UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








Form
10-Q




(Mark
One)
 x QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the
quarterly period ended June 30,
2008
  o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the
transition period from ________ to _________
 Commission
File Number          001-32534


ZAP
 (Exact
name of registrant as specified in its charter)
  California
                  94-3210624(State
      or other jurisdiction of incorporation or organization)
                  (IRS
      Employer Identification No.)
  501
4th Street, Santa
Rosa,
CA              
95401
 (Address
of principal executive offices)  (Zip Code)
  (707)
525-8658
 (Registrant’s
telephone number)
  
 (Former
name, former address and former fiscal year, if changed since last
report)
  Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.
 Yes x    No
o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting
company.
   Large accelerated
      filer o
                      Accelerated filer
      o
                      Non-accelerated
      filer o
                      Small
      reporting company x
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes oNo x
  APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
 PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
  Check
whether the registrant filed all documents and reports required to be filed by
Section l2, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes oNo x





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





59,777,951
shares of common stock as of August 12, 2008.










ZAP





FORM
10-Q




INDEX





Page
      No.PART
      I.
            Financial
      InformationItem
      1.
            Condensed
      Consolidated Financial Statements (unaudited) :Condensed
      Consolidated Balance Sheets as of June 30, 2008 unaudited and December 31,
      2007 (audited).
            1Condensed
      Consolidated Statements of Operations for the Three and Six Months Ended
      June 30, 2008 and 2007, unaudited.
            2Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended June 30,
      2008 and 2007, unaudited.
            3Notes
      to Condensed Consolidated Financial Statements
            4Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            13Item
      4T.
            Controls
      and Procedures
            26PART
      II.
            Other
      InformationItem
      1.
            Legal
      Proceedings
            27Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            29Item
      3.
            Defaults
      Upon Senior Securities
            29Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            29Item
      5.
            Other
      Information
            29Item
      6.
            Exhibits
            30SIGNATURES
            
            34








Part I.
     FINANCIAL INFORMATION


Item
1.    Financial Statements
 ZAP AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In
thousands)
 June 30,
      2008
                Unaudited
              
              
              December
      31, 2007
                AuditedASSETSCURRENT
      ASSETSCash
      and cash equivalents
              
              $
              1,146
              
              
              $
              4,339Accounts
      receivable, net of allowance for doubtful accounts of $155 and
      $172
              
              
              307
              
              
              
              373Inventories,
      net
              
              
              1,345
              
              
              
              1,437Prepaid
      non-cash professional fees
              
              
              91
              
              
              
              283Other
      prepaid expenses and other current assets
              
              
              1,397
              
              
              
              747Total current
      assets
              
              
              4,286
              
              
              
              7,179Property,
      and equipment, net of accumulated depreciation
              
              
              4,235
              
              
              
              4,471OTHER
      ASSETSPatents
      and trademarks, net
              
              
              4
              
              
              
              10Prepaid
      non-cash professional fees, less current portion
              
              
              82
              
              
              
              82Deferred
      offering costs
              
              
              —
              
              
              
              20Deposits
      and other assets
              
              
              415
              
              
              
              176Total
      Other Assets
              
              
              501
              
              
              
              288TOTAL
      ASSETS
              
              $
              9,022
              
              
              $
              11,938LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESCurrent
      portion of secured convertible note
              
              $
              —
              
              
              $
              1048%
      Senior convertible notes, net of discount of  $136 in
      2007
              
              
              475
              
              
              
              546Accounts
      payable
              
              
              51
              
              
              
              128Accrued
      liabilities
              
              
              1,936
              
              
              
              2,259Deferred
      revenue
              
              
              637
              
              
              
              752Total
      Current Liabilities
              
              
              3,099
              
              
              
              3,789LONG-TERM
      LIABILITIESSecured
      convertible note, less current portion
              
              
              1,782
              
              
              
              1,724Total
      liabilities
              
              
              4,881
              
              
              
              5,513SHAREHOLDERS’
      EQUITYCommon
      stock, authorized 400 million shares; no par value; 59,242,128shares and
      57,478,158 shares issued and outstanding  at June 30, 2008
      and December 31, 2007, respectively
              
              
              123,832
              
              
              
              122,672Common
      stock issued as loan collateral
              
              
              —
              
              
              
              (1,549
              )Accumulated
      deficit
              
              
              (119,691
              )
              
              
              (114,698
              )Total
      shareholders’ equity
              
              
              4,141
              
              
              
              6,425Total
      liabilities and shareholders’ equity
              
              $
              9,022
              
              
              $
              11,938
 
 See
accompanying notes to condensed consolidated financial statements
(unaudited)
 
 
 1
 ZAP
AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 (Thousands,
except share amounts)
 
   Three
      Months ended
                June
      30, 2008
              
              
              Three
      Months ended
                June
      30, 2007
              
              
              Six
      Months ended
                June
      30, 2008
              
              
              Six
      Months ended
                June
      30, 2007NET
      SALES
              
              $
              1,923
              
              
              $
              1,405
              
              
              $
              2,979
              
              
              $
              2,542COST
      OF GOODS SOLD
              
              
              1,700
              
              
              
              1,189
              
              
              
              2,662
              
              
              
              2,272GROSS
      PROFIT
              
              
              223
              
              
              
              216
              
              
              
              317
              
              
              
              270OPERATING
      EXPENSESSales
      and marketing
              
              
              412
              
              
              
              264
              
              
              
              802
              
              
              
              635General
      and administrative (non-cash stock-based compensation of $1.1 million and
      $1.6million and $2.6 million and $14.5 million for the three and six
      months ended June 30, 2008 and 2007, respectively)
              
              
              1,910
              
              
              
              2,798
              
              
              
              3,909
              
              
              
              16,788Research
      and development
              
              
              303
              
              
              
              54
              
              
              
              318
              
              
              
              3892,625
              
              
              
              3,116
              
              
              
              5,029
              
              
              
              17,812LOSS
      FROM OPERATIONS
              
              
              (2,402
              )
              
              
              (2,900
              )
              
              
              (4,712)
              
              
              
              (17,542
              )OTHER
      INCOME (EXPENSE)Interest
      expense, net
              
              
              (184
              )
              
              
              (384
              )
              
              
              (230
              )
              
              
              (600
              )Other
      expense
              
              
              (44
              )
              
              
              (24
              )
              
              
              (43
              )
              
              
              (1
              )(228
              )
              
              
              (408
              )
              
              
              (273
              )
              
              
              (601
              )LOSS
      BEFORE INCOME TAXES
              
              $
              (2,630
              )
              
              $
              (3,308
              )
              
              $
              (4,985
              )
              
              $
              (18,143
              )PROVISION
      FOR INCOME TAXES
              
              
              —
              
              
              
              —
              
              
              
              (4
              )
              
              
              (4
              )NET
      LOSS
              
              $
              (2,630
              )
              
              $
              (3,308
              )
              
              $
              (4,989
              )
              
              $
              (18,147
              )NET
      LOSS PER COMMON SHAREBASIC
      AND DILUTED
              
              $
              (0.05
              )
              
              $
              (0.07
              )
              
              $
              (0.09
              )
              
              $
              (0.42
              )WEIGHTED
      AVERAGE OF COMMON SHARES OUTSTANDING --BASIC
      AND DILUTED
              
              
              58,596
              
              
              
              45,455
              
              
              
              57,974
              
              
              
              43,527
 
  See
accompanying notes to condensed consolidated financial statements
(unaudited).
  2
 ZAP
AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 (In thousands)
 Six
      months ended June 30,2008
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
              
              $
              (4,989
              )
              
              $
              (18,147
              )Items
      not requiring the use of cash:Amortization
      of note discount and deferred offering costs
              
              
              156
              
              
              
              205Stock-based
      compensation for consulting and other services
              
              
              2,085
              
              
              
              1,901Stock-based
      employee compensation
              
              
              576
              
              
              
              12,618Stock
      based compensation for interest and registration penalties
              
              
              —
              
              
              
              314Depreciation
      and amortization
              
              
              131
              
              
              
              182Allowance
      for doubtful accounts
              
              
              (41
              )
              
              
              5Changes
      in other items affecting operations:Receivables
              
              
              107
              
              
              
              (120
              )Inventories
              
              
              92
              
              
              
              464Prepaid
      expenses and other assets
              
              
              (900
              )
              
              
              (306
              )Accounts
      payable
              
              
              (78
              )
              
              
              128Accrued
      liabilities
              
              
              (323
              )
              
              
              (310
              )Deferred
      revenue
              
              
              (115
              )
              
              
              (280
              )Net
      cash used for operating activities
              
              
              (3,299
              )
              
              
              (3,346
              )CASH
      FLOWS FROM INVESTING ACTIVITESPurchase
      of equipment
              
              
              —
              
              
              
              (20
              )Proceeds
      from sale of equipment
              
              
              111
              
              
              
              —Net
      cash provided by ( used for) investing activities
              
              
              111
              
              
              
              (20
              )CASH
      FLOWS FROM FINANCING ACTIVITIESIssuance
      of common stock and warrants, net of offering costs
              
              
              —
              
              
              
              1,640Pay-off
      of Convertible debt
              
              
              (431
              )
              
              
              —Re-issuance
      of convertible debt
              
              
              475
              
              
              
              —Proceeds
      from long-term debt, net of offering costs
              
              
              —
              
              
              
              1,185Repayments
      of long-term debt
              
              
              (49
              )
              
              
              (64
              )Net
      cash provided by (used by) financing activities
              
              
              (5
              )
              
              
              2,761NET
      INCREASE ( DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              (3,193
              )
              
              
              (605
              )CASH AND CASH EQUIVALENTS,beginning of period
              
              
              4,339
              
              
              
              2,160CASH AND CASH EQUIVALENTS,end of period
              
              $
              1,146
              
              
              $
              1,555
  
 See
accompanying notes to condensed consolidated financial statements
(unaudited)
 
 
 3


ZAP
AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE
1   BASIS OF PRESENTATION




The
accompanying unaudited condensed financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (“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
six months ended June 30, 2008 are not indicative of the results that may be
expected for the year ending December 31, 2008 or for any other future period.
These condensed consolidated 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-KSB for the year ended December 31,
2007 filed with the Securities and Exchange Commission (the “SEC”) on April 14,
2008 (our “2007 10-K”).





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 upon protecting
our intellectual property rights.








NOTE
2   SIGNIFICANT ACCOUNTING POLICIES





NET
INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS





Basic and
diluted net income (loss) per common share is based on net income (loss) for the
relevant period, divided by the weighted average number of common shares
outstanding in each period. Diluted net income per share gives effect to all
potentially dilutive common shares outstanding during the period such as
options, warrants, convertible preferred stock, and contingently issuable
shares. Potentially dilutive securities associated with stock options, warrants
and convertible preferred stock and debt have been excluded from the diluted net
loss per share amounts, since the effect of these securities would be
anti-dilutive. At June 30, 2008, these potentially dilutive securities include
options for 11.4 million shares of common stock, warrants for 47.8 million
shares of common stock and debt  of $475,000 convertible
into  shares of common stock on November 8,2008,the maturity date at
90% of the closing market price on that day.





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.





4


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.  As the Company
collects monies related to these agreements, it is classified as deferred
revenue until the Company begins delivering a substantial number of vehicles to
these dealerships on a regular basis  over the terms of the agreement.
The Company has recognized approximately $42,000 and $104,000 of license revenue
and other adjustments for the three and six month periods ended June 30, 2008,
resulting in an ending balance of $637,000.





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 consolidated 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.





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.  Inventories consist primarily of
vehicles, both gas and electric, parts and supplies, and finished goods and are
carried at the lower of cost (first-in, first-out method) or
market.





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.




STOCK ISSUED AS COLLATERAL –
The stock was returned to the Company in January, 2008 and
cancelled.





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 has provided a 6 month warranty for the Xebra® vehicles. At June30,
2008, the Company has recorded a warranty liability for $75,000 for estimated
repair costs, down from $94,000 at December 31, 2007.





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.





NOTE
3   STOCK-BASED COMPENSATION




We have
stock compensation plans for employees and directors, which are described in
Note 8 to our consolidated financial statements in our 2007 Annual Report on
Form 10-KSB as filed with the SEC on April 14, 2008. We recognize the
stock-based compensation expense over the requisite service period of the
individual grantees, which generally equals the vesting period. All of our
stock-based compensation is accounted for as an equity instrument.




On
January 26, 2007, the Company extended the expiration date of 21.8 million
warrants previously issued to employees and officers by five years to July 1,
2012, with new exercise prices ranging from $1.00 to $1.20. As a result of the
modification of the warrants, the Company determined the fair value of the
warrants immediately prior to and after the modification. The incremental
difference in value resulted in the recognition of $11.7 million in non-cash
compensation expense during the first quarter of 2007. The Company valued the
modified warrants at $0.57 per share using a Black-Scholes option pricing model
with the following assumptions: risk free interest rate of 4.98%; dividend rate
of 0.00%; volatility of 123%, and expected term of 2.7 years.




5


Under the
provisions of SFAS 123R, we recorded $ 156,200, of stock compensation, net
of estimated forfeitures, in  general and administrative expenses, in
our unaudited condensed consolidated statement of operations for the three
months ended June 30, 2008 . 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.




Three
      Months Ended
              June
      30, 2008Expected
      Dividend yield
            
            0%Expected
      volatility
            
            
            115.40-120.08Risk-free
      interest rate
            
            
            2.64-3.28Expected
      life (in years) from grant date
            
            
            2.5
      to 6.00Exercise
      price
            
            $
            0.97
















































6


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 and six months ended June 30,
2008 was $0.84 and $0.97, respectively.  We 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 adjusted to actual forfeiture
experience as needed.




A summary
of options under the Company’s stock option plans from December 31, 2007 through
June 30, 2008 is as follows:




Number
      of
              Shares
            
            Weighted
              Average
              Exercise
      Price
            
            Weighted
              Average
              Remaining
              Contractual
              Term
              (in
      years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
      December 31, 2007
            11,276,000
            
            $
            1.03
            
            8.32Options
      granted under the plan
            104,000
            
            $
            0.84
            
            9.75
            
            –Options
      exercised
            –
            
            
            –Options
      forfeited and expired
            –
            
            
            –Outstanding
      March 31, 2008
            11,380,000Options
      granted under the plan
            72,000
            
            $
            0.97
            
            10.0
            
            –Options
      exercised
            (38,100)
            
            $
            0.29Options
      forfeited and expired
            (33,000)
            
            
            –
            
            –
            
            –Outstanding
      June 30, 2008
            11,380,900




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 June 30, 2008, for those
options for which the quoted market price was in excess of the exercise price
(“in-the-money-options”). There were no options in the money at June 30,
2008.





As of
June 30, 2008, total compensation cost of unvested employee stock options is
$1.1 million. This cost is expected to be recognized through June 2011. We
recorded no income tax benefits for stock-based compensation expense
arrangements for the six months ended June 30, 2008, as we have cumulative
operating losses, for which a valuation allowance has been
established.








NOTE 4   INVENTORIES, NET-Inventories at June 30, 2008 are summarized as follows
(thousands):





Vehicles
      - conventional
            
            $
            267Advanced
      transportation vehicles
            
            
            812Parts
      and supplies
            
            
            601Finished
      goods
            
            
            196$
            1,876Less
      - inventory reserve
            
            $
            (531
            )$
            1,345





7


NOTE
5    LONG-TERM DEBT





PROMISSORY
NOTE




On July
30, 2008, ZAP (the “Company”) executed a Promissory Note for a credit line (the
“Note”) and a Deed of Trust, Assignment of Leases and Rents and Security
Agreement and Fixture Filing (the “Security Agreement”), both in favor of Al
Yousuf LLC (the “Lender”). The Al Yousuf Group is a Dubai-based conglomerate and
a major shareholder of ZAP. The President of Al Yousuf LLC is Mr. Eqbal Al
Yousuf who is also the Chairman of the Board of ZAP.






The
following description is a summary of the material terms and conditions of both
the Note and the Security Agreement.






The
maximum principal loan under the Note is $10,000,000. The initial outstanding
principal sum advanced to the Company is $1,760,000. This advance was used to
pay-off the existing secured note payable on the building. The Note matures
February 28, 2010. Interest only payments are due under the Note monthly
commencing August 30, 2008. Other advances shall be for (i) the purposes of
inventory from June 1, 2008 consistent with the currently applicable budget of
the Company, as approved by its board of directors (an “Inventory Advance”) or
(ii) general working capital to be used consistently with the Company’s budget (a
“Working Capital Advance”). The interest rate shall accrue daily at a rate per
annum equal to the greater of (i) one month LIBOR plus 3% per annum and (ii)
eight percent (8.00%) per annum, commencing on the date of the
Note.






The Note
matures February 28, 2010. Interest only payments are due under the Note monthly
commencing August 30, 2008. Repayment of an Inventory Advance is due four (4)
months after the date of such Advance. Repayment of a Working Capital Advance is
due six (6) months after the date of such Advance. The repayment term may be
extended upon written request of the Company and at the Lender’s sole
discretion. The Note is pre-payable in whole or in part without penalty and upon
30 days’ written notice to Lender.




The Note
contains customary Events of Default, including but not limited to the
following: (i) failure by the Company to make any scheduled payment of
principal, interest or other amounts due under the Note, (ii) failure to pay-off
the Note upon the Maturity Date, (iii) any representation or warranty made in
the Loan Documents by the Company being found false in any material respect,
(iv) consent by the Company to appoint a conservator or liquidator in a
bankruptcy proceeding relating to the Company or all or substantially all of its
assets and (v) failure of the Company to maintain insurance required pursuant to
the Loan Documents. Upon the occurrence of an Event of Default, the Note shall
become due and payable and the interest rate shall increase by 3.00% per annum. All
principal and interest due under the Note is secured by the Company’s corporate
headquarters building.





SECURED
CONVERTIBLE DEBT





On July
30, 2008 the Company signed a $1.7 million note payable to the  Al
Yousuf Group who is a Dubai-based conglomerate and a major shareholder of ZAP.
The President of Al Yousuf LLC is Mr. Eqbal Al Yousuf who is also the Chairman
of the Board of ZAP. The Note matures February 28, 2010. Interest only payments
are due under the Note monthly commencing August 30, 2008. The repayment term may be extended upon
written request of the Company and at the Lender’s sole discretion. The Note is
pre-payable in whole or in part without penalty and upon 30 days’ written notice
to Lender. See also Note 8 Related Parties and Note 13 Subsequent Events. This
note was used to pay-off the existing secured note on the building. All
principal and interest due under the Note is secured by the corporate
headquarters building in Santa Rosa, California.





CONVERTIBLE
DEBT





8% Senior
Convertible Notes





On
December 5, 2006, when the market price of the Company’s common stock was $0.89
per share, the Company entered into a Securities Purchase Agreement with three
institutional and accredited investors or purchasers pursuant to which the
Company sold to the purchasers $1.5 million aggregate principal amount of 8%
senior convertible notes due December 5, 2008 (the “Notes due 2008”) and
warrants to purchase 450,000 shares of common stock of the Company (the “Initial
Warrants”) in a private placement. The Notes due 2008 were originally
convertible at $1.00 per share (the “Conversion Price”) into 1,500,000 shares of
the Company’s common stock, subject to anti-dilution and other adjustments. The
Initial Warrants, each immediately exercisable and expiring on December 5, 2011,
are exercisable at $1.10 per share, subject to anti-dilution and other
adjustments.





8


On
February 20, 2007, when the market price of the Company’s common stock was $1.08
per share, the Company entered into a Purchase and Amendment Agreement (the
“Amendment”), amending the Securities Purchase Agreement entered into by the
Company on December 5, 2006 (the “Original Agreement” and as amended by the Amendment,
the “Agreement”), with several institutional and accredited investors or
purchasers pursuant to which the Company sold to the purchasers $1.2 million
aggregate principal amount of 8% senior convertible notes due February 2009 (the
“Notes due 2009” and with the Notes due 2008, the “Notes”) and warrants to
purchase 360,000 shares of the common stock of the Company (the “Additional
Warrants” and with the Initial Warrants, the “Warrants”), in a private
placement. The transaction closed on February 22, 2007 (the “February 2007 financing”).
The Notes due 2009 were originally convertible at $1.00 per share into 1,200,000
shares of the Company’s common stock, subject to anti-dilution and other
adjustments.





On June
26, 2007, the Company entered into an Amendment Agreement (the “Second
Amendment”) with the purchasers to adjust certain provisions of the Notes and
Initial Warrants as a consequence of selling shares to a third party investor
for per share consideration less than the conversion price of the Notes and
exercise price of the Initial Warrants. As a result, the conversion price of the
Notes was reduced to $0.72 per share.





On May 7,
2008, the Company entered into a settlement with Gemini Master Fund ,LTD and
Gemini Strategies,LLC, the holders of the  8% Senior Convertible
Notes. The agreement reached requires the termination and cancellation of the
notes in exchange for $475,000 in cash and 100,000 common shares of ZAP common
stock. In connection with the aforementioned agreement ZAP has obtained the
funds necessary for the payment of $475,000 through a note payable to Al Yousuf
LLC . Eqbal Al Yousuf who is the Chairman of the Board of ZAP, is also the
President of Al-Yousulf LLC.





The note
bears interest at the greater of 6 month LIBOR plus 250 basis points or 6% per
annum and may be converted in whole or in part into securities of the Company
November of 2008 in accordance with the terms of the note.  The price
was agreed to be at 90% of the closing market price on the date selected for
conversion.




NOTE
6    INCOME TAXES




We
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109,or FIN 48, on
January 1, 2007. Upon adoption of FIN 48, we commenced a review of our
tax position taken in our tax returns that remain subject to examination. Based
upon our review, we do not believe we have any unrecognized tax benefits or that
there is a material impact on our financial condition or results of operations
as a result of implementing FIN 48.




We file
income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. We are subject to U.S. federal or state income tax
examinations by tax authorities for all years in which we reported net operating
losses that are being carried forward. We do not believe there will be any
material changes in our unrecognized tax positions over the next 12
months.




We
recognize interest and penalties accrued on any unrecognized tax benefits as a
component of income tax expense. As of the date of adoption of FIN 48, we did
not have any accrued interest or penalties associated with any unrecognized tax
benefits, nor was any interest expense recognized for the period ended June 30,
2008.




NOTE
7    SHAREHOLDERS’ EQUITY





ZAP’s
common stock is quoted on the OTC Bulletin Board under the symbol “ZAAP.
OB”




NOTE
8    RELATED PARTY TRANSACTIONS




Rental
agreements





The
Company rents office space, land and warehouse space from Mr. Steven Schneider,
its CEO and a major shareholder. These properties are used to operate the car
outlet and to store inventory. Rental expense was approximately $42,000 for both
the six months ended June 30, 2008 and 2007.


9


Financing  provided
to the Company By Al-Yousuf LLC





The
company entered into various financing arrangements during the second quarter
ended June 30, 2008 with The Al Yousuf Group who is a  Dubai-based
conglomerate and a major shareholder of ZAP. The President of Al Yousuf LLC is
Mr. Eqbal Al Yousuf who is also the Chairman of the Board of ZAP.




On July
30, 2008 we received a $10 million financing arrangement from the Al Yousuf
Group, a Dubai-based conglomerate to provide future working capital to ZAP and
help meet the growing demand for ZAP electric vehicles. The financing
arrangement allows for advances by ZAP over the next few yearscommencing on the date of
the Note. The initial outstanding
principal sum advanced to the Company is $1,760,000. This advance was used to
pay-off the existing secured note payable on the building. The Note matures
February 28, 2010. Interest only payments are due under the Note monthly
commencing August 30, 2008.All principal and interest due under the Note
is secured by the corporate headquarters building in Santa Rosa,
California.




On May 7,
2008, the Company entered into a settlement with Gemini Master Fund ,LTD and
Gemini Strategies, LLC, the holders of the  8% Senior Convertible
Notes. The agreement reached requires the termination and cancellation of the
notes in exchange for $475,000 in cash and 100,000 shares of ZAP common stock.
In connection with the aforementioned agreement ZAP has obtained the funds
necessary for the payment of $475,000 through a note payable to Al
Yousuf  LLC .




Sale of Portable Energy
Product Line/Investment in Portable Energy LLC





We
reported in our quarterly report as of March 31, 2008 filed on May 15, 2008,
that we signed a draft agreement with Al-Yousuf LLC for the sale of our portable
energy product line for $1,000,000 in exchange for a 50% ownership in a new
company. However, no gain will be recognized on the transaction with Al-Yousuf
LLC since no sale took place. There was a misunderstanding with Mr. Al-Yousuf
our investor from Dubai  and Chairman of our Board of Directors. When
the funds were received in June of 2008, Mr. Al-Yousuf  indicated that
he was not buying 50 % of the portable energy product line from ZAP but rather
purchasing a 50 % interest in the newly formed company called Portable Energy
LLC. We transferred the assets of our Portable Energy Product Line at our
historical cost of approximately $75,000 in June of 2008 to a newly formed
company called  Portable Energy LLC in exchange for a 50% ownership
interest. The $1 million in funds received 06/13/08 from Al-Yousuf were also
transferred to the new company in exchange for a 50 % interest for Al
Yousuf.





Consulting
Agreement





On
September 1, 2007, the Company and Mr. Albert Lam, who became a director of the
Company, in October 2007 entered into an Independent Consulting Agreement
(“Consulting Agreement”).  Pursuant to the Consulting Agreement, Mr.
Lam was to consult and advise the Company in the areas of Chinese manufacturing,
facilities, tooling, financing, and contract negotiations on an independent
consultant basis.  Mr. Lam’s compensation under the Consulting
Agreement was: 200,000 shares of the Company’s common stock valued at $194,000,
issued under the Company’s 2007 Consultant Stock Plan (the “Plan”); a warrant to
purchase 200,000 shares of the Company’s common stock valued at $131,000,
expiring five years after grant, with an exercise price of $1.00 per share,
issued under the Plan; and a warrant to purchase 1,000,000 shares of the
Company’s common stock valued at $654,000, expiring five years after grant, with
an exercise price of $1.00 per share and a net exercise provision.





The
Consulting Agreement expired on September 30, 2007, and expense totaling
$979,000 related to the consulting agreement was recorded in the third quarter
of 2007.





The
Company also paid Mr. Lam $65,000 in the first quarter of 2008 for consulting
services. In addition his travel expenses were also reimbursed.





On
October 22, 2007, the Board of Directors (“Board”) of ZAP (“Company”) appointed
Albert Lam as a director of the Company.


10


NOTE
9    COMMITMENTS





At
December 31, 2007 we noted the following commitments that we have updated to
provide the current status at August 14, 2008.





Distribution
Agreement





In May of
2007, ZAP signed a distribution agreement with PML FlightLink Limited (“PML”)
for the purchase of an advanced propriety wheel motor and control system. ZAP
received the exclusive rights to use this system in its current and future
product line. In conjunction with the agreement with PML, ZAP has committed to
an initial order of approximately $10 million in PML wheel motors, subject to
terms and conditions agreed on by the parties. PMLhas not presented us with
a working commercial product through August 14, 2008 and we have not had any
contact with them.  As an alternate to PML, we have made an agreement
with a Chinese company to develop a similar product.





China Joint
Venture





On
September 17, 2007, ZAP entered into a shareholders’ agreement to form a joint
venture with Youngman Automobile Co., Ltd. (“Youngman”) also known as Youngman
Automotive Group, a leading maker of luxury motor coaches and high-quality
commercial trucks in China.  ZAP and Youngman have agreed to pursue
the joint venture under EV Holdings Limited, a newly formed corporation based in
Hong Kong (“EV Holdings”). The name of the company was changed to “ Detroit
Electric” which is an   historic manufacturer of electric
vehicles.




Under the
agreement, ZAP and Youngman will jointly pursue the manufacture, marketing and
distribution of electric and hybrid vehicles for the worldwide passenger car,
truck and bus markets.  The joint venture, EV Holdings, will also
focus on the development and manufacturing of electric charging
infrastructure.  The joint venture partners have agreed to invest a
total of $100 million into the new joint venture by December 31,
2008  (Zap to invest $49 million and Youngman to invest $51
million).  In 2008, the parties informally agreed to a revised initial
capital contribution of $2.5 million by each party subject to outside raising of
funds. The agreement also provides that Youngman shall have rights to control
the manufacturing of products licensed by EV Holdings, and that EV Holdings will
sell its products to ZAP and Youngman for resale within exclusive territories
worldwide.




There has
been no activity under the joint venture in 2008, both of the parties were
seeking outside financing to fund the project, however given the tight economy,
the efforts have not been successful. We also hired an outside investment firm
to find acceptable funding sources with no success.




NOTE
10  SEGMENT REPORTING





In
accordance with the provisions of SFAS No. 131, the Company has identified four
reportable segments consisting of sales and marketing of electronic consumer
products, the Zappy 3 scooters and ATV’s, Rechargeable portable energy products,
operation of a retail car outlet and sales to and sales of advanced technology
vehicles for the Xebra (TM) electric vehicles.  These segments are
strategic business units that offer different services.  They are
managed separately because each business requires different resources and
strategies.  The Company’s chief operating decision making group,
which is comprised of the Chief Executive Officer and the senior executives of
each of ZAP’s strategic segments, regularly evaluate the financial information
about these segments in deciding how to allocate resources and in assessing
performance.  The performance of each segment is measured based on its
profit or loss from operations before income taxes.





Electric
Consumer products and corporate expenses represent sales of our ZAPPY 3 which is
a three wheeled electric scooter and the overall corporate expenses for the
company. Many of these expenses relate to the overall development of our core
business, Electric Consumer Products.


11


Portable
Energy products represent the sales activity of “Recharge-it-all Batteries” which are battery
packs used to power or charge a wide range of mobile electronics as cellar
phones, digital cameras and laptop computers. This product line was transferred
to a separate company in exchange for a 50% interest.




Car
outlet represents the activity of a retail outlet that sells pre-owned
conventional vehicles and advanced technology vehicles, now the Xebra a
three-wheeled plug in electric vehicle to retail customers.




Advanced
Technology Vehicles represents the sales activity of advanced technology
vehicles, now the Xebra a three-wheeled plug in electric vehicle to ZAP Dealers
through-out the U.S.




Segment
results are summarized as follow (in thousands):





ElectronicConsumerProducts
      and Corporate Expenses
            
            
            Portable
      Energy
            
            
            Car
              Outlet
            
            
            AdvancedTechnologyVehicles
            
            
            TotalsFor
      the 3 months ended of June 30, 2008:Net
      Sales
            
            $
            68
            
            
            $
            50
            
            
            $
            430
            
            
            $
            1,375
            
            
            $
            1,923Gross
      profit (Loss)
            
            
            (45
            )
            
            
            29
            
            
            
            (26
            )
            
            
            265
            
            
            
            223–Net
      Income (Loss)
            
            
            (2,427
            )
            
            
            21
            
            
            
            (140
            )
            
            
            (84
            )
            
            
            2,630Total
      Assets
            
            
            7,509
            
            
            
            –
            
            
            
            514
            
            
            
            999
            
            
            
            9,022For
      the 3 months ended of June 30, 2007:Net
      Sales
            
            $
            247
            
            
            $
            43
            
            
            $
            307
            
            
            $
            808
            
            
            $
            1,405Gross
      profit (Loss)
            
            
            94
            
            
            
            12
            
            
            
            45
            
            
            
            65
            
            
            
            216–Net
      Income (Loss)
            
            
            (3,260
            )
            
            
            31
            
            
            
            (37
            )
            
            
            (42
            )
            
            
            3,308Total
      Assets
            
            
            7,734
            
            
            
            –
            
            
            
            477
            
            
            
            1,571
            
            
            
            9,782ElectronicConsumerProducts
      and Corporate Expenses
            
            
            PortableEnergy
            
            
            CarOutlet
            
            
            AdvancedTechnologyVehicles
            
            
            TotalsFor
      the 6 months ended of June 30, 2008:Net
      Sales
            
            $
            75
            
            
            $
            173
            
            
            $
            722
            
            
            $
            2,009
            
            
            $
            2,979Gross
      profit (Loss)
            
            
            (172
            )
            
            
            94
            
            
            
            26
            
            
            
            369
            
            
            
            317–Net
      Income (Loss)
            
            
            (4,819
            )
            
            
            79
            
            
            
            (189
            )
            
            
            (60
            )
            
            
            (4,989
            )Total
      Assets
            
            
            7,508
            
            
            
            –
            
            
            
            515
            
            
            
            999
            
            
            
            9,022For
      the 6 months ended of June 30, 2007:Net
      Sales
            
            $
            392
            
            
            $
            70
            
            
            $
            657
            
            
            $
            1,423
            
            
            $
            2,542Gross
      profit (Loss)
            
            
            34
            
            
            
            27
            
            
            
            118
            
            
            
            91
            
            
            
            270–Net
      Income (Loss)
            
            
            (17,879
            )
            
            
            44
            
            
            
            (101
            )
            
            
            (211
            )
            
            
            (18,147
            )Total
      Assets
            
            
            7,734
            
            
            
            –
            
            
            
            477
            
            
            
            1,571
            
            
            
            9,782





12


NOTE
11  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:





Six
      Months EndedJune
      30,
              (in
      thousands)2008
            
            
            2007Cash
      paid during the period for interest
            
            $
            –
            
            
            $
            16Cash
      paid during the period for income taxes
            
            $
            4
            
            
            $
            4Non-cash
      investing and financing activities:Stock
      and warrants issued for:Re-payment
      of 8% Senior debt
            
            $
            431
            
            
            $
            –




NOTE
12  SUBSEQUENT EVENTS




On July
30, 2008 we received a $10 million financing arrangement from the Al Yousuf
Group, a Dubai-based conglomerate, to provide future working capital to ZAP and
help meet the growing demand for ZAP electric vehicles. The Al-Yousuf group is a
major investor of ours and the President of Al-Yousuf, Mr. Eqbal Al-Yousuf is
our Chairman of the Board. The financing arrangement allows for advances by ZAP
over the next few yearscommencing on the date of
the Note.




The initial outstanding principal sum
advanced to the Company is $1,760,000. This advance was used to pay-off the
existing secured note payable on the building. The Note matures February 28,
2010. Interest only payments are due under the Note monthly commencing August
30, 2008.All principal and interest due under the Note is secured by the
corporate headquarters building in Santa Rosa, California








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





THIS
QUARTERLY REPORT OF FORM 10-Q, INCLUDING THE FOLLOWING MANAGEMENT’S DISCUSSION
AND ANALYSIS, AND OTHER REPORTS FILED BY THE REGISTRANT FROM TIME TO TIME WITH
THE SECURITIES AND EXCHANGE COMMISSION (COLLECTIVELY THE “FILINGS”) CONTAIN
FORWARD-LOOKING STATEMENTS WHICH ARE INTENDED TO CONVEY OUR EXPECTATIONS OR
PREDICTIONS REGARDING THE OCCURRENCE OF POSSIBLE FUTURE EVENTS OR THE EXISTENCE
OF TRENDS AND FACTORS THAT MAY IMPACT OUR FUTURE PLANS AND OPERATING RESULTS.
THESE FORWARD-LOOKING STATEMENTS ARE DERIVED, IN PART, FROM VARIOUS ASSUMPTIONS
AND ANALYSES WE HAVE MADE IN THE CONTEXT OF OUR CURRENT BUSINESS PLAN AND
INFORMATION CURRENTLY AVAILABLE TO US AND IN LIGHT OF OUR EXPERIENCE AND
PERCEPTIONS OF HISTORICAL TRENDS, CURRENT CONDITIONS AND EXPECTED FUTURE
DEVELOPMENTS AND OTHER FACTORS WE BELIEVE TO BE APPROPRIATE IN THE
CIRCUMSTANCES. YOU CAN GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS THROUGH
WORDS AND PHRASES SUCH AS “SEEK”, “ANTICIPATE”, “BELIEVE”, “ESTIMATE”, “EXPECT”,
“INTEND”, “PLAN”, “BUDGET”, “PROJECT”, “MAY BE”, “MAY CONTINUE”, “MAY LIKELY
RESULT”, AND SIMILAR EXPRESSIONS. WHEN READING ANY FORWARD-LOOKING STATEMENT
YOU


13


SHOULD
REMAIN MINDFUL THAT ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN AS
THEY ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS CONCERNING FUTURE EVENTS
OR FUTURE PERFORMANCE OF OUR COMPANY, AND ARE SUBJECT TO RISKS, UNCERTAINTIES,
ASSUMPTIONS AND OTHER FACTORS RELATING TO OUR INDUSTRY AND RESULTS OF
OPERATIONS, INCLUDING BUT NOT LIMITED TO THE FOLLOWING FACTORS:





o
            WHETHER
      THE ALTERNATIVE ENERGY AND GAS-EFFICIENT VEHICLE MARKET FOROUR
      PRODUCTS CONTINUES TO GROW AND, IF IT DOES, THE PACE AT WHICH ITMAY
      GROW;




o
            OUR
      ABILITY TO ATTRACT AND RETAIN THE PERSONNEL QUALIFIED TO
      IMPLEMENTOUR
      GROWTH STRATEGIES,




o
            OUR
      ABILITY TO OBTAIN APPROVAL FROM GOVERNMENT AUTHORITIES FOR OURPRODUCTS;




o
            OUR
      ABILITY TO PROTECT THE PATENTS ON OUR PROPRIETARY
    TECHNOLOGY;




o
            OUR
      ABILITY TO FUND OUR SHORT-TERM AND LONG-TERM FINANCING
    NEEDS;




o
            OUR
      ABILITY TO COMPETE AGAINST LARGE COMPETITORS IN A RAPIDLY
      CHANGINGMARKET
      FOR ELECTRIC AND GAS-EFFICIENT
VEHICLES;




o
            CHANGES
      IN OUR BUSINESS PLAN AND CORPORATE STRATEGIES;
  AND




o
            OTHER
      RISKS AND UNCERTAINTIES DISCUSSED IN GREATER DETAIL IN VARIOUSSECTIONS
      OF THIS REPORT, PARTICULARLY THE SECTION CAPTIONED “RISK
      FACTORS.”





SHOULD
ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR
PLANNED.





EACH
FORWARD-LOOKING STATEMENT SHOULD BE READ IN CONTEXT WITH, AND WITH AN
UNDERSTANDING OF, THE VARIOUS OTHER DISCLOSURES CONCERNING OUR COMPANY AND OUR
BUSINESS MADE IN OUR FILINGS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON ANY
FORWARD-LOOKING STATEMENT AS A PREDICTION OF ACTUAL RESULTS OR DEVELOPMENTS. WE
ARE NOT OBLIGATED TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT CONTAINED IN
THIS REPORT TO REFLECT NEW EVENTS OR CIRCUMSTANCES UNLESS AND TO THE EXTENT
REQUIRED BY APPLICABLE LAW.




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




Overview


GENERAL





ZAP
stands for Zero Air Pollution(R). With its new product offerings,
the Company is positioned to become a leading brand and distribution portal
of electric and other 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 electric and fuel efficient vehicles. With the recent increases in
the cost of 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 asimilar
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 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 iswww.zapworld.com. Please refer to it for further
information on ZAP.


14


SUBSIDIARIES





We have
the following wholly owned subsidiaries : 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”) ; 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 at one location and ZAP Manufacturing is engaged primarily
in the distribution of ZAP products. ZAP World Outlet , ZAP Rental Outlet and
RAP Group are not currently operating subsidiaries.




Recent
Developments





Some of
the noteworthy events for the Company that occurred during the second quarter of
2008 and through the date of this report are as follows:





1.
            On
      July 30, 2008 we received a $10 million financing arrangement from the Al
      Yousuf Group, a Dubai-based conglomerate to provide future working capital
      to ZAP and help meet the growing demand for ZAP electric vehicles. The
      Al-Yousuf group is a major investor of ours and the President of Al-Yousuf
      LLC, Mr. Eqbal Al-Yousuf is our Chairman of the Board.The financing
      arrangement allows for advances by ZAP over the next few years. We
      received an initial advance of $1.7 million on the financing arrangement
      to pay-off the existing long term secured note on the corporate
      headquarters building




2.
            In  June,
      we transferred our portable energy product line of the Recharge-It-All
      line of mobile re-chargers to a new company, Portable Energy LLC in
      exchange for a 50% interest. Mr. Eqbal Al Yousuf also contributed $1
      million to the new Company in exchange for a 50%
  interest.





3.
            In
      May, we also completed a transaction with the Al-Yousuf LLC to purchase
      our convertible debt of $475,000 that was part of a private placement to
      an outside investor in 2007.




4.
            The
      New York Times in a March 9, 2008 article reported that the our Xebra
      electric car is the best-selling model at the nation’s top electric car
      dealer. The newspaper also reported that electric car dealer Ecomotion of
      Portland, Oregon is the top dealer in the nation with about 125 vehicles
      sold. The article says the dealer sold about 50 of the ZAP Xebra, called
      the “surprise success” by the Portland
  Oregonian.




5.
            We
      signed an agreement with The Coca-Cola Company  to use 30
      compact trucks for a new beverage distribution system in Montevideo,
      Uruguay. Officials say that the new distribution model using these trucks
      averages about one-fifth the fuel consumption of the former model.Recently
      Coca-Cola announced a pledge to the environment as part of its policy of
      corporate social responsibility.




6.
              Due to the rising
      price of gas and oil, the Company has seen interest and sales of its
      electric vehicles grow.  The Company has increased its dealer base
      from 20 in 2007 to 50 in 2008.  Consumer demand for our electric
      vehicles has never been better.


Results
of Operations





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







Three
      months ended June 30
              Six
      months ended June 302008
              2007
              2008
              2007Statements of
      Operations Data:Net
      sales
              100%
              100%
              100%
              100%Cost
      of sales
              (88.4)
              (84.6)
              (89.4)
              (89.4)Operating
      expenses
              (136.5)
              (221.8)
              (168.8)
              (700.7)Loss
      from operations
              (124.9)
              (206.4)
              (158.2)
              (690.1)Net
      loss
              (136.8)
              (235.4)
              (167.5)
              (713.9)


15


Quarter
Ended June 30, 2008 Compared to Quarter Ended June 30, 2007





Net sales for the quarter
ended  June 30, 2008 were $1.9 million compared to $1.4 million for
the period ended June 30, 2007.





Our
second quarter sales of Advanced Technology vehicles such as the Xebra, our
three wheeled electric car and Zapino, a full size electric road scooter
increased from $808,000 in 2007 to $1.4 million in 2008. The primary reason is
greater consumer demand due to the high price of gasoline and a larger number of
dealers carrying our products.





Sales of
our Portable energy Product line in the second quarters experienced a slight
increase from $43,000 to $50,000 in 2008. Our marketing efforts to major retail
chains were less than we anticipated due to the overall tight economy for
consumer spending. We experienced a difficult market for retailers.





We
experienced an increase in retail sales by our car lot in the second quarter of
$123,000 from $307,000 in 2007 to $430,000. Although the economy is tight, our
sales are dependent on the mix of car models on hand in our lot at any
time.





In our
Consumer Product segment second quarter sales decreased from $247,000 in 2007 to
$68,000 in 2008. As discussed below we did not have any of our Zappy3 electric
scooters available due to switching and improving suppliers in
2008.





Gross profit increased by
$7,000 from $216,000 for the second quarter ended June 30, 2007 to $223,000 for
the quarter ended June 30, 2008.





The
second quarter gross profits for our Advanced Technology vehicles increased from
$65,000 or 8% of sales to $265,000 or 19% of sales due to higher sales volumes
in 2008. We also experienced fewer quality control issues in 2008 that adversely
affected our profits in 2007.





Our
Portable Energy Product line experienced an increase in second quarter gross
profits from $12,000 in 2007 to $29,000 in 2008.





The
Consumer Products segment experienced a decrease in gross profits in the second
quarter  from $94,000 in 2007 to a gross loss of $45,000 in 2008. The
primary reason for the decrease was lower sales volumes due to the
unavailability of products together with fixed expenses for the operations
area.





The gross
profits in the second quarter for our car lot sales decreased from $45,000 or
14% of sales in 2007 to a gross loss of $26,000 or -6% of sales in 2008. The
lower profits are due to the tight economy, a write down of inventory
valuations, and the mix of vehicle models sold during the quarter.





Sales and marketing expenses
increased by $148,000 from $264,000 for the quarter ended June 30, 2007 to
$412,000 in 2008.  As a percentage of sales it represents an increase
from 19% to 21%. The increase was due to higher salaries with more personnel in
the function and outside consultants used to promote the sales
efforts.





General and
administrative expenses decreased by $888,000
from $2.8million for the quarter ended June 30, 2007 to $1.9 million in 2008.
The reason for the decrease was due to less consulting and professional
fees.





Research and development
expensesincreasedby $249,000 from $54,000
in 2007. The primary reason for the increase were expenses incurred in the ZAP X
and to build a full scale model of our new vehicle, the ZAP-Alias. This vehicle
will be a production-ready all electric highway vehicle and our heavy duty ATV
for ZAP in the USA market. In addition, we reclassified some expenses to R&D
expense from General and Administrative Expenses.





Interest expense, netdecreased from an expense of $384,000 in second quarter 2007 to
$184,000 in second quarter  of 2008. The decrease was due to lower
interest bearing balances on the 8% senior convertible debt.





Other expense, netincreased  from $24,000 for the second quarter of 2007 to other
expense of $44,000  in the second quarter of 2008. The reason for the
increase was our donation of $25,000 to the Red Cross for China earthquake
relief.





Net Lossfor the quarter ended
June 30, 2008 was $2.6 million compared to a net loss of $3.3 million for period
ended June 30, 2007.




Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007




Net sales for the six months
ended June 30, 2008, were $2.9 million compared to $2.5 million for the six
months  ended June 30 in the prior year. Sales in the Advanced
Technology segment increased from $1.4 million in 2007 to $2.0 million in 2008
primarily due to greater demand. With the high price of gasoline in the U.S.
many consumers are seeking alternatives such as electric vehicles both our Xebra
electric vehicle and our Zapino a full-size Vespa like electric scooter. We now
have one of the few road ready electric vehicles available.





We
experienced a decrease of $317,000 in sales of consumer products from $392,000
in 2007 to $75,000 in 2008.




Our main
consumer product the ZAPPY3 electric scooter was not available in 2008 since our
previous manufacturer experienced financial difficulties in early 2008 and we
switched to a new manufacturer but did not receive new products until June
2008.





Sales in
our Portable Energy segment increased from $70,000 in 2007 to $173,000 in 2008.
The primary reason for the increase was that we did not introduce the product
line until late in the second quarter of 2007. In mid June we transferred this
product line to a new company, Portable Energy LLC in exchange for a 50%
interest.





Our
retail car lot experienced a slight increase in sales from $657,000 in 2007 to
$722,000 in 2008. However, the overall U.S. market for retail cars remains
sluggish due to the tight economy.





Gross profitwas
$317,000  for the six months ended June 30, 2008 compared to $270,000
for the six months ended June 30, 2007 resulting in an increase of
$47,000.





In our
Advanced Technology segment our gross profit increased from $91,000 or 6% of
sales to $369,000 or 18% of sales. The increase was due to greater sales of
vehicles in 2008 together with less expense for quality control issues in
2008.





In our
Consumer Products segment we experienced a decrease of $206,000 in gross profits
from $34,000 in 2007 to a gross loss of $172,000 in 2008. As per above we did
not have product available in 2008 but still incurred fixed expenses for labor,
rents etc.





Our
Portable Energy Segment experienced a increase in gross profits from $27,000 or
38% of sales in 2007 to $94,000 or 54% of sales in 2008. The increase was due to
higher sales volumes and product mix.





Gross
profits in our retail car lot decreased from $118,000 or 18% of sales to $26,000
or 3.6% of sales in 2008. This reflects lower margins on car sales due to the
tight economy.




Sales and marketing expenses
in the first six months of 2008 increased by $167,000 from
$635,000  in 2007 to  $802,000 in 2008. As a percentage of
sales it represents an increase from 25% to 27%. The increase was due to higher
salaries with more personnel in the function and outside consultants used to
promote the sales efforts.


16


General and administrative
expensesfor the six
months ended June 30, 2008 decreased by $12.9 million from $16.8 million in 2007
to $3.9 million in 2008.  The primary reason for the decrease was due
to the 2007 one-time  non-cash expense of  $12 million to
account for the modification and extension of certain expiring warrants that
were issued to shareholders pursuant to the plan of reorganization in June of
2002 and also to current ZAP employees for compensation purposes. The warrants
were extended by five years until July 2012 with the exercise prices also
adjusted.





Research and development
expensesdecreased by $71,000 from $389,000 in 2007 to
$318,000 in 2008. In 2007 the
Company’s expense  was for  the design and drawings for the
development of two concept cars by  Lotus Engineering .





Interest expense, netdecreased by $370,000 from an interest expense of  $600,000 for
the first six months of 2007 to
interest expense of $230,000 in the six months ended June 30, 2008. The decrease
was due to less interest and penalties paid in connection with the senior
convertible debt that was issued in late 2006 and early 2007.





Other expenseincreasedfrom $1,000 for the six
months ended June 30, 2007 to $43,000 in the first six months of 2008. The main
reason for the increase was our donation of $25,000 to the Red Cross for China
earthquake relief.





Net Losswas $4.9 million for
the six months ended June 30, 2008 as compared to a net loss of $18.1 million
for period ended June 30, 2007. The additional losses in 2007 were primarily due
to the modification and extension of certain expiring warrants that were issued
by the Company to selected shareholders and current ZAP employees, as well
as stock-based compensation expense due to the adoption of SFAS
123R.




Liquidity
and Capital Resources





In the
first six months of 2008 net cash used for operating activities was $3.3
million. Cash used in the first six months of 2008 was comprised of the net loss
incurred for the first six months of $4.9 million plus net non-cash expenses of
$2.9 million and the net decrease of $1.2 million in operating assets and
liabilities. In the first six months of 2007, the Company used cash for
operations of $3.3 million was comprised of the net loss of $18.1 million plus
net non-cash expenses of $15.2 million, and the net change in operating assets
and liabilities of $424,000.





Investing
activities provided  cash of $111,000 in the first six months ended
June 30, 2008 compared with a use of cash of $20,000 in 2007.




Financing
activities for the first six months ended June 30, 2008 used cash of $5,000
compared with investing activities providing cash of $2.8 million in 2007. In
2007, we issued senior convertible debt and stock and warrants to generate
cash.





The
Company had cash of $1.1 million at June 30, 2008 as compared to $1.6 million at
June 30, 2007. The Company had working capital of $1.2 million and a working
capital deficit of $958,000 for the periods ended June 30, 2008 and 2007
respectively.




On
July 30, 2008 we received a $10 million financing arrangement from the Al Yousuf
Group, a Dubai-based conglomerate to provide future working capital to ZAP and
help meet the growing demand for ZAP electric vehicles. The Al-Yousuf group is a
major investor of ours and the President of Al-Yousuf, Mr. Eqbal Al-Yousuf is
our Chairman of the Board. The financing arrangement allows for advances by ZAP
over the next few yearscommencing on the date of
the Note.




CRITICAL
ACCOUNTING POLICIES





Revenue
Recognition





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


17





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.





Allowance for Doubtful
Accounts




The
Company performs ongoing credit evaluations of its customers’ financial
condition and, generally, requires no collateral from its customers. The Company
records an allowance for doubtful accounts receivable for credit losses at the
end of each period based on an analysis of individual aged accounts receivable
balances. As a result of this analysis, the Company believes that its allowance
for doubtful accounts is adequate at June 30, 2008 and 2007, respectively. 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
Valuation




We adjust
the value of our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions and
development of new products by our competitors.  Inventories consist
primarily of vehicles, both gas and electric, parts and supplies, and finished
goods, and are carried at the lower of cost (first-in, first-out method) or
market.





Deferred Tax Asset
Realization





We record
a full valuation allowance to reduce our deferred tax assets to the amount that
is more likely than not to be realized.  While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made.





BUSINESS
DEVELOPMENT





Founded
in 1994, ZAP has invented, designed, manufactured, and marketed
numerous innovative products since the Company’s inception. In 1995, ZAP
began marketing electric transportation on the Internet through our
website, www.zapworld.com. ZAP
has been a pioneer in developing and marketing electric vehicles such as
a zero-emission ZAP(R) electric bicycle, ZAP Power System, which adapts to
most bicycles, and the ZAPPY(R) folding electric scooter. From 1996 through
1998, we continued to add to our product line; in 1999, ZAP added electric
motorbikes; in 2001, it 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. To date, we have delivered
more than 100,000 electric vehicles and consumer products to customers in
more than 75 countries, which we believe establishes us as one of the
leaders in the alternative transportation marketplace.





Today,
ZAP is continuing its focus as one of the pioneers of
advanced transportation technologies and leveraging its place in the market
as a magnet for new technologies. The Company believes there is a growing
and underrepresented market for fuel efficient transportation vehicles and
we are capitalizing on the opportunities,


18


enhanced
by heightened environmental awareness, climate changes and economic
pressures. The technology is available to deliver transportation solutions
that are practical and affordable. With our products such as the XEBRA and
ZAPPY 3, ZAP is already delivering such solutions to the market. Our goal
is to become one of the largest and most complete brand and distribution
portals in the United States for advanced technology vehicles.




To
distribute our practical, affordable and advanced
transportation technologies, we have established and are growing both our
portal of qualified automotive dealers and our relationships with specialty
dealers/distributors for


our power
system products. Through these distribution channels, coupled with
the continued establishment of partnerships with select manufacturers, we
intend to expand our market recognition by building awareness of the
evolving technologies available for automotive transportation and in
reducing our nation’s dependency on
foreign oil.





PRODUCT
SUMMARY





Our
existing product line, which includes completed, market ready products
and planned introductions, is as follows:





ZAP
AUTOMOTIVE




ZAP
believes it is positioned to become one of the leading distributors of
fuel efficient alternative energy vehicles in the United States. We believe
that we are one of only a few companies distributing a 100% production
electric vehicle capable of speeds up to 40 mph in 2007. Within the next
twelve to thirty-six months, we hope to have distribution agreements in
place with three to four vehicle manufacturers whose products fit ZAP’s
mission. To distribute our product to end consumers and fleets, we have
established more than 30 licensed automotive dealers and intend to grow
this base significantly over the next several years.





In 2006,
ZAP Automotive introduced the following automobile products:





o
            the
      100% electric XEBRA sedan with an MSRP of approximately$11,000;





o
            the
      100% electric XEBRA utility vehicle truck with an MSRP ofapproximately
      $12,000; and








In 2007,
ZAP Automotive introduced a new electric scooter, the ZAPINO, with an advanced
3,000 watt brushless DC hub motor, perfect for city commuting and able to
reach speeds of 30 MPH with an MSRP of $3,000.





Our
future offerings that are currently in the developmental stage
include:








o
            the
      ZAP-X, a 100% electric vehicle which will use LotusEngineering’s
      Aluminum Performance Crossover (“APX”)
design.





o
            The
      ZAP Alias, which has a target price of $32,500 per vehicle andan
      estimated range of 100 miles per charge. This vehicle launchdate
      is for 2009.





o
            The
      ZAP Truck XL, which is a low speed 4 wheel utility truck and havinga
      MSRP of approximately $14,900.





We are
also in discussions with other foreign manufacturers and hope to establish
additional relationships within the next twelve to thirty-six months for
other vehicle platforms.





XEBRA





We
believe that XEBRA is the only series production electric vehicle in
the United States that can legally travel faster than 25 mph. The car’s
suggested retail price of $11,000 is significantly less expensive than most
of its


19


competitors,
some of which cost more than $100,000 and are not yet widely available
today. XEBRA has three wheels and is being imported as a
motor-driven cycle, yet, unlike most other motor-driven cycles, the XEBRA
is enclosed with windows and a roof, affording it protection from inclement
weather.





Working
with our Chinese manufacturing partner, we have designed two XEBRA models:
a sedan and a utility pick-up truck. The Chinese manufacturer’s
current manufacturing capacity is approximately 1,000 vehicles per month.
Subject in large part to the level of financing secured, our current target
is to distribute approximately 200 vehicles per month over the next 12
months. Initial market demand has been strong, both from end consumers
using the vehicle as a “city-car” and from fleet managers of
municipalities, states, green friendly corporations, and universities who
have a preference or mandate to purchase zero emission
vehicles.




We are
working closely with our manufacturing partner to continually upgrade
the XEBRA, adding features while balancing the goal of maintaining an
affordable price level. We are in the process of looking into incorporating
options to enhance the consumer’s experience, including providing lithium
battery packs for additional (up to 100 mile) range and solar panels for
low cost and true zero air pollution charging. Solar options were
introduced in the current quarter.




XEBRA
Sedan (ZAPCAR (R))





ZAP
launched the sedan version of its XEBRA ZAPCAR on July 11, 2006. The
sedan has a seating capacity for four and is being targeted for
city/commuter use. Based on initial feedback, ZAP will be marketing the
XEBRA sedan to government and corporate fleets as well as to families with
two or more cars, but with plenty of occasion to use their vehicles for
short, city drives.





XEBRA PK
( ZAPTRUCK(R))





ZAP
launched its utility pick-up truck version of the XEBRA, the XEBRA
ZAPTRUCK, on August 24, 2006. This electric vehicle seats two with a
multi-purpose platform behind the passenger compartment that serves as a
hauler, dump truck or flatbed. The XEBRA ZAPTRUCK is targeted to
municipalities, maintenance facilities, universities, ranches and
warehouses. Since its launch, we have received overwhelming inquiries for
test drives. To date, we have focused on our west coast market and sales
have exceeded our initial distribution and sales plans.




LOTUS





In 2007,
we announced and entered into a development contract with Lotus Engineering
to develop a electric all-wheel drive crossover high performance vehicle
for the U.S. market. A combination of the lightweight aluminum
vehicle architecture, a new efficient drive and advanced battery management
systems is intended to enable a range of up to 350 miles between
charges.  An auxiliary power unit is planned to support
longer distance journeys.





The ZAP-X
is proposed to be powered by revolutionary in-hub electric
motors, delivering 644 horsepower in all wheel drive mode, theoretically
capable of powering the ZAP-X to a potential top speed of 155mph. A new,
strong,


lightweight
and highly efficient structure based on the Lotus technology is planned to
give the car a very attractive power-to-weight ratio. We are in the midst
of the development plan for the ZAP-X.





We are
also developing a $32,000 all electric vehicle with a targeted 100
mile range, the ZAP Alias (TM), which is expected second quarter
2009.





Future
Automotive
Offerings





Over the
next 36 months, we hope to establish relationships with two to
four additional manufacturers who can supply automobiles and related
vehicles that meet our mission of affordable, advanced transportation
technologies that are socially responsible and environmentally sustainable.
In 2007, we have identified the following products as potential future
offerings for the Company: (1) an affordable 100% electric two-seater
sports coupe; (2) a high performance highway all electric vehicle and (3)
electric trucks.


20





ZAP
Power Systems




We
launched the Company in 1994 with the invention of the ZAPPY electric
scooter and quickly established a presence as one of the market leaders in
the electric “personal” transportation product segment. Since inception,
the Company has been able to maintain a steady business and committed
buyers in this segment. In keeping with our initial product offerings, at
the beginning of 2006, we revitalized our consumer products line (recently
renamed “Power Systems”), including an updated version of the electric
scooter. As part of the segment’s revitalization, we reduced the number of
suppliers and placed more emphasis on upgrading existing models with newer
component technology and more robust features in order to provide a higher
quality consumer experience and product.





Our
current product offerings include:





o
            Three-wheeled
      personal transporters (ZAPPY3, ZAPPY3 Pro, ZAPPY3EZ);




o
            Off-road
      vehicles (electric quads and motorcycles);
and




o
            Portable
      energy (universal recharge-it-all batteries and auxiliarybatteries).





The
ZAPPY3 Personal Transporters





Segway’s
highly publicized “human transporter to change the world” unearthed
a growing need for a “scooter for adults,” better known as personal
electric transportation. The Company responded to this demand by designing
the ZAPPY3. Unlike the Segway, the ZAPPY3’s 3-wheeled vehicle design
provides stability and maneuverability allowing just about anyone to ride
this vehicle without training. It has a top speed of 15 mph, and the Pro
has the farthest range of any personal transporter available today at 25
miles range per charge.





The
Company initially thought that the ZAPPY3 would be great for the
consumer market. Over the past year, the Company has revisited its sales
strategy and come to recognize that the largest market opportunities are in
the industrial and commercial applications. The Company’s primary sales
channels are now more clearly defined as security, sporting goods and
material handling.





With the
increased emphasis on homeland security, there are several
product competitors in the security and police market segment. Segway, the
most well known, can be found in select police departments and airports and
sells for


about
$5,500. American Chariot, which is a chariot-like transporter, has
entered the market selling between $1,500 to $2,500. Newest to the security
transporter business is T3Motion, which is built like a small tank and
priced at up to $8,000. The ZAPPY3 meets the need of a majority of the
security transportation needs and with an selling price range of $530 to
$900, depending on the model purchased, which we believe is the most
economical of all offerings.





The
ZAPPY3 retail focus has continued strong in 2008. As the product line
has gained momentum and market acceptance,
we plan to grow distribution in the retail channel through larger regional
and specialized chain stores.





The
material handling, warehousing, fabrication, and construction industries
are the ideal markets for the ZAPPY3 Pro. We are not currently aware of any
major competitors in this market. The traditional solution for short
distance


transportation
has been bicycles. The ZAPPY Pro offers the perfect utility vehicle for
shuttling, picking and packing and getting into small areas like elevators.
While the Company’s entrance into this market is still in the early stages,
the product response has been very favorable, demonstrated by our
newly established relationship with Indoff, the largest distributor of
material handling equipment in the United States.





The
Zapino is an electric scooter that is a great link between ZAP’s
personal transporters and electric cars. Not only economical and
eco-friendly, the Zapino is powerful with an advanced 3000-watt brushless
DC hub motor, perfect for city commuting. Able to reach speeds of 30 MPH,
the Zapino is able to keep up with city traffic without contributing to
city pollution. The rear wheel hub motor on the Zapino creates more room on
board for additional batteries and performance. This innovative drive
system eliminates the need for belts or chains with lower overall
maintenance. It also delivers a more enjoyable ride because it is
nearly silent, accelerates smoothly with no shifting, has no engine
vibration, no tailpipe or heat exhaust -- just good, clean
fun.


21


Off-Road
Vehicles





All
terrain vehicle (“ATV”) manufacturers recognized in excess of $5.0
billion in revenues in 2006 with the market for ATVs. In the United States
alone, approximately 800,000 units were sold in 2006. To date, all of the
ATV’s on the market are gas-powered. We believe electric ATV’s have
practical environmental benefits over their gas-powered counterparts: they
are silent and generate no emissions. Moreover, there are now over 8,000
organic farms in the United States which are committed to reducing
pollutants that may put organic certification at risk. The electric ATVs
can provide the ruggedness of the traditional ATV in areas never before
accessible, while being more versatile than golf carts.





We
entered the electric ATV market in 2006 with our ZAP Buzz mini ATV. The Buzz has
a 450 watt geared-motor and a top speed of 15 mph with a range
of approximately 20 miles. In the 1st quarter of 2007, we introduced the
800 watt “mid size” ATV for sale in the United States and some of our
existing ZAP dealers already have placed preorders. We hope to launch a
heavy duty ATV in the 3rd quarter 2008 with product features and styling
comparable to existing gas-models. We believe our position as an innovator
in the electric vehicle market, coupled with first-mover advantage in the
electric ATV market, will allow us to capitalize on this market segment. If
we are able to capture 1% of the all terrain vehicle market share, it could
equate to over $40 million in revenues per year. However, there can be no
assurances that we will be able to achieve such market share.




Portable
Energy - Recharge-It -All Batteries





We
believe we were one of the first and now one of the leading producers
of rechargeable battery sources using lithium-ion and lithium polymer
technology. Through our Recharge-It-All line, we sell battery packs to
power or charge a wide range of mobile electronics such as cellular phones,
digital cameras and laptops, providing significantly more charge time than
currently available technologies. Our Portable Energy devices fall under
two product lines: universal chargers and made-for iPOD models. The
universal chargers are rechargeable battery packs that extend the use of
most small and medium-sized electronic devices up to 2 to 5 times their
normal battery life. The made-for iPOD models are a series of portable
energy devices designed to work specifically with all the major iPOD
products, including the iPOD, iPOD nano, iPOD shuffle and the iPOD with
video.





We
launched our Portable Energy products at the end of 2006 with
marketing targeted to large electronic retailers. Market statistics
indicate that there will be over two billion users of mobile electronic
devices by the end of 2007.


Our goal
with Portable Energy is to provide a solution that helps solve the energy
management challenge for electronic and mobile internet users. Today, there
are only a few companies that have begun to address the mobile
device backup power/charge market. The currently available products include
Energizer’s “Energi to Go”, Charge 2 Go, Cell Boost, and Medis Power Pack.
We believe that no manufacturer offers rechargeable devices that offer the
ability to re-charge a myriad of electronic devices from the same device as
effectively as ZAP’s Portable Energy.





In June
of 2008 we transferred the assets of the portable energy product line to a new
Company called Portable Energy LLC in return for a 50% interest.




Risk
factors




We have a
history of losses and our future profitability on a quarterly or annual basis is
uncertain, which could have a harmful effect on our business and the value of
ZAP’s common stock.





We
incurred net losses of $4.9 million, $28 million, $11.9 million, for the 6
months  ended June 30, 2008 and the years ended December 31, 2007,
2006 respectively.  We can give no assurance that we will be able to
operate profitably in the future.




We
face intense competition which could cause us to lose market
share.





In the
advanced technology vehicle market in the United States, we compete with large
manufacturers, including Honda, Toyota, and Daimler-Chrysler, who have more
significant financial resources, established market positions, long-standing
relationships with customers and dealers, and who have more significant name
recognition, technical, marketing, sales, manufacturing, distribution, financial
and other resources than we do.  Each of these companies is currently
working to develop, market, and sell advanced technology vehicles in the United
States market.  The


22


resources
available to our competitors to develop new products and introduce them into the
marketplace exceed the resources currently available to us.  We also
face competition from smaller companies with respect to our consumer products,
such as our electric bicycle and scooter.  We expect to face
competition from the makers of consumer batteries and small electronics with
respect to the ZAP Portable Energy line.  This intense competitive
environment may require us to make changes in our products, pricing, licensing,
services, distribution, or marketing to develop, maintain, and extend our
current technology and market position.





Changes in the market for electric
vehicles could cause our products to become obsolete or lose
popularity.





The
electric vehicle industry is in its infancy and has experienced substantial
change in the last few years.  To-date, demand for and interest in
electric vehicles has been sporadic.  As a result, growth in the
electric vehicle industry depends on many factors, including:




·
            continued
      development of product
technology;


·
            the
      environmental consciousness of
customers;


·
            the
      ability of electric vehicles to successfully compete with vehicles powered
      by internal combustion engines;


·
            widespread
      electricity shortages and the resultant increase in electricity prices,
      especially in our primary market, California, which could derail our past
      and present efforts to promote electric vehicles as a practical solution
      to vehicles which require gasoline;
and


·
            whether
      future regulation and legislation requiring increased use of nonpolluting
      vehicles is enacted.




We cannot
assure you that growth in the electric vehicle industry will
continue.  Our business may suffer if the electric vehicle industry
does not grow or grows more slowly than it has in recent years or if we are
unable to maintain the pace of industry demands.




We
may be unable to keep up with changes in electric vehicle technology and, as a
result, may suffer a decline in our competitive
position.





Our
current products are designed for use with, and are dependent upon, existing
electric vehicle technology.  As technologies change, we plan to
upgrade or adapt our products in order to continue to provide products with the
latest technology.  However, our products may become obsolete or our
research and development efforts may not be sufficient to adapt to changes in or
create necessary technology.  As a result, our potential inability to
adapt and develop the necessary technology may harm our competitive
position.





The
failure of certain key suppliers to provide us with components could have a
severe and negative impact upon our business.





We rely
on a small group of suppliers to provide us with components for our products,
some of whom are located outside of the United States.  If these
suppliers become unwilling or unable to provide components, there are a limited
number of alternative suppliers who could provide them.  Changes in
business conditions, wars, governmental changes, and other factors beyond our
control or which we do not presently anticipate could affect our ability to
receive components from our suppliers.  Further, it could be difficult
to find replacement components if our current suppliers fail to provide the
parts needed for these products.  A failure by our major suppliers to
provide these components could severely restrict our ability to manufacture our
products and prevent us from fulfilling customer orders in a timely
fashion.




As
described elsewhere, we have entered into a contract with a Brazilian automobile
manufacturer, OBVIO, for the delivery of 50,000 flex-fuel vehicles in two
different models.  We may not be able to obtain the vehicles that we
expect to obtain from OBVIO because OBVIO is a new developer and manufacturer of
automobiles in Brazil and there are many risks associated with its design and
manufacturing of cars for us, including, but not limited to, risks associated
with the constructing its factory, hiring personnel, acquiring equipment,
assembling a network of suppliers and developing the vehicle assembly
process.  If we cannot get the vehicles from OBVIO that we expect to,
our business will be adversely affected.


23


Product
liability or other claims could have a material adverse effect on our
business.





The risk
of product liability claims, product recalls, and associated adverse publicity
is inherent in the manufacturing, marketing, and sale of electrical
vehicles.  Although we have product liability insurance for our
consumer products for risks of up to an aggregate of $5,000,000, that insurance
may be inadequate to cover all potential product claims.  We also
carry liability insurance on our automobile products.  Any product
recall or lawsuit seeking significant monetary damages either in excess of our
coverage, or outside of our coverage, may have a material adverse effect on our
business and financial condition.  We may not be able to secure
additional product liability insurance coverage on acceptable terms or at
reasonable costs when needed.  A successful product liability claim
against us could require us to pay a substantial monetary
award.  Moreover, a product recall could generate substantial negative
publicity about our products and business and inhibit or prevent
commercialization of other future product candidates.  We cannot
assure you that such claims and/or recalls will not be made in the
future.





We
must devote substantial resources to implementing a product distribution
network.





Our
dealers are often hesitant to provide their own financing to contribute to our
product distribution network.  As a result, we anticipate that we may
have to provide financing or other consignment sale arrangements for dealers who
would like to participate as our regional distribution
centers.





The
further expansion of our product distribution network will require a significant
capital investment and will require extensive amounts of time from our
management.  A capital investment such as this presents many risks,
foremost among them being that we may not realize a significant return on our
investment if the network is not profitable.  Our inability to collect
receivables from our dealers could cause us to suffer losses.  Lastly,
the amount of time that our management will need to devote to this project may
divert them from performing other functions necessary to assure the success of
our business.




Failure to manage our growth
effectively could adversely affect our business.





We plan
to increase sales and expand our operations substantially during the next
several years through internally-generated growth and the acquisition of
businesses and products.





To manage
our growth, we believe we must continue to implement and improve our
operational, manufacturing, and research and development
departments.  We may not have adequately evaluated the costs and risks
associated with this expansion, and our systems, procedures, and controls may
not be adequate to support our operations.  In addition, our
management may not be able to achieve the rapid execution necessary to
successfully offer our products and services and implement our business plan on
a profitable basis.  The success of our future operating activities
will also depend upon our ability to expand our support system to meet the
demands of our growing business.  Any failure by our management to
effectively anticipate, implement, and manage changes required to sustain our
growth would have a material adverse effect on our business, financial
condition, and results of operations.  We cannot assure you that we
will be able to successfully operate acquired businesses, become profitable in
the future, or effectively manage any other change.  An inability to
successfully operate recently acquired businesses and manage existing business
would harm our operations.




The loss of certain key personnel
could significantly harm our business.





The
Company’s performance is substantially dependent upon the services of its
executive officers and other key employees, as well as on its ability to
recruit, retain, and motivate other officers and key employees. Competition for
qualified personnel is intense and there are a limited number of people with
knowledge of and experience in the advanced technology vehicle industry. The
loss of services of any of our officers or key employees, or our inability to
hire and retain a sufficient number of qualified employees, will harm our
business. Specifically, the loss of Mr. Schneider, our Chief Executive Officer
or Mr. Starr, our Director and founder, who is also head of our R&D efforts,
whose specialized knowledge of the electric vehicle industry is essential to our
business, would be detrimental. We have employment agreements with Mr. Schneider
and Mr. Starr that provide for their continued service to the Company until
October 1, 2013.


24


Regulatory
requirements may have a negative impact upon our business.





While our
products are subject to substantial regulation under federal, state, and local
laws, we believe that the products we have sold are materially in compliance
with all applicable laws.  However, to the extent the laws change, or
if we introduce new products in the future, some or all of our products may not
comply with applicable federal, state, or local laws.  Further,
certain federal, state, and local laws and industrial standards currently
regulate electrical and electronics equipment.  Although standards for
electric vehicles are not yet generally available or accepted as industry
standards, our products may become subject to federal, state, and local
regulation in the future.  Compliance with this regulation could be
burdensome, time consuming, and expensive.





Our
automobile products are subject to environmental and safety compliance with
various federal and state regulations, including regulations promulgated by the
EPA, NHTSA, and Air Resource Board of the State of California, and compliance
certification is required for each new model year.  The cost of these
compliance activities and the delays and risks associated with obtaining
approval can be substantial.  Although the Company had marketed its
Smart Car product in the United States, the car must be certified by the
California Air Resources Board before it can be sold in California, New York,
and three other states.  In addition, the two models of our OBVIO
products will need to satisfy all regulatory requirements before they can be
sold in the United States.  The risks, delays, and expenses incurred
in connection with such compliance could be
substantial.





Manufacturing
overseas may cause problems for us.





We have
been shifting our manufacturing overseas. There are many risks associated with
international business.  These risks include, but are not limited to,
language barriers, fluctuations in currency exchange rates, political and
economic instability, regulatory compliance difficulties, problems enforcing
agreements, and greater exposure of our intellectual property to markets where a
high probability of unlawful appropriation may occur.  A failure to
successfully mitigate any of these potential risks could damage our
business.




We
may not be able to protect our internet address.





We
currently hold the internet address, http://www.zapworld.com, a portal through
which we sell our products.  We may not be able to prevent third
parties from acquiring internet addresses that are confusingly similar to our
address, which could adversely affect our business.  Governmental
agencies and their designees generally regulate the acquisition and maintenance
of internet addresses.  However, the regulation of internet addresses
in the United States and in foreign countries is subject to
change.  As a result, we may not be able to acquire or maintain
relevant internet addresses in all countries where we conduct
business.





Our
success is heavily dependent on protecting our intellectual property
rights.





We rely
on a combination of patent, copyright, trademark, and trade secret protections
to protect our proprietary technology.  Our success will, in part,
depend on our ability to obtain trademarks and patents.  We hold
several patents registered with the United States Patent and Trademark
Office.  These registrations include both design patents and utility
patents.  In addition, we have recently submitted provisional patents
which may or may not be afforded the limited protection associated with
provisional patents.  We have also registered numerous trademarks with
the United States Patent and Trademark Office, and have several pending at this
time.  We cannot assure you that the trademarks and patents issued to
us will not be challenged, invalidated, or circumvented, or that the rights
granted under those registrations will provide competitive advantages to
us.





We also
rely on trade secrets and new technologies to maintain our competitive
position.  Although we have entered into confidentiality agreements
with our employees and consultants, we cannot be certain that others will not
gain access to these trade secrets.  Others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets.





We
may be exposed to liability for infringing intellectual property rights of other
companies.





Our
success will, in part, depend on our ability to operate without infringing on
the proprietary rights of others.  Although we have conducted searches
and are not aware of any patents and trademarks which our products or their


25


use might
infringe, we cannot be certain that infringement has not or will not
occur.  We could incur substantial costs, in addition to the great
amount of time lost, in defending any patent or trademark infringement suits or
in asserting any patent or trademark rights, in a suit with another
party.




Risk
of Unregistered Securities Offering.





In the
past, we have had numerous sales of our securities which were not registered
under federal or state securities laws.  We have strived to comply
with all applicable Federal and state securities laws in connection with our
issuances of unregistered securities.  However, to the extent we have
not complied, there may be liability for the purchase price of the securities
sold together with interest and the potential of regulatory
sanctions.





Our
stock price and trading volume may be volatile, which could result in
substantial losses for our stockholders.





The
equity trading markets may experience periods of volatility, which could result
in highly variable and unpredictable pricing of equity
securities.  The market price of our common stock could change in ways
that may or may not be related to our business, our industry or our operating
performance and financial condition.  In addition, the trading volume
in our common stock may fluctuate and cause significant price variations to
occur.  We have experienced significant volatility in the price of our
stock over the past few years.  We cannot assure you that the market
price of our common stock will not fluctuate or decline significantly in the
future. In addition, the stock markets in general can experience considerable
price and volume fluctuations.





We have
not paid cash dividends on our common stock and do not anticipate paying any
cash dividends on our common stock in the foreseeable future.





We have
not achieved profitable operations and if we do realize a profit in the future,
we anticipate that we will retain all future earnings and other cash resources
for the future operation and development of our
business.  Accordingly, we do not intend to declare or pay any cash
dividends on our common stock in the foreseeable future.  Payment of
any future dividends will be at the direction of our board of directors after
taking into account many factors, including our operating results, financial
conditions, current and anticipated cash needs and plans for
expansion.





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
4T. Controls and Procedures





Disclosure
Controls and Procedures
  Our
management, under the supervision and with the participation of the Chief
Executive Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)) as of the end of the period covered by this
report. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, our
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by us in the reports filed, furnished or submitted under the Exchange
Act. Our Chief Executive Officer and Chief Financial Officer also concluded that
our disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosures.


Changes
in Internal Control Over Financial Reporting





There
were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by
this report that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.


26


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





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 in excess of $500 million.. 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 complaint for lack of personal
jurisdiction. We appealed the matter  to the State of California
Supreme Court who concurred with the lower court that we could not obtain
personal jurisdiction in California. We have concluded that it will be too
costly to continue any further legal action at this time.





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 the Company and Rotoblock
Corporation (“Rotoblock”) as a consultant to perform public relations work on
behalf of the Company and Rotoblock. As consideration for Mr. Alvis’ consent to
the contract with the Company, the Company provided Mr. Alvis with use of a
motor home worth approximately $306,000. The Company then sued Mr. Alvis,
claiming he failed to perform his obligations under the contract and refused to
return the consideration he received therefore (i.e. the motor home). The
Company is seeking either the return of the motor home or $500,000 in damages.
Mr. Alvis initially did not respond to the complaint, which prompted the Company
to take his default on May 9, 2006. The court then entered a default judgment on
May 16, 2006, on which date the Company obtained a writ of possession allowing
it to reclaim possession of the disputed motor home. On June 18, 2006, Mr. Alvis
moved the court to set aside the default and default judgment and to vacate its
order authorizing issuance of the writ of possession. The court agreed to set
aside the default judgments, but it left intact the writ of possession. The
court also required Mr. Alvis to pay the Company $1,000 as compensation for
forcing the Company to initially take his default. Mr. Alvis has paid the
Company the required $1,000. Mr. Alvis then filed (1) an answer denying the
Company’s allegations, and (2) a cross-claim against the Company, Steve
Schneider in his individual capacity, and Rotoblock, alleging two counts of
breach of contract, one common count of work, labor, and services received, and
one count of fraud. All of Mr. Alvis’ claims relate to the two contracts he
executed with the Company and Rotoblock. Mr. Alvis claims he provided services
to the Company and Rotoblock pursuant to these contracts but received no
consideration in exchange therefore.




For the
fraud claim, the defendant claims the Company and Schneider executed the
contracts with no intent to perform. Mr. Alvis has prayed for damages of
$2,000,000, interest according to proof, punitive damages, and an order
directing the Company to perfect title to the motor home. Mr. Alvis then moved
the court to quash the writ of possession.  The parties attended
mediation on March 4, 2008 and reached a tentative settlement.  On June 3,
2008, the parties entered into a formal Settlement Agreement by which the matter
was resolved according to the following terms:  (1) a mutual release
of all claims; (2) ZAP would pay $25,000 to Mr. Alvis;. (3) ZAP would issue to
Alvis $25,000 worth of shares of restricted ZAP common stock; (4) ZAP would
issue Alvis warrants for 100,000 shares of restricted ZAP common stock, at a
strike price of $.70 per share; and (5) ZAP would transfer title of
disputed motor home directly to a third party purchases designated by
Alvis.  ZAP performed all of its obligations under the Settlement
Agreement, and the lawsuit was thereafter dismissed with prejudice on June 20,
2008. We have provided for this settlement in our results of
operations.


27


Robert Chauvin; Mary Chauvin; Rajun
Cajun, Inc. dba ZAP of Carson City, dba ZAP of Reno, dba ZAP of Sparks (“Robert
Chauvin, et al.”) v. Voltage Vehicles; ZAP; ZAP Power Systems Inc.; ZAPWORLDCOM;
Elliot Winfield; Steven Schneider; Phillip Terrazzi; Max Scheder-Breschin; Renay
Cude; [sic] and Does I-XX, Second Judicial District Court State of Nevada,
County of Washoe, Case No. CV06 02767.On November 17, 2006, Robert
Chauvin, et al. filed a complaint alleging breach of contract, breach of the
covenant of good faith and fair dealing, breach of warranties,
fraud/misrepresentation, negligent misrepresentation, quantum merit or unjust
enrichment, civil conspiracy, violation of Security [sic] and Exchange
Act/federal securities law, and deceptive trade practices, pursuant to a License
Agreement (for a distribution license) entered into between Rajun Cajun, Inc.
dba ZAP of Carson City, dba ZAP of Reno, dba ZAP of Sparks (“Rajun Cajun”) and
Voltage Vehicles. The complaint seeks general damages in an amount in excess of
$10,000, special damages in an amount in excess of $10,000, punitive damages in
an amount in excess of $10,000, attorneys’ fees and cost of suit, for judgment
in an amount equal to treble actual damages, and recession in the amounts of
$397,900 and $120,000. On January 19, 2007, defendants Voltage Vehicles and ZAP
filed a Motion to Dismiss on the grounds that the License Agreement entered into
between Rajun Cajun and Voltage contains a forum selection clause designating
Sonoma County, State of California as the only appropriate forum. The court
granted that Motion on April 13, 2007. In its order on that motion, the court
also found that all other motions pending in the Nevada court in this matter are
now moot. (As of that time, the following motions were still pending: (1)
Chauvin, et al.’s Notices of Intent to Take Default against two of the named
corporate defendants and against the individual defendants, except Renay Cude;
(2) a Motion to Quash Service of Process or Alternatively for Dismissal by each
of the individual defendants and both of the defunct corporate defendants; and
(3) Chauvin, et al.’s Motion for Publication of Summons against the named
individual defendants.)




Voltage Vehicles v. Rajun Cajun, et
al., Superior Court of California, County of Sonoma, Case No. SCV 240179, filed
February 9, 2007. (This suit is related to the Nevada case of Robert
Chauvin, et al. v. Voltage Vehicles, et al. discussed immediately above.) In its
complaint, Voltage Vehicles requests Declaratory Relief against Rajun Cajun,
asking the Court to declare that the License Agreement between those two parties
does not grant Rajun Cajun an exclusive dealership in northern Nevada to
distribute Voltage Vehicle products and that Voltage Vehicles has performed its
obligations under the License Agreement. On May 24, 2007, Rajun Cajun filed a
Cross-Complaint in substantially the same form as the Complaint filed in Nevada,
alleging breach of contract, breach of the covenant of the good faith, etc. The
Cross-Complaint seeks general damages in an amount in excess of $25,000, special
damages in an amount in excess of $25,000, punitive damages in an amount in
excess of $25,000, attorneys’ fees and cost of suit, for judgment in the amount
equal to treble actual damages, and rescission in the amounts of $397,900 and
$120,000, plus interest. Cross-Defendants intend to vigorously defend against
the claims set forth in the Cross-Complaint and so, on August 22, 2007,
Cross-Defendants filed both a special demurrer for abatement to prohibit
Cross-Complainants from maintaining a cross-complaint and a demurrer to the
Cross-Complaint itself. On February 11, 2008 ZAP and Voltage Vehicles filed a
demurrer to Cross-complainants’ third through fifteenth causes of action. A
hearing on that demurer is currently set for June 11, 2008.  In its
tentative ruling, the Court ruled in ZAP and Voltage Vehicles’ favor and granted
Rajun Cajun leave to file a Second Amended Cross-Complaint.  Rajun
Cajun did not contest the ruling, which then became the order of the
Court.  In the interim, the individual third party defendants were
served with the First Amended Cross-Complaint.  On April 25, 2008,
Steven Schneider and Renay Cude [sic] filed a demurrer to causes of action eight
through fifteen of the First Amended Cross-Complaint.  A hearing on
that demurrer was set for August 6, 2008.  After receipt of the
demurrer, and prior to that hearing, Rajun Cajun agreed to dismiss Steven
Schneider and Renay Cude [sic].  A stipulation to that effect was
filed on July 23, 2008, and the demurrer was taken off calendar
accordingly.  On June 6, 2008, Maximillian Scheder-Bieschin filed an
answer to the First Amended Cross-Complaint.  The remaining individual
Cross-defendants have yet to appear.  It is anticipated that Rajun
Cajun will file a Second Amended Cross-complaint.  The next case
management conference is scheduled for September 23, 2008.  In the
meantime, discovery is ongoing.




CIT Communications Finance Corporation
v. ZAP, formerly known as ZapWorld.com and as Zap Power Systems, and DOES 1-20,
complaint filed on February 26, 2008, Case No. 242445, in the Superior Court of
California, County of Sonoma.  CIT Communications Finance
Corporation (“CIT”) has served ZAP with a complaint, an application for writ of
possession, and an application for writ of attachment.


28


CIT’s
complaint and its applications for the two writs are based on three telephone
equipment leases CIT alleges it has with ZAP, through predecessors in
interest.  The Complaint includes five causes of action:  (1)
breach of written lease agreements; (2) recovery of personal property; (3)
conversion; (4) quantum valebant; and (5) quantum meruit or unjust
enrichment.  For each of those claims, CIT alleges that ZAP entered into
the leases, never returned the equipment, and, in or about June 2002, ceased
payment of amounts owed under the leases.  CIT is now seeking both return
of the equipment and a monetary award covering amounts owed under the
leases.  More particularly, for its breach of contract claim, CIT is
seeking recovery of $108,967.26 allegedly owed on the leases.   On its
recovery of personal property claim, CIT is seeking either return of
all the leasedequipment or
a monetary damages to cover the value of theleased equipment. 
On the conversion claim, CIT is seeking general damages for ZAP’s continued
possession and use of the equipment, as well as punitive damages based on a
claim that ZAP’s actions were malicious, willful, and oppressive.  On its
quantum valebant and quantum meruit claims, CIT is seeking general damages for
the value of ZAP’s continued use and possession of the equipment since June 24,
2002.  CIT is also seeking reimbursement of all of its attorneys’ fees and
costs of suit, as well as any additional legal and equitable relief that the
court may deem proper.  ZAP’s Answer to the Complaint was filed on April
24, 2008.  CIT has also applied for both a writ of possession, seeking
return of all of the leased equipment, and a writ of attachment, seeking
attachment of $122,588.26 against ZAP.  The hearing on CIT’s writ
applications was held on June 3, 2008.  At that hearing, the Court
denied CIT’s application for writ of attachment, finding that CIT had not
proven, based on the record to date, that it was more likely than not to prevail
at trial on its breach of contract cause of action against ZAP.  The
Court did, however, grant CIT’s application for writ of possession, finding no
dispute between the parties regarding ZAP’s willingness to give to CIT all
components of the at-issue telephone equipment still in ZAP’s
possession.  Given ZAP’s multiple offers to date to cooperate in
returning any such equipment, the Court refused CIT’s demand that ZAP be
required to post a bond to support the writ of possession.  The writ
of possession was issued on June 17, 2008, but, to date, ZAP is unaware of any
action by CIT toenforce that
writ.  On June 20, 2008, ZAP sent CIT an Offer to Compromise, offering
to settle the matter with ZAP’s payment to CIT of $2,500, inclusive of
attorneys’ fees and costs to date.  CIT has not responded to that
offer.  A Case Management Conference was set for June 30, 2008, but
the court continued that Conference until September 25, 2008. We are in the
process of preparing written discovery requests and will be serving same on CIT
shortly.  We intend to vigorously defend against these
claims.




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





The
following lists sales of unregistered securities during the quarter ended June
30, 2008 that were not previously included in a Quarterly Report on Form 10-QSB
or a Current Report on Form 8-K.   We relied on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933, as
amended (the “Securities Act”) for the issuance of these
securities.  Except as stated below, no underwriting discounts or
commissions were payable with respect to any of the following transactions. The
offer and sale of the following securities was exempt from the registration
requirements of the Securities Act under Rule 506 insofar as (1) except as
stated below, each of the investors was accredited within the meaning of Rule
501(a); (2) the transfer of the securities were restricted by the company in
accordance with Rule 502(d); (3) there were no more than 35 non-accredited
investors in any transaction within the meaning of Rule 506(b), after taking
into consideration all prior investors under Section 4(2) of the Securities Act
within the twelve months preceding the transaction; and (4) none of the offers
and sales were effected through any general solicitation or general advertising
within the meaning of Rule 502(c).





On  May
5, 2008, the Company issued 287,000 shares of common stock for settlement of a
note payable and interest  valued at $134,900.




On June
2, 2008 the Company issued the following: 5,412 shares of common stock for
professional services valued at $5,250, common stock of 108,696 shares valued at
$105,435 in settlement of a dispute with outside parties, 10,000 shares for an
asset purchase valued at $9,700 and shares of 25,773 valued at $25,000 for a
donation to a charity for earthquake relief in China.




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


29


Item
6. Exhibits





2.1       Approved
Second Amended Plan of Reorganization, dated as June 20, 2002. (5)





3.1       Amended
and Restated Articles of Incorporation. (4)





3.2       Certificate
of Determination of Series SA Convertible Preferred Stock. (14)





4.1       Form
of common share purchase warrant of the Company held by Fusion Capital
Fund II, L.P. (6)





4.2       Form
of Series B common stock purchase warrant of the Company. (14)





4.3       Form
of Series K common stock purchase warrant of the Company. (14)





10.1      Settlement
Agreement between ZAPWORLD.COM, Ridgewood ZAP, LLC, and the Shareholders
dated June 27, 2001. (3)





10.3      2004
Consultant Stock Plan. (7)





10.4      Convertible
Promissory Note, dated April 26, 2004, issued to Banks Living Trust.
(1)





10.5      Purchase
and Sale Agreement dated March 7, 2003 between ATOCHA Land LLC and ZAP.
(3)





10.6      Promissory
Note $2,000,000 - Atocha Land LLC and ZAP. (3)





10.7      Warrant
Agreement dated April 26, 2004, issued to Banks Living
Trust.  (1)





10.8      Common
Stock Purchase Agreement between ZAP and Fusion Capital Fund II, LLC.
(6)





10.9      Registration
Rights Agreement between ZAP and Fusion Capital Fund II, LLC. (6)





10.10     Form
of Common Stock Purchase Warrant between ZAP and Fusion Capital Fund II, LLC
(6)





10.11     Agreement
for Consulting Services with Evan Rapoport dated January 8, 2004.
(1)





10.12     Asset
Purchase Agreement dated April 12, 2004 with Jeffrey Banks for purchase of
various autos (1)





10.13     Agreement
for Private Placement Investment received dated April 14, 2004 with Phi-Nest
Fund LLP (1)





10.14     Consulting
Agreement dated April 21, 2004 with Elexis International (1)




10.15     Consulting
Agreement dated April 21, 2004 with Sunshine 511 Holdings (1)




10.16     Definitive
Stock Agreement dated October 25, 2004 with Smart-Automobile, LLC
(2)


30


10.17     Master
Distribution Agreement between Apollo Energy Systems, Inc. and Voltage Vehicles
Corporation, a subsidiary of ZAP. (8)





10.18     ZAP
Floor Line and Dealer Development Agreement with Clean Air Motors, LLC for a $45
Million Floor Plan Line of Credit for Qualified ZAP Dealers (9)





10.19     Exclusive
Purchase, License and Supply Agreement between Smart Automobile, LLC and ZAP.
(10)





10.20     Amendment
dated November 15, 2004 to previous consulting agreement with Sunshine Holdings
511 (14)





10.21     Secured
Promissory Note Payable dated December 30, 2004 with Phi-Nest Fund, LLP.
(14)





10.22     ZAP
assignment of 2.9 million shares of Restricted Common Stock to Phi-Nest Fund,
LLP as collateral on note payable (14)





10.23     Promissory
note receivable dated January 6, 2005 for $1 million loan  due from
Smart Automobile, LLC and Thomas Heidemann (President Smart Automobile, LLC)
(14)





10.24     Security
Agreement dated January 6, 2005 from Smart Automobile, LLC and Thomas Heidemann
(President Smart Automobile, LLC) to secure loan above. (14)





10.25     Common
Stock Purchase Agreement between ZAP and Platinum Partners Value Arbitrage Fund
LP (14)





10.26     Form
of Common Stock Purchase Warrant between ZAP and Platinum Partners Value
Arbitrage Fund LP (14)





10.27     Common
Stock Purchase Agreement between ZAP and Lazarus Investment Partners LLP
(14)





10.28     Form
of Common Stock Purchase Warrant between ZAP and Lazarus Investment Partners LLP
(14)





10.29     Termination
of Common Stock Purchase Agreement between ZAP and Fusion Capital Fund II, LLC
(11)





10.30     Financing
Agreement between ZAP and Surge Capital II, LLC (12)





10.31     Exclusive
Purchase, License, and Supply Agreement between ZAP and Obvio! Automotoveiculos
S.P.E. Ltda (13)





10.36     Agreement
dated July 14, 2006 between ZAP, Thomas Heidemann and Smart Automobile
(15)





10.37     Amendment
Agreement Dated August 30, 2006 between ZAP and Smart Automobile LLC
(16)





10.38     Exclusive
Distribution Agreement dated May 1, 2005, as supplemented by a letter dated June
9, 2006 (17)





10.39     ZAP
Guarantee (18)





10.40     Shandong
Jindalu Vehicle Co., Ltd. Guarantee (19)





10.41     Joint
Venture Negotiations dated September 21, 2006 (20)





10.42     Security
Purchase Agreement between ZAP and Certain Institutional Investors
(21)





10.43     Purchase
and Amendment Agreement between ZAP and Certain Institutional Investors
(22)





10.44     Form
of Convertible





10.45     Form
or Warrant





10.46     Purchase
order from the Electric Vehicle Company, LLC (“EVC”) for 10,000 of its Xebra
2007 model year electric vehicles


31


10.47     Distribution
agreement this week with PML FlightLink Limited (PML) for the purchase of an
advanced wheel motor and control system





10.48     Joint
Venture Agreement with Youngman Automobile Co., Ltd to manufacture, market and
distribute electric a and hybrid vehicles for the worldwide passenger car, truck
and bus





10.49     Form
SB-2 Registration of Common Stock incorporated by reference to SEC filing on
September 24, 2007 effective on October 2, 2007.





10.50     Settlement
and Mutual Release Agreement with Gemini Master Fund,LTD and Gemini
Strategies,LLC dated May 7, 2008.(22)





10.51     Note
Purchase Agreement with Al Yousuf dated May 8,2008.(22)





10.52     Promissory
Note in favor of AlYousuf LLC,dated July 30, 2008 and Deed of Trust, Assignment
of Leases, Rents and Security Agreement and Fixture Filing by ZAP in favor of Al
Yousuf LLC, dated July 30, 2008.(23)





21.1      List
of subsidiaries. (3)





31.1      Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.(22)





31.2      Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Exchange Act, as Adopted Pursuant to  Section 302 of the
Sarbanes-Oxley Act of 2002. (22)





32.1      Certification
of Principal Executive Officer Pursuant to 18 U.S.C.  Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(22)





32.2      Certification
of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.
(22)





(1)  
  Previously Filed as an exhibit to the Registrants’s Form 8-K for the
quarter ended March 31, 2004 and incorporated by reference.


(2) 
   Previously filed as an exhibit to the Registrant’s Form 8-K of
November 6, 2004 and incorporated by reference.


(3)  
  Previously filed as an exhibit to the Registrant’s Annual Report on
Form 10-KSB for the year ended December 31, 2003 and incorporated by
reference.


(4)  
  Previously filed with Pre-effective Amendment Number 3 to Form SB-2
registration statement filed with the Securities and Exchange Commission on
October 3, 2001.


(5) 
   Previously filed as an exhibit to the Registrant’s Form 8-K of
October 20, 2002 and incorporated by reference.


(6) 
   Previously filed as an exhibit to the Registrant’s Current
Report on Form 8-K dated July 22, 2004 and incorporated by
reference.


(7)  
  Previously filed as an exhibit to the Registrant’s Registration
Statement on Form S-8 (File No. 333-117560) on July 22, 2004.


(8
)    Previously filed as an exhibit to the Registrant’s
Current Report on Form 8K filed with the Securities and Exchange Commission on
October 6, 2004 and incorporated herein by reference.


(9) 
   Previously filed as an exhibit to the Registrant’s Quarterly
Report on Form 10QSB for the period ended June 30, 2004 and incorporated herein
by reference.


(10)   Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the
Securities and Exchange Commission on April 21, 2004 and incorporated herein by
reference.


(11)   Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the
Securities and Exchange Commission on February 25, 2005 and incorporated herein
by reference.


(12)   Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the
Securities and Exchange Commission on September 16, 2005 and incorporated herein
by reference.


(13)   Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the
Securities and Exchange Commission on September 21, 2005 and incorporated herein
by reference.


32


(14)   Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the
Securities and Exchange Commission on July 20, 2006 and incorporated herein by
reference.


(15)   Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the
Securities and Exchange Commission on September 6, 2006 and incorporated herein
by reference.


(16)   Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the
Securities and Exchange Commission on November 6, 2006 and incorporated herein
by reference.


(17)   Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the
Securities and Exchange Commission on November 6, 2006 and incorporated herein
by reference.


(18)   Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the
Securities and Exchange Commission on November 6, 2006 and incorporated herein
by reference.


(19)   Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the
Securities and Exchange Commission on November 6, 2006 and incorporated herein
by reference.


(20)   Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the
Securities and Exchange Commission on December 11, 2006 and incorporated herein
by reference.


(21)   Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the
Securities and Exchange Commission on February 26, 2007and incorporated herein
by reference.


(22)  
Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10Q
for the period ended March 31, 2008 and incorporated herein by
reference.


(23)   Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the
Securities and Exchange Commission on August 5, 2008and incorporated herein by
reference.




33
 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.









ZAPDated:   August 13,
      2008
            By:
            /s/ Steven
      SchneiderName:  
      Steven SchneiderTitle:    
      Chief Executive Officer (Principal Executive
      Officer)




ZAPDated:   August 13,
      2008
            By:
            /s/ William
      HartmanName:  
      William HartmanTitle:    
      Chief Financial Officer (Principal Financial and Accounting
      Officer)







34