
      RAP’s net sales for the period accounted were $675,000 versus $ 1 million in
      2005. The net sales for ZAP were $2.2 million versus $159,000 in 2005. The
      sales
      for RAP for gas automobiles were less than last year while ZAP experienced
      an
      increase of $2.0 million primarily due to the sales of the Smart Cars
      Americanized by ZAP and various models of electric vehicles.





**Gross
      profit** was
      $424,000 for the first quarter ended March 31, 2006 compared to $34,000 for
      the
      quarter ended March 31, 2005. The RAP Group accounted for $193,000 of the gross
      profit for the quarter ended March 31, 2006 versus $53,000 in 2005. ZAP’s gross
      profit excluding the RAP Group, increased from a loss of $19,000 in 2005 to
      a gain of $231,000 in 2006. The increase in gross profit was due to higher
      sales
      of the Smart Cars Americanized by ZAP.





**Sales**  **and
      marketing expenses** in the
      first quarter of 2006 were $251,000 as compared to $193,000 in 2005. RAP’s
      expenses were $37,000 in 2006 and $27,000 in 2005 and ZAP’s expenses were
      $214,000 versus $166,000 in 2005. As a percentage of sales, total selling
      expenses decreased from 17% of sales to 9% of sales for the quarter ended March
      31, 2006. The higher expenses were primarily for the promotion of advanced
      technology cars.





**General
      and administrative** expenses
      for 2006 were $3.1 million for the quarter ended March 31, 2006 as compared
      to
      $2.9 million in 2005. RAP’s portion of the expenses was $97,000 versus $181,000
      in 2005. For ZAP the expenses increased from $2.6 million to $3.0 million.
      As a
      percentage of sales, general and administration expenses decreased from 246%
      of
      sales to 105% of sales. RAP’s decrease of $84,000 was primarily due to lower bad
      debt expenses. ZAP’s net increase of $400,000 in general and administration
      expenses was due to stock-based compensation expense due to the
      adoption of SFAS 123R.





**Interest**  **expense
      net of interest income** was
      approximately $6,000 and $7,000 in the first quarter of 2006 and 2005,
      respectively.





**Other
      income net of expense** was
      $126,000. The other income resulted from changes in the value of a warrant
      liability and put option liabilities.





**Net
      Loss** was
      $2.8
      million for the quarter ended March 31, 2006 as compared to a net loss of $1.6
      million for period ended March 31, 2005. The increase was primarily due to
      higher consulting and professional fees, as well as stock-based compensation
      expense due to the adoption of SFAS 123R.





**Liquidity
      and Capital Resources**


In
      the
      first three months of 2006 net cash provided by operating activities
      was $65,000. In the first three months of 2005, the Company used cash for
      operations of $2.1 million. Cash used in the first three months of 2006 was
      comprised of the net loss incurred for the first three months of $2.8 million
      plus net non-cash expenses of $2.1 million plus the net change in operating
      assets and liabilities of $.7 million. Cash used in operations in the first
      three months of 2005 was comprised of the net loss incurred for the quarter
      of
      $1.6 million plus net non-cash expenses of $31,000, and the net change in
      operating assets and liabilities resulting in a further use of cash of
      $579,000.





14


Investing
      activities provided cash of $11,000 in the first three months ended March 31,
      2006 and used $158,000 during the first three months ended March 31, 2005.




Financing
      activities provided cash of $987,000 and $1,482,000 during the first three
      months ended March 31, 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. No
      funds have been drawn on the financing facility as of May 12, 2006. Each
      financing incurs an interest charge equal to 2% of the principal amount for
      the
      first 30 days and thereafter at a Per Diem Rate of .067%.





At
      March
      31, 2006 the Company had cash of $2.6 million compared to $4.6 million at March
      31, 2005. At March 31, 2006, the Company had working capital of $1.0 million,
      as
      compared to working capital of $13.9 million at March 31, 2005. The decrease
      was
      due to the following: cash used in operations, 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 other than our line of credit with Surge
      Capital II for inventory purchase, 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.





The
      Company’s primary capital needs are to fund its growth strategy, which includes
      creating an auto distribution network for the distribution of the Smart Cars
      and
      electrical vehicles, increasing its internet shopping mall presence, increasing
      distribution channels, establishing ZAP licensed dealerships, introducing new
      products, improving existing product lines and developing a strong corporate
      infrastructure.





**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.






**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) 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 March 31, 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 March 31, 2006 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.








15


**PART
      II - OTHER INFORMATION**








Item
      1.  Legal Proceedings





In
      the
      normal course of business, we may become involved with various litigation
      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.





A
      dormant
      complaint filed in 2002 against the RAP Group and Steve Schneider the CEO of
      ZAP, individually was reactivated by the plaintiff (Jim Arnold Trucking). The
      Compliant alleges breach of contract, promissory estoppel and fraud and seeks
      contract damages in the amount $71,000 plus monthly storage fees and punitive
      damages of $750,000. The Company has cross-claimed against Plaintiffs seeking
      compensatory damages, attorneys' fees and equitable relief for breach of oral
      contract, common count for goods sold and delivered, conversion, liability
      of
      surety, violation of statue, and violation of the Unfair Practices Act. On
      February 17, 2005, the court referred the matter to non-binding arbitration.
      The
      non binding arbitration hearing was held on July 27, 2005 where the arbritrator
      awarded the plaintiff damages in the amount of $68,290 plus prejudgement
      interest of 7%. On May 2, 2006 a trial was held with the parties agreeing to
      settle the matter for $40,000 and execute mutual releases of all claims arising
      out of the subject matter of the litigation.





On
      October 28, 2005, we filed a complaint against DaimlerChrysler Corporation
      and
      others in the Los Angeles Superior Court, under the title *ZAP
      v. DaimlerChrysler AG, et al* **.** 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
      DaimlerChrysler 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. DaimlerChrysler has not
      yet filed a response to our complaint.








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




Not
      Applicable











Item
      3.  Defaults
      Upon Senior Securities





Not
      Applicable











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





Not
      Applicable










Item
      5.  Other
      Information





Not
      Applicable









Item
      6.  Exhibits





**A.**
            **Exhibits**




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.




16
  **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 
                   May 12, 2006
              By:
              /s/ Steven
                  SchneiderName:Steven
                  SchneiderTitle:    
                  Chief Executive Officer (Principal Executive
                  Officer)
  
 
 Dated  
                  May 12, 2006
              By:
              /s/ William
                  HartmanName:William
                  HartmanTitle:     
                  Chief Financial Officer (Principal Financial and Accounting
                  Officer)
   
          17