**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**Form
      10-QSB**





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


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**







For
      the quarterly period ended September 30, 2007





Commission
      File Number 001-32534








**ZAP**


(Name
      of
      small business issuer in its charter)





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





**501
      Fourth Street**


**Santa
      Rosa, CA 95401**


**(707)
      525-8658**


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


registrant’s
      principal executive offices)







Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act during the past 12 months (or for such
      shorter period that the registrant was required to file such reports), and
      (2)
      has been subject to such filing requirements for the past 90
      days.        Yes x No o




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




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




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





57,268,558**shares
      of common stock as of November 9, 2007.





Transitional
      Small Business Disclosure
      Format          Yes o    No
x














**ZAP**





**FORM
      10-QSB**




**INDEX**





**Page
                No.****PART
                I.****Financial
                Information**Item
                1.
            Condensed
                Consolidated Financial Statements (unaudited) :Condensed
                Consolidated Balance Sheet as of  September 30,
                2007
            2Condensed
                Consolidated Statements of Operations for the Three and Nine Months
                Ended
                September 30, 2007 and 2006
            3Condensed
                Consolidated Statements of Cash Flows for the  Nine Months Ended
                September 30, 2007 and 2006
            4Notes
                to Condensed Consolidated Financial Statements
            5Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            22Item
                3.
            Controls
                and Procedures
            39**PART
                II.****Other
                Information**Item
                1.
            Legal
                Proceedings
            40Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            42Item
                3.
            Defaults
                Upon Senior Securities
            43Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            43Item
                5.
            Other
                Information
            43Item
                6.
            Exhibits
            43SIGNATURES
            
            43










-
          1
          -


Part
      I.     FINANCIAL INFORMATION


Item
      1.    Financial Statements


**ZAP**


**CONDENSED
      CONSOLIDATED BALANCE SHEET (UNAUDITED)**


***(In
      thousands)***


**September
                30,**
              **2007****ASSETS****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            739Accounts
                receivable, net of allowance for doubtful accounts of $185
            
            
            937Inventories,
                net
            
            
            1,881Prepaid
                non-cash professional fees
            
            
            463Other
                prepaid expenses and other current assets
            
            
            533Total
                current
                assets
            
            
            4,553**PROPERTY
                AND EQUIPMENT,**net of accumulated depreciation of
                $816
            
            
            4,346**OTHER
                ASSETS**Patents
                and trademarks, net
            
            
            33Goodwill
            
            
            175Prepaid
                non-cash professional fees, less current portion
            
            
            78Deposits
                and other assets
            
            
            85Total
                assets
            
            $
            9,270**LIABILITIES
                AND SHAREHOLDERS’ EQUITY****CURRENT
                LIABILITIES**Current
                portion of secured convertible note
            
            $
            1048%
                Senior convertible notes, net of discount of $754
            
            
            1,721Accounts
                payable
            
            
            152Accrued
                liabilities
            
            
            3,357Deferred
                revenue
            
            
            753Total
                current
                liabilities
            
            
            6,087**LONG-TERM
                LIABILITIES**Secured
                convertible note, less current portion
            
            
            1,725Total
                liabilities
            
            
            7,812**SHAREHOLDERS’
                EQUITY**P
                Preferred stock, authorized 50 million shares; no par value, no shares
                issued and outstanding
            
            
            —Common
                stock, authorized 400 million shares; no par
                value;****47,697,681shares issued and
                outstanding
            
            
            111,589Common
                stock issued as loan collateral
            
            
            (1,549
            )Accumulated
                deficit
            
            
            (108,582
            )Total
                shareholders’ equity
            
            
            1,458Total
                liabilities and shareholders’ equity
            
            $
            9,270





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





-
          2
          -


**ZAP**


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


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









**Three
                Months**
              **ended**
              **September
                30,**
              **2007**
            
            
            **Three
                Months**
              **ended**
              **September
                30,**
              **2006**
            
            
            **Nine
                Months**
              **ended**
              **September
                30,**
              **2007**
            
            
            **Nine
                Months**
              **ended**
              **September
                30,**
              **2006****NET
                SALES**
            
            $
            2,019
            
            
            $
            2,640
            
            
            $
            4,561
            
            
            $
            9,928**COST
                OF GOODS SOLD**
            
            
            1,476
            
            
            
            2,525
            
            
            
            3,748
            
            
            
            9,101**GROSS
                PROFIT**
            
            
            543
            
            
            
            115
            
            
            
            813
            
            
            
            827**OPERATING
                EXPENSES**Sales
                and marketing
            
            
            519
            
            
            
            370
            
            
            
            1,154
            
            
            
            974General
                and administrative (non-cash stock-based compensation of $2.8 million
                and
                $3.0 million and $17.3 million and $5.9 million for the three and
                nine
                months ended September 30, 2007 and 2006, respectively)
            
            
            3,525
            
            
            
            4,147
            
            
            
            20,313
            
            
            
            10,080Impairment
                loss on Smart Auto license and equipment
            
            
            —
            
            
            
            2,345
            
            
            
            —
            
            
            
            2,345Research
                and development
            
            
            23
            
            
            
            —
            
            
            
            412
            
            
            
            —4,067
            
            
            
            6,862
            
            
            
            21,879
            
            
            
            13,399**LOSS
                FROM OPERATIONS**
            
            
            (3,524
            )
            
            
            (6,747
            )
            
            
            (21,066)
            
            
            
            (12,572
            )**OTHER
                INCOME (EXPENSE)**Gain
                on settlement of Smart Auto liability
            
            
            —
            
            
            
            7,051
            
            
            
            —
            
            
            
            7,051Gain on
                revaluation of warrant and put option liabilities
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            304Interest
                expense, net
            
            
            (210
            )
            
            
            (17
            )
            
            
            (810
            )
            
            
            (26
            )Other
                income (expense)
            
            
            (10
            )
            
            
            18
            
            
            
            (11
            )
            
            
            22(220
            )
            
            
            7,052
            
            
            
            (821
            )
            
            
            7,351**INCOME
                (LOSS) BEFORE INCOME TAXES**
            
            
            (3,744
            )
            
            
            305
            
            
            
            (21,887
            )
            
            
            (5,221
            )**PROVISION
                FOR INCOME TAXES**
            
            
            —
            
            
            
            —
            
            
            
            4
            
            
            
            4**NET
                INCOME (LOSS)**
            
            $
            (3,744
            )
            
            $
            305
            
            
            $
            (21,891
            )
            
            $
            (5,225
            )**NET
                INCOME (LOSS) PER COMMON SHARE****BASIC
                AND DILUTED**
            
            $
            (0.08
            )
            
            $
            0.01
            
            
            $
            (0.49
            )
            
            $
            (0.14
            )**WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING --****BASIC
                AND DILUTED**
            
            
            46,957
            
            
            
            37,348
            
            
            
            44,683
            
            
            
            37,879







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




-
          3
          -


**ZAP**


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


***(In
      thousands**)*


**Nine
                months ended September 30,****2007**
            
            
            **2006****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                loss
            
            $
            (21,891
            )
            
            $
            (5,225
            )Adjustments
                to reconcile net loss used for operating activities:
              Gain
                on settlement of Smart Auto liability
            
            
            —
            
            
            
            (7,051
            )Impairment
                loss on Smart Auto license and equipment
            
            
            —
            
            
            
            2,345Items
                not requiring the use of cash:Amortization
                of note discount and deferred offering costs
            
            
            332
            
            
            
            —Stock-based
                compensation for consulting and other services
            
            
            3,019
            
            
            
            2,950Stock-based
                employee compensation
            
            
            14,291
            
            
            
            2,962Stock-based
                compensation for interest and registration penalties
            
            
            314
            
            
            
            -Gain
                on revaluation of warrant and put option liabilities
            
            
            —
            
            
            
            (365
            )Depreciation
                and amortization
            
            
            251
            
            
            
            1,422Loss
                on disposal of fixed asset
            
            
            —
            
            
            
            4Allowance
                for doubtful accounts
            
            
            6
            
            
            
            (120
            )Changes
                in other items affecting operations:Accounts
                receivable
            
            
            (719
            )
            
            
            (110
            )Smart
                Car inventory
            
            
            —
            
            
            
            1,378Inventories
            
            
            466
            
            
            
            (514
            )Prepaid
                expenses and other assets
            
            
            (71
            )
            
            
            (770
            )Accounts
                payable
            
            
            (98
            )
            
            
            (18
            )Accrued
                liabilities
            
            
            391
            
            
            
            (386
            )Deferred
                revenue
            
            
            (427
            )
            
            
            156Net
                cash used for operating activities
            
            
            (4,136
            )
            
            
            (3,342
            )**CASH
                FLOWS FROM INVESTING ACTIVITES**Purchase
                of equipment
            
            
            (20
            )
            
            
            (386
            )Proceeds
                from sale of equipment
            
            
            —
            
            
            
            35Net
                cash used for investing activities
            
            
            (20
            )
            
            
            (351
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Issuance
                of common stock and warrants, net of offering costs
            
            
            1,640
            
            
            
            2,522Proceeds
                from long-term debt, net of offering costs
            
            
            1,185
            
            
            
            —Repayments
                of long-term debt
            
            
            (90
            )
            
            
            (70
            )Net
                cash provided by financing activities
            
            
            2,735
            
            
            
            2,452**NET
                CHANGE IN CASH AND CASH EQUIVALENTS**
            
            
            (1,421
            )
            
            
            (1,241
            )**CASH
                AND CASH EQUIVALENTS,**beginning of period
            
            
            2,160
            
            
            
            1,547**CASH
                AND CASH EQUIVALENTS,**end of period
            
            $
            739
            
            
            $
            306




See
      accompanying notes to condensed consolidated financial statements
      (unaudited)




-
          4
          -


**ZAP**


**NOTES
      TO CONDENSEDCONSOLIDATED 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
      nine months ended September 30, 2007 are not indicative of the results that
      may
      be expected for the year ending December 31, 2007 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, 2006 filed with the Securities and Exchange Commission (the “SEC”) on April
      2, 2007 (our “2006 10-K”).




Going
      Concern - The accompanying condensed consolidated  financial
      statements have been prepared assuming we will continue as a going
      concern.  The Company has a history of losses and might not achieve
      profitability.  The Company will need to arrange additional financing
      in the future in order to continue its current operations.  There can
      be no assurance that additional financing would be available, or if it is
      available, that it would be on acceptable terms. The Company’s future
      liquidity
      and capital requirements will depend on numerous factors, including successful
      development, marketing and sale of advanced technology vehicles, protection
      of
      intellectual property rights, costs of developing its new products, including
      the necessary intellectual property rights, obtaining regulatory approvals
      for
      its new products, market acceptance of all its products, existence of competing
      products in its current and anticipated markets, and its ability to raise
      additional capital in a timely manner. Management expects to be able to raise
      additional capital; however, the Company may not be able to obtain additional
      financing on acceptable terms, or at all. We currently expect to be able to
      fund
      our working capital requirements from our existing cash and cash flows from
      operations, plus the $5 million received from the sale of common shares in
      November 2007 (See Note 13-Subsequent Events) through at least December 31,
      2007.




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





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




**NOTE
      2   SIGNIFICANT ACCOUNTING POLICIES**




**ADOPTION
      OF NEW ACCOUNTING PRONOUNCEMENTS**





Effective
      January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Staff
      Position (FSP) Emerging Issues Task Force (EITF) 00-19-2, “Accounting for
      Registration Payment Arrangements”. This FASB staff position addresses how to
      account for registration payment arrangements and clarifies that a financial
      instrument subject to a registration payment arrangement should be accounted
      for
      in accordance with other generally accepted accounting principles (GAAP) without
      regard to the contingent obligation to transfer consideration pursuant to the
      registration payment arrangement. This accounting pronouncement further
      clarifies that a liability for liquidated damages resulting from registration
      statement obligations should be recorded in accordance with Statement of
      Financial Accounting Standards No. 5, “Accounting for Contingencies*,*”
when the payment of liquidated damages becomes probable and can be
      reasonably
      estimated.





-
          5
          -


Prior
      to
      the adoption of this FSP, we had classified as a note derivative liability
      and
      as a warrant liability, financial instruments included in or issued in
      conjunction with our December 5, 2006 convertible note financing, since the
      offering of the underlying shares issuable upon conversion of the notes and
      exercise of the warrants was required to be registered with the SEC, and our
      failure to file, and obtain and maintain the effectiveness of a registration
      statement would result in potential cash payments which were not
      capped.  Our adoption of this accounting pronouncement as of January
      1, 2007 resulted in a reclassification of the note derivative liability to
      the
      note liability and the warrant liability to equity, and an adjustment to the
      note discount to reflect the allocated value of the warrant and a beneficial
      conversion feature, accreted to December 31, 2006, both calculated in accordance
      with EITF Nos. 98-5 and 00-27.  The cumulative effect of this
      accounting change of $24,000 was credited to our opening accumulated deficit
      balance as of January 1, 2007.





In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109”**(“FIN
      48”). This Interpretation clarifies the accounting for uncertainty in income
      taxes recognized in a company’s financial statements in accordance with FASB
      Statement No. 109, *Accounting for Income Taxes.*  FIN 48
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. This Interpretation also provides guidance on the
      recognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition.  The evaluation of a tax position
      in accordance with FIN 48 is a two-step process. The first step is recognition:
      The entity determines whether it is “more-likely-than-not” that a tax position
      will be sustained upon examination, including resolution of any related appeals
      or litigation processes, based on the technical merits of the position. In
      evaluating whether a tax position has met the “more-likely-than-not” recognition
      threshold, the entity presumes that the position will be examined by the
      appropriate taxing authority that would have full knowledge of all relevant
      information. The second step is measurement: A tax position that meets the
      “more-likely-than-not” recognition threshold is measured to determine the amount
      of benefit to recognize in the financial statements. The tax position is
      measured at the largest amount of benefit that is greater than 50 percent likely
      to be realized upon ultimate settlement. We adopted FIN 48 on
      January 1, 2007 and the impact on our consolidated results of operations
      and financial position was not material.





**RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
      February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159
      permits the measurement of many financial instruments and certain other items
      at
      fair value. Entities may choose to measure eligible items at fair value at
      specified election dates, reporting unrealized gains and losses on such items
      at
      each subsequent reporting period.  The objective of SFAS 159 is to
      provide entities with the opportunity to mitigate volatility in reported
      earnings caused by measuring related assets and liabilities differently without
      having to apply complex hedge accounting provisions.  It is intended
      to expand the use of fair value measurement.  SFAS 159 is effective
      for fiscal years beginning after November 15, 2007.  We are currently
      evaluating what effect, if any, the adoption of SFAS 159 will have on the
      Company’s consolidated results of operations and financial
      position.





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
      value, establishes a framework for measuring fair value in generally accepted
      accounting principles, and expands disclosures about fair value measurements
      required under other accounting pronouncements. SFAS 157 does not change
      existing guidance regarding whether or not an instrument is carried at fair
      value. SFAS No. 157 is effective for financial statements issued for fiscal
      years beginning after November 15, 2007. We are currently evaluating the impact
      on our consolidated financial statements of adopting SFAS No. 157.





In
      June
      2007, the EITF reached a consensus on EITF Issue No. 07-03, *Accounting
      for Nonrefundable Advance Payments for Goods or Services to Be Used in Future
      Research and Development Activities*(EITF 07-3). Under EITF 07-03,
      nonrefundable**advance
      payments for goods or services to be received in the future for use in research
      and development activities should be deferred**and
      capitalized. Such amounts should be expensed as the related goods are delivered
      or services**are
      performed. If our expectations change such that we do not expect the goods
      to be
      delivered or services to be rendered, the**capitalized
      advance payment should be charged to expense. EITF 07-03 is effective for new
      contracts entered into beginning**January
      1, 2008. We have not yet determined the impact that EITF 07-03 will have on
      our
      financial statements.





-
          6
          -


**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. The weighted average number of shares outstanding for the period ended
      September 30, 2006 has been restated for the 10% stock dividend of February
      2007. 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 September 30, 2007, these potentially dilutive securities
      include options for
      9.7****million****shares of common stock,
      warrants for 70.7 million****shares of common stock and debt
      convertible into 4.3 million shares of common stock.





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





**REVENUE
      RECOGNITION**


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





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





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





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





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





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




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. During
      the first quarter of 2006, the Company began recognizing revenue on various
      license agreements on a straight-line basis over the terms of the
      agreement.  Accordingly, the Company has recognized approximately
      $146,000 and $428,000 of license revenue and other adjustments for the three
      and
      nine month periods ended September 30, 2007, resulting in an ending balance
      of
      $753,000.





**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.





-
          7
          -


**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 -**In January 2003, the Company entered into a Loan
      Agreement with Mercatus Partners LLP (“Mercatus”) and issued 2,941,176 common
      shares to Mercatus as collateral for a $1 million loan that never funded. The
      $3.529 million market value of these shares at the date of issuance was recorded
      in common stock with an offsetting contra equity account. The shares were
      reported as lost to the Company in December 2003 and in December 2004, the
      shares were reissued to Mercatus who then assigned the shares and their
      interests to Phi-Nest Fund, L.P. (“Phi-Nest”) as collateral for the $1 million
      loan commitment. The Company amended the Loan Agreement allowing Phi-Nest to
      purchase 500,000 shares for $1.16 per share. On March 30, 2006, the Company
      received $500,000 in net proceeds from the sale of the 500,000 shares and the
      collateralized shares were reduced to 2,441,176 shares. Phi-Nest did not provide
      the $1 million loan. In September of 2006, the Company signed a Settlement
      Agreement with Phi-Nest requiring that the common stock being held as collateral
      be transferred to an independent third party (Michael C. Sher dba the Law
      Offices of Michael C. Sher), to hold the securities in a depository account.
      At
      the same time, the Company entered into an agreement with International Monetary
      Group (“IMG”) whose President and CEO is Patrick D. Harrington, a merchant
      banking company to procure financing for the Company. Michael C. Sher was also
      acting as IMG’s in-house attorney. In return, Phi-Nest received 150,000 shares
      of the collateral stock for consulting services and forgiveness of a note
      receivable for $56,000 owed by a cousin of Steven Schneider, ZAP CEO. As a
      result, the Company recognized $236,000 in non-cash charges in the consolidated
      statement of operations for the year ended December 31, 2006. In September
      2006,
      the Board of Directors approved the sale of 500,000 shares of the collateral
      stock to a qualified investor for $500,000. In October 2006, the qualified
      investor transferred $500,000 directly to IMG who in turn was to transfer the
      proceeds to the Company after the Company authorized Michael C. Sher to release
      500,000 shares of the collateral stock. In October 2006, IMG required the
      Company to sign a $500,000 note and represented that they would not enforce
      the
      note based on other agreements with the Company, and in return IMG transferred
      $487,500 in net proceeds to ZAP for the 500,000 shares of collateral stock
      previously issued to the qualified investor. Also in October 2006, the Company
      authorized the issuance of 250,000 shares of the collateral stock to IMG and
      250,000 shares of the collateral stock to Michael C. Sher for consulting
      services and recognized $600,000 in non-cash consulting expense in the
      consolidated statement of operations for the year ended December 31, 2006.
      At
      December 31, 2006, there were 1,291,176 shares remaining in collateral stock
      held by Michael C. Sher. In January 2007, IMG provided the Company with a notice
      of default on the $500,000 alleged note obligation. In addition, Michael C.
      Sher
      has refused to release the remaining 1,291,176 shares of collateral stock to
      the
      Company due to a dispute over the alleged debt obligation with IMG. In February
      2007, the Company filed suit to have the collateral stock returned. See Note
      9
      ZAP v. International Monetary Group, Inc., a Delaware corporation; Michael
      C.
      Sher dba the Law Offices of Michael C. Sher, Case No. SCV 240277) for a detailed
      discussion.  Management has recorded an estimated liability for any
      potential exposure to this transaction which is included in the accompanying
      condensed consolidated financial statements. In addition, management believes
      that the ultimate resolution of this claim will not have a material adverse
      effect on our consolidated financial position or on the results of
      operations.





**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 September
      30, 2007, the Company has recorded a warranty liability for
      $90,000****for estimated repair costs.





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





-
          8
          -


**NOTE
      3   STOCK-BASED COMPENSATION**





We
      have
      stock compensation plans for employees and directors, which are described in
      Note 10 to our consolidated financial statements in our 2006 Annual Report
      on
      Form 10-KSB as filed with the SEC on April 2, 2007. In June 2006, our
      shareholders approved the Company’s 2006 incentive stock plan. Under the 2006
      plan, we may grant stock options for up to 4 million shares of common stock.
      We
      adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
“*Share-Based Payment,*” (“SFAS 123R”) effective January 1, 2006. SFAS
      123R requires the recognition of the fair value of stock-based compensation
      in
      net income (loss). 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. Prior to January 1, 2006, we followed Accounting
      Principles Board Opinion 25, *Accounting for Stock Issued to Employees”*
      (“APB 25”) and related interpretations in accounting for our stock
      compensation.




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.




Under
      the provisions of SFAS 123R, we recorded $1.5 million and $14.7 million of
      stock-based compensation, net of estimated forfeitures, in selling, general
      and
      administrative expenses, in our unaudited condensed consolidated statement
      of
      operations for the three and nine months ended September 30, 2007. We utilized
      the Black-Scholes valuation model for estimating the fair value of the
      stock-based compensation granted after the adoption of SFAS 123R, with the
      following range of assumptions:





Three
                months ended
              September
                30, 2007
            
            Nine
                months ended
              September
                30, 2007Expected
                dividend yield
            
            0%
            
            0%Expected
                volatility
            
            
            114.34
                to 126.17
            
            114.34
                to 126.17Risk-free
                interest rate
            
            
            4.16
                to 4.64
            
            4.16
                to 4.98Expected
                life (in years) from grant date
            
            
            2.5
                to 5.75
            
            2.5
                to 5.75Exercise
                price
            
            
            $0.98
                to $1.12
            
            $0.98
                to $1.15




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 nine months ended
      September 30, 2007 was $1.03 and $1.07, respectively.  As required by SFAS
      No. 123R, we now estimate forfeitures of employee stock options and
      recognize compensation cost only for those awards expected to vest. Forfeiture
      rates are determined based on historical experience.  Estimated forfeitures
      are now adjusted to actual forfeiture experience as needed.







-
          9
          -


A
      summary
      of options under the Company’s stock option plans from December 31, 2006 through
      September 30, 2007 is as follows:




Number
                of
              Shares
            
            
            Weighted
              Average
              Exercise
                Price
            
            
            Weighted
              Average
              Remaining
              Contractual
              Term
              (in
                years)
            
            
            Aggregate
              Intrinsic
              ValueOutstanding
                December 31, 2006
            
            
            7,828,566
            
            
            $
            1.02
            
            
            
            7.40
            
            
            $
            1,942,600Options
                granted under the plan
            
            
            589,606
            
            
            $
            1.15
            
            
            
            —
            
            
            $
            —Options
                exercised
            
            
            (245,000
            )
            
            $
            .059
            
            
            
            —
            
            
            $
            119,300Options
                forfeited and expired
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —Outstanding
                March 31, 2007
            
            
            8,173,172
            
            
            $
            1.03
            
            
            
            8.04
            
            
            $
            1,823,300Options
                granted under the plan
            
            
            3,000
            
            
            $
            1.13Options
                exercised
            
            
            (610,639
            )
            
            $
            .75
            
            
            
            
            
            
            $
            128,100Options
                forfeited and expired
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Outstanding
                June 30, 2007
            
            
            7,565,533
            
            
            $
            1.05
            
            
            
            8.04
            
            
            $
            1,695,200Options
                granted under the plan
            
            
            1,006,000
            
            
            $
            1.03Outstanding
                September 30, 2007
            
            
            8,571,533
            
            
            
            1.03
            
            
            
            7.85
            
            
            $
            1,695,200





Aggregate
      intrinsic value is the sum of the amounts by which the quoted market price
      of
      our stock exceeded the exercise price of the options at September 30, 2007,
      for
      those options for which the quoted market price was in excess of the exercise
      price (“in-the-money-options”). The total intrinsic value of options exercised
      was $247,400 and $430,152 for the nine month period ended September 30, 2007
      and
      2006, respectively.




As
      of
      September 30, 2007, total compensation cost of unvested employee stock options
      is****$9.0 million. This cost is expected to be recognized
      through August 2010. We recorded no income tax benefits for stock-based
      compensation expense arrangements for the nine months ended September 30, 2007,
      as we have cumulative operating losses, for which a valuation allowance has
      been
      established.




As
      of
      September 30, 2007, total compensation cost of unvested options and warrants
      to
      consultants total $541,000. This cost is expected to be recognized through
      September 2009.




**NOTE
      4   INVENTORIES, NET-**Inventories at September 30, 2007 are
      summarized as follows (thousands):





Vehicles
                - conventional
            
            $
            187Advanced
                transportation vehicles
            
            
            906Parts
                and supplies
            
            
            664Finished
                goods
            
            
            6652,422Less-inventory
                reserve
            
            
            (541
            )$
            1,881




-
          10
          -


**NOTE
      5   LICENSE AND DISTRIBUTION FEE**





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





Under
      the
      agreement, ZAP was SA’s exclusive distributor and licensee of the right to
      manufacture and distribute Smart cars in the United States and the non-exclusive
      distributor and licensee outside of the United States for a period of ten years.
      Subject to the terms of the agreement, ZAP was obligated to pay SA a license
      and
      distribution fee of $10,000,000: a $1 million payment in cash was made upon
      execution of the agreement, $1 million was payable in cash ratably commencing
      with the delivery of the first 1,000 Smart Cars, and $8 million was paid in
      ZAP
      preferred stock.





A
      more
      detailed agreement was signed and completed on October 25, 2004. Under this
      agreement, SA exchanged their original preferred shares for new preferred shares
      with the designation of SA. These SA preferred shares convert to ZAP common
      shares under the following formula: For every 1,000 Smart vehicles delivered
      to
      ZAP in the years 2004, 2005 and 2006 which are fully EPA compliant to sell
      in
      the United States as new cars, the holder shall convert 500 shares of preferred
      stock SA to $500,000 of common stock, and allow the holder to receive 505,000
      warrants with an exercise price of $2.50 per share exercisable through July
      1,
      2009, or when all the preferred shares have been converted. During 2004, ZAP
      allowed SA to convert 500 preferred shares to $500,000 of common stock prior
      to
      delivering any EPA compliant Smart Cars.





The
      Company recorded the cost of the Smart Automobile license at $10.6 million,
      based on: 1) the $10 million the Company paid to SA as consideration for the
      Purchase, License and Supply Agreement dated April 19, 2004; and 2) the fair
      value of five-year warrants issued under the Agreement for the purchase of
      505,000 common shares at $2.50 per share and expiring in July 1, 2009. The
      warrants were valued at $1.16 per share using the Black-Scholes option pricing
      model with the following assumptions: expected dividend yield of 0.0%; risk
      free
      interest rate of 3.08%; contractual life of 4.5 years; and volatility of
      229.43%.





In
      the
      fourth quarter of 2005, the Company filed a lawsuit against Daimler Chrysler
      Corporation (“Daimler Chrysler”) and others alleging that Daimler Chrysler has
      engaged in a series of anti-competitive tactics aimed at defaming ZAP and
      disrupting its third party relationships including this arrangement.
      Shortly thereafter, the Company commenced its annual impairment assessment.
      An
      independent valuation of the Smart Automobile license as of December 31, 2005
      estimated the fair value to be $3.1 million with a remaining life of two years
      which was less than the $10.6 million recorded cost of the license. The carrying
      cost of the license was $8.8 million prior to the impairment calculation and
      accordingly, the Company recorded an impairment charge of $5.7 million for
      the
      year ended December 31, 2005. The valuation of the license was based on the
      Company’s discounted projected cash flows from projected sales of Smart Cars
      over the estimated life of the license agreement.




In
      June
      2006, ZAP agreed in principle to amend its agreement with SA that was originally
      signed in April 2004. As a result, SA returned to ZAP all of the remaining
      preferred shares, or 7,500 preferred shares valued at $7.5 million, in exchange
      for, among other things, 300,000 common shares valued at $405,000 and one
      million warrants with an exercise price of $1.75 per share, valued at $950,000
      using the Black-Scholes option pricing model. In addition, ZAP’s obligation to
      pay accrued license fees of $906,000 at June 30, 2006 was canceled. As a result,
      ZAP recorded a liability to SA of $7.1 million at June 30, 2006.




In
      September 2006, the Company further amended and renegotiated its agreement
      with
      SA for the Smart Car, due to the unavailability of Smart Cars and
      Daimler-Chrysler’s announcement to begin selling Smart Cars in the U.S. in 2008.
      This negotiation superseded all previous license and other distribution or
      asset
      agreements between ZAP and SA. The renegotiated agreement released ZAP from
      any
      remaining obligations to SA under its previous agreements and any liability
      to
      SA and resulted in the reversal of the $7.1 million liability owed and the
      corresponding recognition of $7.1 million in other income. The Company also
      recognized an impairment loss on the remaining value of the license with SA
      of
      approximately $2.2 million. Amortization expense of the license was $1,056,000
      for the nine months ended September 30, 2006.  As of September 30,
      2007, the Company no longer distributes Smart Cars.




-
          11
          -


**NOTE
      6  LONG-TERM DEBT**




**CONVERTIBLE
      SECURED 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.




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
      April
      30, 2007, the Company entered into Certificates of Adjustments to the Notes
      and
      Warrants (the “Adjustments”) to adjust certain provisions of the Notes and
      Warrants as a consequence of the declaration by the Company of a ten percent
      (10%) common stock dividend to common shareholders of record on February 15,
      2007, payable February 28, 2007. As a result of the Adjustments, the conversion
      price of the Notes was reduced to $0.90 per share, the Initial Warrants were
      increased to 495,000 at an exercise price of $1.00 per share, and the Additional
      Warrants were increased to 396,000 at an exercise price of $1.20 per
      share.




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 convertible into 3,713,892 shares of common
      stock and the initial Warrants were increased to 594,001 at an exercise price
      of
      $0.80 per share. The Second Amendment also deferred the June and July 2007
      payments of the principal due under the Notes to August 1, 2007, extended the
      filing deadline of the Registration Statement to July 9, 2007, reduced the
      number of shares required to be registered under the Agreement to 130% of the
      shares underlying the Notes and Warrants, and allowed for the inclusion of
      an
      aggregate of 4,490,630 additional shares of common stock in any registration
      statement filed by the Company in connection with the Agreement. In
      consideration for these modifications, the Company agreed to pay the purchasers
      liquidated damages, payable in 141,750 shares of common stock of the Company,
      and warrants to purchase an aggregate of 200,000 shares of common stock of
      the
      Company at an exercise price of $1.10 per share. The Company also agreed to
      include the shares and warrants issued pursuant to the Second Amendment in
      the
      registration statement required to be filed by the Company pursuant to the
      Agreement.




The
      Notes
      provide for anti-dilution adjustments of issuable shares and the conversion
      price should the Company issue common stock or common stock equivalents for
      a
      price less than the conversion price, on or prior to the later of 1) the earlier
      of (x) the date a registration statement is declared effective by the SEC and
      (y) the two year anniversary of the issue date and 2) the six month anniversary
      of the issue date. The Warrants provide for anti-dilution adjustments of the
      issuable shares and the exercise prices thereof should the Company issue common
      stock or common stock equivalents for a price less than the exercise price
      of
      the Warrants, on or prior to the later of 1) the earlier of (x) the date a
      registration statement is declared effective by the SEC and (y) the two year
      anniversary of the issue date and 2) the six month anniversary of the issue
      date. The anti-dilution provided by the Warrants calls for the exercise price
      of
      the Warrants to adjust to 110% of the price of any dilutive issuances, on a
      per
      share basis. After December 31, 2007 and if the daily volume weighted average
      priceof its common
      stock is equal to or greater than the Forced Conversion Price (as defined)
      for
      20 trading days occurring during any period of thirty consecutive trading days,
      the Company has the right to require the conversion of any unconverted Notes
      into shares of common




-
          12
          -


stock.
      After December 31, 2007, and if the daily volume weighted average price of
      its
      common stock is equal to or greater than the $2.20 for 20 trading days occurring
      during any period of thirty consecutive trading days, the Company has the right
      to require the exercise of any unexercised Warrants into shares of common
      stock.




The
      Notes
      provide for quarterly interest to be paid in cash, or subject to certain
      conditions, by issuing shares of common stock. If the Company is eligible and
      elects to pay quarterly interest in stock, the price per share used to calculate
      the number of shares due for interest will be calculated by reducing the market
      price of the shares by 5% (as defined).




The
      Company will use the proceeds from the issuance of the Notes for general working
      capital purposes and to increase the capacity of its product distribution
      network.




Under
      terms of a registration rights agreement, the Company  was obligated
      to file a registration statement within 90 days of the closing date of the
      sale
      of the Notes due 2008 for the resale of the shares of common stock underlying
      the Notes, the Warrants and any other shares issuable pursuant to the terms
      of
      the Notes or the Warrants and to cause the registration statement to become
      effective within 180 days of the closing date. The Company is also required
      to
      maintain the effectiveness of the registration statement until all shares have
      been sold or may be sold without a registration statement.




The
      Company filed the required registration statement on July 3, 2007, which became
      effective on October 2, 2007. If the Company issues additional common stock
      or
      common stock equivalents for a price less than the Conversion Price, on or
      prior
      to the later of 1) the earlier of (x) the date a registration statement is
      declared effective by the SEC and (y) the two year anniversary of the issue
      date
      and 2) the six month anniversary of the issue date of the Notes, the investors
      will have the right, but not the obligation, to participate in such issuance,
      upon the same terms as those offered, so that each Investor’s percentage
      ownership of the Company remains the same.




The
      Company paid fees of $40,000 related to the Notes. These cash fees have been
      recorded as deferred offering costs and are being amortized over the life of
      the
      Notes.




As
      discussed in Note 2, on January 1, 2007, we adopted Financial Accounting
      Standards Board (FASB) Staff Position (FSP) Emerging Issues Task Force (EITF)
      00-19-2, “Accounting for Registration Payment Arrangements”. This FASB staff
      position addresses how to account for registration payment arrangements and
      clarifies that a financial instrument subject to a registration payment
      arrangement should be accounted for in accordance with other generally accepted
      accounting principles (GAAP) without regard to the contingent obligation to
      transfer consideration pursuant to the registration payment arrangement. Prior
      to the adoption of this FSP, the Company classified as a note derivative
      liability and as a warrant liability, financial instruments included in or
      issued in conjunction with our December 2006 financing, since the resale of
      the
      underlying shares issuable upon conversion of the notes and exercise of the
      warrants was required to be registered with the SEC, and the Company’s failure
      to file, and obtain and maintain the effectiveness of a registration statement
      would result in potential cash payments which were not capped.  The
      Company’s adoption of this accounting pronouncement as of January 1, 2007
      resulted in a reclassification of the note derivative liability to the note
      liability and the warrant liability to equity, and an adjustment to the note
      discount to reflect the allocated value of the warrant and a beneficial
      conversion feature, accreted to December 31, 2006, both calculated in accordance
      with EITF Nos. 98-5, “Accounting for Convertible Securities with Beneficial
      Conversion Features or Contingently Adjustable Conversion Ratios,” and “EITF
      00-27, “Application of Issue No. 98-5, to Certain Convertible
      Instruments.”  The cumulative effect of this accounting change of
      $24,000 was credited to the opening accumulated deficit balance as of January
      1,
      2007.





The
      Company allocated the note proceeds of $1.5 million from the December 2006
      financing between the fair value of the notes and the fair value of the
      warrants. The Company valued the warrants at $0.84 per share using the binomial
      option pricing model with the following assumptions: risk free interest rate
      of
      4.39%; effective dividend rate of 0.00%; volatility of 142%; and expected term
      of 5 years. The relative fair value of the warrants is $303,000, which was
      recorded as a discount to the notes, with a corresponding credit to equity,
      or
      common stock. The Company determined that the proceeds allocated to the warrants
      should be treated as equity in accordance with the provisions of EITF 00-19
      and
      FSP 00-19-2. The Company further determined that there was a beneficial
      conversion feature associated with the notes of $138,000, calculated as the
      difference between the fair value of the shares of common stock issuable upon
      conversion of the notes and the proceeds allocated to the notes. The Company
      recorded the amount of the beneficial conversion feature as an additional
      discount to the notes, with a corresponding credit to equity, or common stock.
      The aggregate amounts of the discounts to the notes was $441,000, which is
      being




-
          13
          -


amortized
      to interest expense using the effective interest method prescribed by APB
      Opinion No. 21, “Interest on Receivables and Payables,” over the life of the
      notes. The effective interest rate of these notes is approximately 17.6% based
      on the stated interest rate, the amount of amortized discount, the amount of
      deferred offering costs attributable to the notes and their term.





In
      accordance with EITF 98-5 and EITF 00-27, the Company allocated the note
      proceeds of $1.2 million from the February 2007 financing between the fair
      value
      of the notes and the fair value of the warrants.  The Company valued
      the warrants at $0.97 per share using the binomial option pricing model with
      the
      following assumptions: risk free interest rate of 4.69%; effective dividend
      rate
      of 0.00%; volatility of 140%, and expected term of 4 years.  The
      relative fair value of the warrants is $272,000, which was recorded as a
      discount to the notes, with a corresponding credit to equity or common
      stock.  The Company determined that the proceeds allocated to the
      warrants should be treated as equity in accordance with the provisions of EITF
      00-19 and FSP 00-19-2.  The Company further determined that there was
      a beneficial conversion feature associated with the notes of $368,000,
      calculated as the difference between the fair value of the shares of common
      stock issuable upon conversion of the notes and the proceeds allocated to the
      notes.  The Company recorded the amount of the beneficial conversion
      feature as an additional discount to the notes, with a corresponding credit
      to
      equity, or common stock.  The aggregate amounts of the discounts to
      the notes was $640,000, which is being amortized to interest expense using
      the
      effective interest method prescribed by APB Opinion No. 21, “Interest on
      Receivables and Payables,” over the life of the notes.  The effective
      interest rate of these notes is approximately 46.7% based on the stated interest
      rate, the amount of amortized discount, the amount of deferred offering costs
      attributable to the notes and their term.




The
      Company was initially required to make monthly principal payments beginning
      on June 1, 2007, in twelve equal installments.  However, the note-holders
      have extended the first payment to August 1, 2007, which was made by issuing
      common stock. The initial first two payments, which were deferred, have extended
      the maturity of the notes by two months. Under certain circumstances, the
      Company may make all or a portion of these principal payments
      with common stock. The Company may not issue its stock in payment of
      such principal at a price below the lower of $0.75 per share or the adjusted
      conversion price in effect. If the Company chooses to repay principal
      with common stock, it will be based on the lower of a 10% discount to the lowest
      daily volume weighted average price for any trading day among the immediately
      preceding ten consecutive trading days and the conversion price in effect on
      such principal payment date.




Scheduled
      annual maturities for this long-term debt for years ending after December 31,
      2006 are as follows: $900,000 in 2007 (four months); and $1,575,000 in
      2008.





The
      note
      agreements contain certain affirmative and restrictive covenants, including
      a
      covenant requiring the Company to file, and achieve and maintain the
      effectiveness of a registration statement.  If the Company breaches
      any of the covenants and if, after receiving notice from note holders, does
      not,
      within a certain period of time, cure the breach, the note holders may call
      the
      loan, thereby requiring the payment of the principal balance of the notes plus
      a
      20% penalty.





**SECURED
      CONVERTIBLE DEBT**




The
      Company also has a $2 million convertible note due in March 2025, with annual
      interest at 2% through March of 2005, and thereafter at the prime rate (as
      defined) plus 2%. Payments started on April 2005, at which time, the note is
      payable with equal principal and interest payments over the next 240 months.
      The
      note holder has the option to convert some or all of the unpaid principal and
      accrued interest to shares of ZAP’s common stock at $2.15 per share or an agreed
      upon conversion price (as defined). The note was issued in exchange for the
      purchase of the Company’s corporate headquarters and is secured by this
      property. The note has a balance of $1,829,000 at September 30, 2007. Scheduled
      annual maturities for this long-term debt for years ending after December 31,
      2006 are as follows: $26,000 - 2007 (three months); $104,000 - 2008; $104,000
      -
      2009; $104,000 - 2010; $104,000 - 2011; and $1,387,000- thereafter.





**NOTE
      7  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




-
          14
          -


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
      September 30, 2007.





**NOTE
      8   SHAREHOLDERS’ EQUITY**





On
      June
      20, 2005, ZAP received approval to list its common stock on the Archipelago
      Exchange (ArcaEx). This exchange was a facility of the Pacific Exchange (PCXE)
      and is the nation’s first totally open, all-electronic stock exchange. The
      Company changed its stock ticker symbol used on the ArcaEx from “ZAPZ” to “ZP”
on July 7, 2005. On March 7, 2006, the ArcaEx merged with the New York Stock
      Exchange (the “NYSE”) creating the NYSE Arca electronic trading
      platform.





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





On
      November 9, 2006, ZAP’s Board of Directors approved a 10% stock dividend to be
      issued effective February 28, 2007, to all shareholders of record as of February
      15, 2007. As a result of the stock dividend, approximately 3.9 million shares
      were issued to shareholders. The number of shares and income (loss) per share
      amounts included in these financial statements have been adjusted for all
      periods presented to reflect the stock dividend.





On
      January 25, 2007, the Board of Directors extended by five years through July
      1,
      2012, the expiration date of certain of the Company’s warrants, Series B through
      K. These warrants were issued for executive compensation and by the plan of
      reorganization. The exercise prices of the warrants were also revised from
      prices ranging from $1.00 to $8.00 to 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.





During
      our annual
      meeting of shareholders held in July of 2007,an amendment to the
      Company’s Amended and Restated Articles of Incorporation was approved to
      increase the authorized common stock from 200 million to 400 million
      shares.





Preferred
      Stock


On
      June
      19, 2006, Smart Automobile LLC returned to the Company all the remaining shares
      of preferred stock with a carrying value of $7.5 million in exchange for, among
      other things, 300,000 shares of common stock valued at approximately $405,000,
      and one million warrants with a strike price of $1.75 per share valued at
      approximately $950,000.  See Note 5, License and Distribution Fee, for
      further discussion on this transaction.





-
          15
          -


The
      Company’s shareholder equity activity for the nine months ended September 30,
      2007 is summarized as follows:  (in thousands)




**Common**Shares
            
            
            **Amount****Balance
                at December 31, 2006**
            
            
            38,464
            
            
            $
            91,227**Issuances
                of Common Stock for:**Exercise
                of options and warrants for cash
            
            
            245
            
            
            
            145Cash
            
            
            843
            
            
            
            900Consulting
                and other services
            
            
            837
            
            
            
            876Employee
                compensation
            
            
            267
            
            
            
            300Stock
                dividend
            
            
            3,962
            
            
            
            —6,154
            
            
            
            2,221**Stock
                Option and Warrant Transactions**Warrants
                issued to convertible debt holders
            
            
            
            
            
            
            1,081Fair
                value of warrants issued for consulting and other services
            
            
            
            
            
            
            260Fair
                value of options and warrants issued to employees
            
            
            
            
            
            
            11,74013,081**Balance
                at March 31, 2007**
            
            
            44,618
            
            
            
            106,529**Issuances
                of Common Stock for:**Exercise
                of options and warrants for cash
            
            
            763
            
            
            
            596Employee
                compensation
            
            
            57
            
            
            
            60Consulting
                and other services
            
            
            509
            
            
            
            535Interest
                and penalties
            
            
            142
            
            
            
            1391,471
            
            
            
            1,330**Stock
                Option and Warrant Transactions**Warrants
                issued to convertible debt holders
            
            
            —
            
            
            
            175Fair
                value of options and warrants issued to employees
            
            
            —
            
            
            
            518—
            
            
            
            693


**Balance
                at June 30, 2007**
            
            
            46,089
            
            
            
            108,552**Issuances
                of Common Stock for:**Asset
                purchase
            
            
            58
            
            
            
            56Employee
                compensation
            
            
            249
            
            
            
            254Consulting
                and other services
            
            
            993
            
            
            
            980Principal
                payments on convertible debt
            
            
            309
            
            
            
            2251,609
            
            
            
            1,515**Stock
                Option and Warrant Transactions**Fair
                value of options and warrants issued to employees
            
            
            —
            
            
            
            1,522**Balance
                at September 30, 2007**
            
            
            47,698
            
            
            $
            111,589





The
      Company issued common stock as consideration under agreements for consulting
      and
      employee services during the nine months ended September 30, 2007. The Company
      recorded the cost based on the market value of the stock at the date of grant.
      The cost of consulting services resulting from issuing stock and warrants and
      stock options is being recognized as expense over the term of their
      respective agreements.





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          16
          -


Stock
      issued as collateral is discussed in Note 2, “Stock Issued as Collateral,” and
      in Note 9, “Litigation, *‘ZAP v. International Monetary Group, Inc., a
      Delaware Corporation; Michael C. Sher dba the Law Offices of Michael C. Sher,
      Case No. SCV 240277.’”*





The
      Company also issued options and warrants to consultants for professional
      services.  During the three months ended March 31, 2007, the Company issued
      warrants to consultants to purchase 272,000 shares of common stock at
      prices ranging from $1.00 per share to $1.32 per share, with a contractual
      life
      ranging from 5 to 6 years.There were no warrants
      issued to consultants for the three month period ending on June 30, 2007. During
      the three months ended September 30, 2007, the Company issued warrants to
      consultants and directors to purchase 1,960,000 shares of common stock at
      prices ranging from $1.00 per share to $1.20 per share, with a contractual
      life
      of 5 years.





The
      options and warrants are nonforfeitable and fully vested at the date of issuance
      and were valued using the Black-Scholes option pricing model with the following
      range of assumptions:




**Low**
            **High**Exercise
                price per share
            $1.00
            $1.32Market
                price
            $1.12
            $1.15Assumptions:Expected
                dividend yield
            0.0%
            0.0%Risk
                free rate of return
            4.58%
            4.64%Expected
                life (contractual term)
            5
                years
            6 yearsVolatility
            115.88%
            120.97%Fair
                market value
            $0.89
            $0.98




**NOTE
      9 LITIGATION**





In
      the
      normal course of business, we may become involved in various legal proceedings.
      Except as stated below, we know of no pending or threatened legal proceeding
      to
      which we are or will be a party which, if successful, might result in a material
      adverse change in our business, properties or financial condition. However,
      as
      with most businesses, we are occasionally parties to lawsuits incidental to
      our
      business, none of which are anticipated to have a material adverse impact on
      our
      financial position, results of operations, liquidity or cash flows. 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. 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, and the court’s ruling on that
      matter is in the process of being appealed.  Two of the other defendants in
      the action, G&K Automotive Conversion, Inc. and The Defiance LLC, have filed
      a cross-complaint against ZAP in the Los Angeles Superior Court for, among
      other
      things, violations of Section 43(a) of the Lanham Act, statutory and common
      law  unfaircompetition, and
      intentional and negligent interference withprospective economic
      advantage.  ZAP has responded to the cross-complaint and denied engaging in
      any wrongful actions.




*Leandra
      Dominguez v. RAP Group,
      Inc. dba The Repo Outlet et. al*., Superior Court of California,
      County of Sonoma, Case No. SCV-235641, complaint filed October 14, 2004, first
      amended complaint filed December 15, 2004.  Plaintiff has sued The
      Repo Outlet and Credit West Corporation for negligent misrepresentation, for
      a
      violation of the Business and Professions Code Section 17200, for breach of
      the
      implied warranty of merchantability under the Magnusson-Moss Act, and for
      violation of the federal Truth in Lending Act.  On January 13, 2005,
      the RAP Group, Inc. agreed to defend and indemnify Credit West
      Corporation.  At a hearing before the Sonoma County Superior Court on
      February 23, 2005, the court granted The Repo Outlet’s motion to




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          17
          -


compel
      arbitration, and on March 8, 2005, the court stayed the court proceeding pending
      arbitration.  The RAP Group, Inc. filed a demand for arbitration with
      the American Arbitration Association (the “Association”) on April 7, 2005, but
      the parties later stipulated that the arbitration would proceed before
      JAMS.  The Repo Outlet made a Code of Civil Procedure 998 offer
      to settle and have Dominguez dismiss the matter with prejudice for the sum
      of
      $1,001.  Because Dominguez failed to timely respond to The Repo Outlet’s
      Section 998 offer, that offer expired on March 2, 2006.  The Repo
      Outlet made another settlement offer of $1,857 to settle this matter as to
      both
      defendants on January 8, 2007, but this offer was rejected as plaintiff’s
      counsel seeks to recover all of his attorneys’ fees.  Although the
      case was sent to arbitration before JAMS, and set for arbitration in February
      2007, on January 9, 2007, The Repo Outlet informed the arbitrator and
      plaintiff’s counsel that it would be ceasing operations and its counsel would be
      withdrawing as attorneys of record.  At a status conference on
      February 8, 2007, the court was informed that counsel for RAP Group had moved
      to
      withdraw for non-payment of fees. Since that time, Credit West has substituted
      its own counsel of record, and so RAP Group is no longer tendering a defense
      to
      Credit West.  On April 4, plaintiff Dominguez filed with the Court a
      Request for Entry of Default Judgment against RAP Group.  On May 2,
      2007, the Court granted Donahue Gallagher Woods LLP’s motion to withdraw as
      counsel of record.  Thus, RAP Group is currently unrepresented by
      counsel in this matter.




*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.  On November 2,
      2006, the court denied this motion, although it did require the Company to
      post
      a $300,000 bond to enforce the writ.  The Company has not yet posted
      that bond, and consequently Mr. Alvis has threatened to move to revoke the
      writ.  The Company, Rotoblock and Schneider then demurred to the
      cross-complaint, and Alvis responded by filing an amended cross-complaint.
      The
      first amended cross-complaint again seeks breach of contract and common count
      damages against the Company and Rotoblock, as well as fraud damages against
      the
      Company and Schneider.  The Company and Schneider answered the first
      amended cross-complaint with general denials; Rotoblock responded by filing
      a
      second demurrer in which it has alleged it was an improperly named
      party.  The hearing on Rotoblock’s demurrer was heard on March 21,
      2007, at which time the demurrer was denied. Rotoblock intends to file an answer
      to the amended cross-compliant with general denials. Counsel has given notice
      of
      the claims against Schneider to the Company’s D&O insurer, which has
      acknowledged receipt of the notice. Mr. Alvis has filed a motion to “recall” the
      writ of possession for which the court authorized issuance respecting the
      disputed motor home currently in Mr. Alvis’ possession. The hearing on that
      motion was heard on July 25, 2007, at which time Mr. Alvis’  motion
      was denied. The parties then confirmed, on the record in court, the original
      order granting ZAP the writ of possession, including ZAP’s ability to post the
      $300,000 bond at any time during the pendency of the suit. In the meantime,
      discovery is on-going, and the parties are discussing mediation and attempting
      to schedule the same. The next case conference has now been continued until
      January 10, 2008.




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          18
          -


*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.  A hearing on those demurrers is
      currently set for November 14, 2007, but the parties have filed a stipulation
      with the court to reschedule that hearing to December 12, 2007.  The
      parties are now simply awaiting the court’s approval of that
      stipulation.  At the case management conference held on October 24,
      2007, Cross-Complainants indicated that they would be filing an amended
      Cross-Complaint, but the Cross-Defendants have not been served with any such
      document.  The next case management conference is scheduled for
      January 23, 2008.  In the meantime, discovery is
      ongoing.




*ZAP
      v. International Monetary
      Group,(Patrick J Harrington President and CEO) Inc., a Delaware corporation;
      Michael C. Sher dba the Law Offices of Michael C. Sher*, Case No. SCV
      240277,complaint
      filed March 1, 2007 in Sonoma County Superior Court.  ZAP sued
      International Monetary Group (“IMG”) whose President and CEO is Patrick D.
      Harrington and Michael Sher for declaratory relief, rescission, and breach
      of
      contract.  ZAP had entered into an agreement with IMG, a merchant
      banking company, to procure financing, and ZAP alleges that IMG, contrary to
      the
      parties’ agreement, is seeking to enforce a $500,000 promissory
      note.  ZAP also alleges that IMG and Sher have taken $12,500 and
      10,000 shares of ZAP common stock that they held in trust for ZAP without
      authorization.  ZAP also alleges that IMG and Sher continue to hold
      1,291,176 shares of ZAP stock that was supposed to have been used as collateral
      for a $1 million loan to be procured by IMG and Sher that never
      materialized.





An
      Amended Complaint was filed October 11, 2007.  The Amended Complaint
      alleges that ZAP and International Monetary Group (“IMG”) entered into a
      consulting agreement whereby IMG was advanced 750,000 shares of ZAP stock as
      pre-payment for consulting services.  ZAP alleges that IMG failed to
      perform the services as contemplated and asks the court (a) to declare the
      parties’ respective rights and duties under the consulting agreement and (b) for
      damages




-
          19
          -


for
      IMG’s
      breach of the consulting agreement.  The Amended Complaint also
      alleges that ZAP, IMG, and Michael Scher (“Scher”) entered into a
      funding agreement whereby ZAP advanced 1,291,176 shares of ZAP stock to the
      defendants, which stock defendants were to use to procure $1 million in
      financing for ZAP.  ZAP alleges that defendants failed to procure the
      financing yet have continued to retain the stock.  The Amended Complaint
      asks the court (a) to declare the parties rights and duties under the funding
      agreement and (b) for damages for defendants’ breach of the agreement.  The
      Amended Complaint also asks the court to declare whether or not IMG may
      enforce a $500,000 promissory note against ZAP.  Defendants’
response to the Amended Complaint is due November 15, 2007 and a case
      management conference is scheduled for November 28, 2007. The parties believe
      they may have reached a settlement; however, no definitive agreement has been
      signed as of November 13, 2007. Management has recorded an estimated liability
      for any potential exposure related to this transaction, which is included in
      the
      accompanying consolidated balance sheet.  In addition, management
      believes that the ultimate resolution of this claim will not have a material
      adverse effect on our consolidated financial position or on results of
      operations.




**NOTE
      10  RELATED PARTY TRANSACTIONS**





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.





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





Rental
      agreements





The
      Company rents office space, land and warehouse space from Mr. Steven Schneider,
      its CEO and major shareholder. These properties are used to operate the car
      outlet and to store inventory. Rental expense under these rentals was
      approximately $63,000 and $108,500****for the nine months
      ended September 30, 2007 and 2006, respectively.




















-
          20
          -


**Note
      11   SUPPLEMENTAL DISCLOSURE OF CASH FLOW
      INFORMATION:**





**Nine
                Months Ended****September 30,**
              **(in
                thousands)****2007**
            
            
            **2006**Cash
                paid during the period for interest
            
            $
            39
            
            
            $
            41Cash
                paid during the period for income taxes
            
            $
            4
            
            
            $
            4Non-cash
                investing and financing activities:Stock
                and warrants issued for:Partial
                settlement of preferred stock liability
            
            $
            —
            
            
            $
            1,354Settlement
                of warrant liability
            
            $
            —
            
            
            $
            568Purchase
                of fixed assets
            
            $
            56
            
            
            
            —Re-payment
                of 8% Senior debt
            
            $
            225
            
            
            $
            —





**NOTE
      12 COMMITMENTS**





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.





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”).





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).  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.





Albert
      Lam, currently the CEO of Lotus Engineering and a Director of ZAP as of October
      22, 2007, has been appointed by the Company and Youngman to serve as Chairman
      of
      the Board of Directors of EV Holdings, which shall initially consist of three
      directors. ZAP CEO Steven Schneider also agreed to serve as a director
      on the board, and a third director shall be selected and appointed by
      Youngman.





The
      shareholders agreement for EV Holdings provides that the company will reserve
      shares for future grant to key employees, on terms to be set from time to time
      by its board of directors. The shareholders agreement may be terminated by
      either ZAP or Youngman with 90 days advance notice if the other party materially
      breaches the agreement, liquidates, or undergoes a change of corporate
      control.








-
          21
          -


**NOTE
      13 SUBSEQUENT EVENTS**





In
      November of 2007, we received $5 million from the issuance of 5,813,954 shares
      of our common stock to Al YOUSUF LLC.





In
      October and November 2007, the note holders of the Senior Convertible notes
      have
      converted approximately $1.6 million of principal payments into 2.3 million
      shares of ZAP common stock.




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





THIS
      QUARTERLY REPORT OF FORM 10-QSB, 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
      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




-
          22
          -


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-QSB the terms “ZAP,” “Company,” “we,” “us” and “our”
refer to ZAP and its subsidiaries.




**Overview**





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.





Today,
      ZAP is renewing its focus as a pioneer at the forefront of advanced
      transportation technologies.  The Company has established an
      automotive portal to distribute vehicles to offer consumers, fleet and other
      stakeholders product that better address social responsibility and environmental
      sustainability than is being offered by the traditional automobile
      manufacturers.  Through this portal, and the continued establishment
      of partnerships with select manufacturers, ZAP intends to play a small part
      in
      building awareness of the evolving technologies available for automotive
      transportation and in reducing our nation’s dependency on foreign oil. To
      complement the efforts of its automotive portal,  ZAP is also
      aggressively upgrading and expanding its traditional consumer products,
      incorporating new motor, drive control and battery technologies and solidifying
      its advance energy solutions through a new portable energy line of products.
      We
      market many forms of advanced transportation vehicles, including electric
      automobiles, fuel-efficient vehicles, motorcycles, bicycles, scooters,
      neighborhood electric vehicles and all terrain vehicles. We market products
      designed solely by us, as well as products we design together with other
      companies. Most of our products are manufactured in China. Our automobiles
      are
      assembled outside of the United States, but made to comply with United States
      laws. The Smart Car Americanized by ZAP is manufactured and made compliant
      for
      sale in the United States by a registered importer. As of September 30, 2006,
      the company no longer distributes the Smart Car Americanized by ZAP due to
      the
      unavailability of Smart Cars. In June 2006 we began delivery of our Xebra,
      the
      only full production electric vehicle available in the United States capable
      of
      speeds in excess of 40 miles per hour.  Our automobile products
      require registration with state vehicle registration departments and must be
      sold through licensed dealers, while our consumer vehicles can be sold directly
      to consumers without registration.





Our
      automobile vehicles are subject to environmental and safety compliance with
      various Federal and State governmental regulations, including regulations
      promulgated by the Environmental Protection Agency, National Highway Traffic
      Safety Administration and Air Resource Board of the State of California (CARB).
      The costs of these compliance activities can be substantial.





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








-
          23
          -


**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 through
      Voltage Vehicles dealers. The Company also operates a retail vehicle outlet
      in
      Santa Rosa to distribute advanced technology vehicles and some conventional
      gas
      automobiles.  ZAP Stores is engaged primarily in consumer sales of ZAP
      products and ZAP Manufacturing is engaged primarily in the distribution of
      ZAP
      products. ZAP World Outlet and ZAP Rental Outlet are not currently operating
      subsidiaries.








**Recent
      Developments**





Some
      of
      the noteworthy events for the Company that occurred during 2007 and through
      the
      date of this report are as follows:





1.
            In
                November we received $5 million from the issuance of common stock
                in a
                private placement to a qualified
                investor.




2.
            We
                signed a joint venture agreement with Youngman Automotive Group,
                China’s
                number one luxury motor coach and high-quality commercial truck
                manufacturer, to manufacture, market and distribute electric and
                hybrid
                vehicles for the passenger car, truck and bus markets.  See Note
                12, “China Joint Venture” of the notes to the interim unaudited condensed
                consolidated financial statements for further description of this
                agreement.




3.
            During
                the third quarter we received orders for over 50,000 units of our
                Recharge-It-All line of rechargeable lithium battery storage devices.
                ZAP’s Recharge-It-All line is a unique rechargeable battery system that
                can provide a portable power source for almost any kind of mobile
                electronic device, from cell phones, to digital cameras, to laptops.
                More
                than just a battery, Recharge-It-All can automatically sense and
                deliver
                the appropriate voltage for a range of power
                settings.





4.
            We
                also signed an agreement for the purchase of an advanced wheel motor
                from
                PML FlightLink Limited for the PML wheel motor technology, which
                we expect
                to play a key role in the development of next generation electric
                vehicles
                being developed with Lotus Engineering.  See Note 12
                “Distribution Agreement” of the notes to the interim unaudited condensed
                consolidated financial statements for further description of this
                agreement.




5.
            We  signed
                an agreement with Coca-Cola’s Latin America subsidiary, Montevideo
                Refrescos Sociedad SA (Monresa). The contract is a purchase and service
                agreement for ZAP XEBRA® trucks. The first container of ZAP trucks is in
                transit from China and more details are expected to be announced
                with the
                rollout of the business model between ZAP and
                Coca-Cola.6.
            We
                are now developing a new electric vehicle that is affordable for
                consumers. With a targeted price of $30,000, the technology for the
                new
                vehicle is similar to that of an electric SUV concept announced earlier
                this year called ZAP-Alias, but will be available
                sooner.





7.
            We
                have been allowed a patent and trademark for the ZAP XEBRA® city-speed
                electric car and truck from the United States Patent and Trademark
                Office.
                Over 500 Xebra trucks and sedans have been delivered through September
                30,
                2007.





8.
            To
                help mitigate pollution and traffic congestion, Chile’s largest power
                company, CHILECTRA, will allow its customers to use their monthly
                utility
                bill to finance the purchase of electric bicycles, scooters, mopeds
                and
                other vehicles from us.As
                part of the program, CHILECTRA has signed an exclusive agreement
                with ZAP
                to distribute its full-line of electric transportation in
                Chile.




-
          24
          -


**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**
                **September
                    30,**
              
              
              **Nine
                  months ended**
                **September
                    30,****Statements
                  of Operations Data:**
              
              **2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Net
                  sales
              
              
              100
              %
              
              
              100
              %
              
              
              100
              %
              
              
              100
              %Cost
                  of sales
              
              
              73.1
              
              
              
              95.6
              
              
              
              82.2
              
              
              
              91.7Operating
                  expenses
              
              
              201.4
              
              
              
              260.0
              
              
              
              479.7
              
              
              
              135.0Loss
                  from operations
              
              
              (174.5
              )
              
              
              (225.6
              )
              
              
              (461.9
              )
              
              
              (126.6
              )Net
                  income
                  (loss)
              
              
              (185.4
              )
              
              
              11.59
              
              
              
              (480.0
              )
              
              
              (56.2
              )


**Quarter
      Ended September 30, 2007 Compared to Quarter Ended September 30,
      2006**





**Net
      sales** for the quarter ended September 30, 2007 were $2 million compared
      to $2.6 million for the period ended September 30, 2006.  Sales of
      vehicles were $ 1.1 million in 2007 versus $2.3 million in 2006. The difference
      was primarily due to the decrease in sales of the Smart Cars Americanized by
      ZAP
      in 2007.  The Company decided in September 2006 to no longer
      distribute the vehicles due to the conflict with Daimler Chrysler because the
      supply was uncertain. The Company had to initiate new market strategies, and
      was
      forced to close down Smart only dealers and to convert some Smart dealers to
      XEBRA dealers and to train all dealers in the sales and service of electric
      vehicles. During the quarter ended September 30, 2007, the Company had
      approximately $660,000 in Xebra sales, as compared to $630,000 during the same
      period in 2006. Sales of the new portable energy product line accounted for
      approximately $731,000 of the net sales for the third quarter of
      2007.





**Gross
      profit** increased by $428,000 from $115,000  for the third
      quarter ended September 30, 2006  to $543,000 for the quarter ended
      September 30, 2007. The major reason for the increase was  the sales
      of the new portable energy product line which has greater profit
      margins.





**Sales** **and
      marketing expenses** increased by $149,000 from $370,000 for the quarter
      ended September 30, 2006 to $519,000 for the quarter ended September 30, 2007.
      As a percentage of sales, it represents an increase from 14% to
      26%.  The increase was primarily due to greater marketing and
      promotion expenses for the Xebras and portable energy product lines during
      the
      third quarter of 2007.





**General
      and administrative** **expenses** decreased by $622,000
      from $4.1 million for the quarter ended September 30, 2006 to $3.5 million
      in
      2007. The reason for the decrease was due to less consulting and professional
      fees with no amortization of the terminated license agreement which were settled
      in 2006.





**Research
      and development expenses******of
      $23,000 in 2007 were due to the purchase of various scooter prototypes for
      evaluation of future product model introductions.





**Interest
      expense, net**increased from an expense of $17,000 in third quarter
      2006 to an expense of $210,000 in third quarter of 2007. The increase was due
      to
      interest paid in connection with the senior convertible debt that was issued
      in
      late 2006 and early 2007.





**Net
      Loss**for the quarter ended September 30, 2007 was $3.7 million compared
      to net income of $305,000 for the third quarter of 2006.  This is
      primarily due to the gain on settlement of the Smart Auto liability in
      2006.




**Nine
      Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
      2006**




**Net
      sales** for the nine months ended September 30, 2007, were $4.6 million
      compared to $9.9 million for the nine months  ended September 30,
      2006.  The decrease was due to less sales of Smart Cars Americanized
      by ZAP (as




-
          25
          -


discussed
      in the quarterly explanation above). During the nine months ended September
      30,
      2007, the Company had approximately $2.0 million in Xebra sales, as compared
      to
      $754,000 for the first nine months of 2006. Sales of the new product line of
      portable energy accounted for approximately $800,000 of the net sales for the
      nine months ended September 30, 2007.





**Gross
      profit** decreased by $14,000 from $827,000 in 2006 to $813,000 for the
      nine months ended September 30, 2007. The major reason for the decrease was
      due
      to less vehicle unit sales in 2007, primarily as the result of the
      discontinuance in September of 2006 of the Smart Automobile Americanized by
      ZAP,
      partially offset by sales of the new portable energy product line, which has
      greater profit margins than the Smart Cars.





**Sales
      and marketing expenses** in the first nine months of 2007 increased by
      $180,000 from $974,000 in 2006 to  $1.2 million in
      2007.  The increase was primarily due to greater marketing and
      promotion expenses for the Xebras and portable energy product lines during
      the
      third quarter of 2007.





**General
      and administrative****expenses**increased by $10.2 million
      from $10.1 million in 2006 to $20.3 million in 2007.  The primary
      increase was due to non-cash expenses of  $11.7 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. The
      aforementioned increase also included expensing of stock options in accordance
      with SFAS123R, which was offset by lower expenses in 2007 as compared to 2006
      related to professional fees and amortization for previously terminated licenses
      agreements.





**Research
      and development expenses**of $412,000 in 2007 were primarily for the
      Company’s investment in a project with Lotus Engineering to develop a new
      electric car based on the APX (Aluminum Performance Crossover) concept, which
      showcases Lotus Engineering’s Versatile Vehicle Architecture technology. The
      vehicle, the ZAPX, will be a production-ready electric all-wheel drive crossover
      high performance vehicle for ZAP in the USA market.


Additionally,
      we purchased various scooter prototypes in 2007 for evaluation of future model
      introductions.





**Interest
      expense, net**increased by $784,000 from an interest expense
      of  $26,000 for the first nine months of 2006 to
      interest expense of $810,000 in the nine months ended September 30, 2007. The
      increase was due to interest and the amortization of the discounts in connection
      with the senior convertible debt that was issued in late 2006 and early
      2007.





**Net
      Loss**was $21.9 million for the nine months ended September 30, 2007 as
      compared to a net loss of $5.2 million for period ended September 30, 2006.
      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, offset by the gain on settlement of
      the
      Smart Auto liability of $7.1 million recorded during the nine months ended
      September 30, 2006.





**Liquidity
      and Capital Resources**





In
      the
      first nine months of 2007, net cash used for operating activities was $4.1
      million. In the first nine months of 2006, the Company used cash for operations
      of $3.3 million. Cash used in the first nine months of 2007 was comprised of
      the
      net loss incurred for the first nine months of $21.9 million, offset by non-cash
      expenses of $18.2 million and the net change in operating assets and liabilities
      of $458,000. Cash used in operations of $3.3 million in the first nine months
      of
      2006 was comprised of the net loss of $5.2 million plus net non-cash expenses
      of
      $2.1 million, and the net change in operating assets and liabilities of
      $264,000.





Investing
      activities used cash of $20,000 and $351,000 in the first nine months ended
      September 30, 2007 and 2006, respectively.




Financing
      activities provided cash of $2.7 million and $2.5 million during the first
      nine
      months ended September 30, 2007 and 2006, respectively.





The
      Company had cash and cash equivalents of $739,000 at September 30, 2007 as
      compared to $306,000 at September 30, 2006. The Company had a working capital
      deficit of $1.5 million at September 30, 2007 as compared to working capital
      of
      $638,000 at September 30, 2006.




-
          26
          -


In
      October and November 2007, the Senior Convertible note holders have converted
      approximately $1.6 million of the notes into ZAP common stock.





In
      November we received $5 million from the issuance of common stock in a private
      placement to a qualified investor.





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





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





**CRITICAL
      ACCOUNTING POLICIES**





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.





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 September 30, 2007 and 2006, 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.





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          27
          -


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.





Classification
      of Financial Instruments with Characteristics of both Liability and
      Equity





We
      account for financial instruments that we have issued and that have
      characteristics of both liability and equity in accordance with SFAS No. 150,
      *Accounting for Certain Financial Instruments with Characteristics of Both
      Liabilities and Equity*.  SFAS No. 150 specifies that mandatory
      redeemable financial instruments are to be recorded as liabilities unless the
      redemption is required to occur upon the liquidation or termination of the
      issuer.  SFAS No. 150 also specifies that a financial instrument that
      embodies a conditional obligation that an issuer may settle by issuing a
      variable number of its equity shares is to be classified as a liability if,
      at
      inception, the value of the obligation is based solely or predominantly on
      variations inversely related to changes in the fair value of the issuer’s equity
      shares.  Should a financial instrument not be classified as a
      liability under the provisions of SFAS No. 150, we further apply the criteria
      in
      Emerging Issues Task Force (EITF) Issue No. 00-19, *Accounting**for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company’s Own Stock,*which enumerates additional criteria to determine the
      appropriate classification as liability or equity.  We also evaluate
      the anti-dilution and/or beneficial conversion features that may be included
      in
      our financial instruments in accordance with the provisions of SFAS No. 133,
      *Accounting for Derivative Instruments and Hedging Activities,*which may
      classify the feature as an embedded derivative and require that the financial
      instrument be bifurcated and the feature accounted for separately.  We
      evaluate each financial instrument on its own merits at inception or other
      prescribed measurement or valuation dates and may engage the services of
      valuation experts and other professionals to assist us in our detemination
      of
      the appropriate classification.





Accounting
      for Stock-Based Compensation





Effective
      January 1, 2006, we adopted the fair value recognition provisions of SFAS No.
      123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), using the
      modified-prospective transition method. Under the fair value recognition
      provisions of SFAS 123(R), share-based compensation cost is estimated at the
      grant date based on the fair value of the award and is 
recognized  as  expense, net  of  estimated
      pre-vesting  forfeitures,  ratably  over  the
 vesting  period  of  the  award.





We
      selected the Black-Scholes option-pricing model as the most appropriate
      fair-value method for our awards. Calculating share-based compensation expense
      requires the input of highly subjective assumptions, including the expected
      term
      of the share-based awards, stock price volatility, and pre-vesting forfeitures.
      The assumptions used in calculating the fair value of stock-based awards
      represent our best estimates, but these estimates involve inherent uncertainties
      and the application of management judgment. As a result, if factors change
      and
      we use different assumptions, our share-based compensation expense could be
      materially different in the future. In addition, we are required to estimate
      the
      expected pre-vesting forfeiture rate and only recognize expense for those shares
      expected to vest. If our actual forfeiture rate is materially different from
      our
      estimate, our share-based compensation expense could be significantly different
      from what we have recorded in the current period.




**ZAP’S
      CURRENT PRODUCT LINE**





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




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          28
          -


vehicle
      capable of speeds up to 40 mph.  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 20 licensed automotive dealers and intend to grow this base significantly
      over the next several years.





In
      2006,
      ZAP Automotive introduced the following automobile products:




·
            the
                100% electric XEBRA sedan with an MSRP of approximately
                $10,500;




·
            the
                100% electric XEBRA utility vehicle truck with an MSRP of approximately
                $11,200; and




·
            the
                Smart micro-car with an MSRP of  approximately $25,000 (no
                longer distributed after September 30,
                2006).




In
      2007,
      ZAP Automotive introduced the ZAPINO, we introduced a new electric scooter,
      the
      Zapino, with an advanced 2,500-watt brushless DC hub motor, perfect for city
      commuting and able to reach speeds of 30 MPH.




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




·
            the
                OBVIO 828, an economy micro-car from Brazil with an estimated MSRP
                of
                $16,000,




·
            the
                OBVIO 012, a sports-coupe from Brazil with an estimated MSRP of $28,000;
                and




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




·
            The
                ZAP Alias, which has a target price of $30,000 per vehicle and an
                estimated range of 100 miles per
                charge




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




XEBRA





We
      believe that XEBRA is the only series production electric vehicle in the United
      States that can legally travel faster than 40 mph.  The car’s
      suggested retail price of $10,500 is significantly less expensive than most
      of
      its 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 overwhelming, 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.




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          29
          -


XEBRA
      Sedan (ZAPCAR ®)





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 TM)





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.





Smart
      Car





The
      Smart
      Car was our initial automotive product. The project provided us with an
      excellent entry level opportunity in the micro-car market in the United States
      and confirmed our belief that there is a sizable demand for smaller, more fuel
      efficient (or alternatively fueled) vehicles. The Smart Car is manufactured
      by
      Daimler Chrysler Corporation, who we believe failed to identify the United
      States as a potential market. In Daimler Chrysler’s absence, we contracted with
      a third party unaffiliated with Daimler Chrysler to have the Smart Car imported
      and “Americanized” to meet the growing demand for micro-cars.  The
      process of Americanizing the Smart Car involved having the car modified to
      meet
      all Federal Motor Vehicle Safety Standards, United States Department of
      Transportation requirements, and Environmental Protection Agency regulations
      and
      applicable state requirements.





We
      proved
      that we could introduce and sell the Smart Car Americanized by ZAP and
      consequently sold over 300 Smart Cars to date, but due to the conflict with
      Daimler-Chrysler and others, and the uncertainty of auto supply, we discontinued
      distribution of the Smart Car in September of 2006.





OBVIO!





In
      September 2005, we entered into an exclusive (in North America) distribution
      contract with the Brazilian automobile manufacturer OBVIO! for the future
      importation of two models of micro-cars – an economy 828 model and a full
      performance 012 model. The cars will have butterfly doors, seating capacity
      to
      accommodate three persons, up to 250 horsepower output and accessories such
      as
      iMobile and air conditioning. This car will function on multi-fuel technology,
      meaning they will have the ability to be powered by ethanol, gasoline, or any
      combination thereof. We are also working with OBVIO! to produce a 100% electric
      version.





There
      are
      currently over four million flex-fuel vehicles in the United States and most
      of
      these vehicles are sport-utility vehicles or others in the “light truck”
class.  Sedans, wagons, and others are usually only available in
      flex-fuel configurations as part of fleet vehicle purchases by
      corporations.  A recent poll conducted by Maritz® showed that 84% of
      consumers would consider purchasing a vehicle capable of running on E85, a
      fuel
      blend of 15% gasoline and 85% ethanol, and consumers were willing to pay a
      median premium of $1,000 more than for a gasoline only
      vehicle.  Unlike most flex-fuel vehicles in the U.S. which can run on
      up to 85% ethanol, OBVIO! vehicles will have the capability to run on 100%
      ethanol.





The
      initial retail price of the 828 model is expected to be approximately $16,000
      and the retail price of the 012 model is expected to be
      $28,000.  OBVIO! is scheduled to deliver 7,500 cars during the first
      year of production, 17,500 cars during the second year and 25,000
      thereafter.  We intend to capture market share of the flex-fuel
      segment by offering cars that are sporty, fun to drive, and high-performance,
      but yet efficient and economical.




LOTUS





On
      January 30, 2007, we announced a contract with Lotus Engineering to develop
      a
      production-ready 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




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          30
          -


of
      up to
      350 miles between charges, with a rapid 10-minute recharging time. 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
      also working on the ZAP Alias TM a $30,000 all electric vehicle with a targeted
      100 mile range.





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, (3) electric busses and (4) electric
      trucks.





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
      goal
      for our consumer product line is to sell an average of 10,000 units per
      year.  At $530 to $900 average unit prices, the business represents a
      strategic compliment to the automotive portal by providing stable and increasing
      cash flows, facilitating access to, and use of, new technologies, and continuing
      to foster loyalty of ZAP’s brand.





Our
      current product offerings include:





·
            Three-wheeled
                personal transporters (ZAPPY3 Pro, ZAPPY3
                EZ);


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


·
            Portable
                energy (universal recharge-it-all batteries and ipod auxiliary
                batteries).





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.





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          31
          -


The
      ZAPPY3 retail focus has continued strong in 2007. In early 2006, the Company
      rolled out a new dealer development program that emphasized the Company’s
      commitment to a nationwide distribution strategy coupled with consistent and
      responsive customer service. 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 2,500-watt
      brushless DC hub motor, perfect for city commuting. Able to reach speeds of
      30
      MPH, the ZAPINO will be 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.




Off-Road
      Vehicles





All
      terrain vehicle (“ATV”) manufacturers recognized in excess of $5.5 billion in
      revenues in 2005 with the market for ATVs and off-road vehicles growing steadily
      since 2003. In the United States alone, approximately 800,000 units were sold
      in
      2005. 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 Buzzz mini
      ATV.  The Buzzz has a 450 watt geared-motor and a top speed of 15 mph
      with a range of approximately 20 miles.   In the current quarter,
      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 late 2007 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




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          32
          -


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.




**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.





Since
      we
      began operation in 1994, we have generated a profit only for the three month
      period ended September 30, 2006 and not in any other fiscal quarters or any
      fiscal year. We incurred net losses of $21.9 million, $11.9 million, $23.5
      million and $27.8 million for the nine months ended September 30, 2007 and
      the
      years ended December 31, 2006, 2005 and 2004, respectively.  We can
      give no assurance that we will be able to operate profitably in the
      future.





In
      each
      of the thirteen years since we began operations, we have not generated enough
      revenue to exceed our expenditures.  Since our inception, we have
      financed our operations primarily through private and public offerings of our
      equity securities.  Our planned expenditures are based primarily on
      our internal estimates of our future sales and ability to raise additional
      financing.  If revenues or additional financing do not meet our
      expectations in any given period of time, we will have to cut our planned
      expenditures which could have an adverse impact on our business or force us
      to
      cease operations.  Our cash on hand was $739,000 on September 30,
      2007.  Failure to achieve profitable operations may require us to seek
      additional financing when none is available or is only available on unfavorable
      terms.





**We
      may face liquidity challenges and need additional financing in the
      future.**





We
      currently expect to be able to fund our working capital requirements from our
      existing cash and cash flows from operations through at least December 31,
      2007.
      However, we could experience unforeseen circumstances, such as an economic
      downturn, unforeseen difficulties in manufacturing/ distribution, or other
      factors that could increase our use of available cash and require us to seek
      additional financing. We may find it necessary to obtain equity or debt
      financing due to the factors listed above or in order to support our expansion,
      develop new or enhanced products, respond to competitive pressures, or respond
      to unanticipated requirements.





We
      may
      seek to raise additional funds through private or public sales of securities,
      strategic relationships, bank debt, or otherwise. If additional funds are raised
      through the issuance of equity securities, the percentage ownership of our
      stockholders will be reduced, stockholders may experience additional dilution
      or
      any equity securities we sell may have rights, preferences or privileges senior
      to those of the holders of our common stock. We expect that if we are unable
      to
      obtain additional financing on acceptable terms, we may be unable to pay our
      debts as they become due, develop our products, take advantage of future
      opportunities or respond to competitive pressures or unanticipated requirements,
      which could have a material effect on our business, financial condition and
      future operating results.





We
      have
      substantial indebtedness and we are highly leveraged. As of September 30, 2007,
      we have total indebtedness of approximately $4.3 million. Our substantial
      indebtedness may limit our strategic operating flexibility and our capacity
      to
      meet competitive pressures and withstand adverse economic conditions. In
      addition, our notes contain restrictive covenants which, among other things,
      limit our ability to borrow additional funds, repay the notes before maturity
      or
      grant security interests on our assets.





Our
      substantial indebtedness could have significant adverse consequences,
      including:





•
            increasing
                our vulnerability to general adverse economic and industry
                conditions,





•
            limiting
                our ability to obtain additional financing to fund future working
                capital,
                capital expenditures, research and development and other general
                corporate
                requirements;





•
            limiting
                our flexibility in planning for, or reacting to, changes in our business
                and the industry; and





•
            placing
                us at a disadvantage compared to our competitors with less debt and
                competitors that have better access to capital
                resources.





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          33
          -


**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 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




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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.





**Litigation
      risks**





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





**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




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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 Chairman of the Board, 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.





**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 shifted our manufacturing overseas, including contracting with OBVIO,
      a Brazilian company, for the manufacture of 50,000 vehicles over three
      years.  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




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          36
          -


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
      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.  See Item 5.  Market For
      Common Equity and Related Shareholder Matters in our annual report on Form
      10KSB
      for the year ended December 31, 2006.  For example, on December 31,
      2004, our stock had a high of $5.15 and on December 31, 2005, it had a low
      of
      $.26.  If the market price of our common stock declines significantly,
      you may be unable to resell your common stock at or about its purchase
      price.  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.





A
      substantial number of shares we have issued in exempt transactions are, or
      are
      being made, available for sale on the open market, and the resale of these
      securities might adversely affect our stock price.





We
      have
      on file with the SEC effective registration statements for a substantial number
      of shares for resale.  The selling stockholders under our effective
      registration statements will be permitted to sell their registered shares in
      the
      open market from time to time without advance notice to us or to the market
      and
      without limitations on volume.





The
      sale
      of a substantial number of shares of our common stock under our registration
      statements, or the anticipation of such sales, could make it more difficult
      for
      us to sell equity or equity-related securities in the future at a time and
      at a
      price that we might otherwise wish to effect sales.





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.





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          37
          -


**Seasonality
      and Quarterly Results**


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





**Inflation**


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







**Item
      3.  Controls and Procedures**




Our
      management, with the participation of our principal executive officer (“CEO”)
      and principal financial officer (“CFO”), has evaluated the effectiveness of our
      disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
      under the Exchange Act) and our internal controls and procedures for financial
      reporting (the “Controls Evaluation”) as of September 30, 2007.




**Limitations
      on the Effectiveness of Controls.**




Our
      CEO
      and CFO do not expect that our disclosure controls or our internal control
      over
      financial reporting will prevent all errors and all fraud. A control system,
      no
      matter how well conceived and operated, can provide only reasonable, not
      absolute, assurance that the control system’s objectives will be met. Further,
      the design of a control system must reflect the fact that there are resource
      constraints, and the benefits of controls must be considered relative to their
      costs. Because of the inherent limitations in all control systems, no evaluation
      of controls can provide absolute assurance that all control issues and instances
      of fraud, if any, within the Company have been detected. These inherent
      limitations include the realities that judgments in decision-making can be
      faulty, and that breakdowns can occur because of simple error or honest mistake.
      Additionally, controls can be circumvented by the individual acts of certain
      persons, by collusion of two or more persons, or by management override of
      the
      controls. The design of any system of controls also is based in part upon
      certain assumptions about the likelihood of future events, and there can be
      no
      assurance that any design will succeed in achieving its stated goals under
      all
      potential future conditions. Over time, specific controls may or may not become
      inadequate because of changes in conditions or deterioration in the degree
      of
      compliance with policies or procedures. Because of the inherent limitations
      in a
      cost-effective control system, misstatements due to error or fraud may occur
      and
      not be detected.




**Conclusion
      regarding the Effectiveness of Disclosure Controls and
      Procedures.**





As
      defined under Sections 13a-15(e) and 15d-15(e) of the Exchange Act, the term
      “disclosure controls and procedures” means controls and other procedures of an
      issuer that are designed to ensure that information required to be disclosed
      by
      the issuer in the reports that it files or submits under the Exchange Act is
      recorded, processed, summarized and reported, within the time periods specified
      in the SEC’s rules and forms. Disclosure controls and procedures include,
      without limitation, controls and procedures designed to ensure that information
      required to be disclosed by an issuer in the reports that it files or submits
      under the Exchange Act is accumulated and communicated to the issuer’s
      management, including the issuer’s CEO and CFO, to allow timely decisions
      regarding required disclosure.  As described in Item 8A “Controls and
      Procedures” in our Annual Report on Form 10-KSB filed with the SEC on April 2,
      2007, our registered independent public accounting firm, Odenberg, Ullakko,
      Muranishi & Co. LLP (“OUM”), have advised us of  several
      deficiencies in both the design and operation of internal controls over
      financial reporting, when considered in the aggregate, they believe the
      deficiencies constitute a material weakness over financial reporting at December
      31, 2006. We have been and continue to be engaged in efforts to improve our
      internal controls and procedures and we expect that these efforts will, over
      time, positively address the weakness noted by our independent auditors. We
      have
      engaged an outside firm to assist us in analyzing and improving our system
      of
      internal controls.





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          -


**Changes
      in Internal Control over Financial Reporting**





There
      were no changes in our internal control over financial reporting that occurred
      during the quarter ended September 30, 2007 that have materially affected,
      or
      are reasonably likely to materially affect, our internal control over financial
      reporting.





**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. 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, and the court’s ruling on that
      matter is in the process of being appealed.  Two of the other defendants in
      the action, G&K Automotive Conversion, Inc. and The Defiance LLC, have filed
      a cross-complaint against ZAP in the Los Angeles Superior Court for, among
      other
      things, violations of Section 43(a) of the Lanham Act, statutory and common
      law  unfaircompetition, and
      intentional and negligent interference withprospective economic
      advantage.  ZAP has responded to the cross-complaint and denied engaging in
      any wrongful actions.




*Leandra
      Dominguez v. RAP Group,
      Inc. dba The Repo Outlet et. al*., Superior Court of California,
      County of Sonoma, Case No. SCV-235641, complaint filed October 14, 2004, first
      amended complaint filed December 15, 2004.  Plaintiff has sued The
      Repo Outlet and Credit West Corporation for negligent misrepresentation, for
      a
      violation of the Business and Professions Code Section 17200, for breach of
      the
      implied warranty of merchantability under the Magnusson-Moss Act, and for
      violation of the federal Truth in Lending Act.  On January 13, 2005,
      the RAP Group, Inc. agreed to defend and indemnify Credit West
      Corporation.  At a hearing before the Sonoma County Superior Court on
      February 23, 2005, the court granted The Repo Outlet’s motion to compel
      arbitration, and on March 8, 2005, the court stayed the court proceeding pending
      arbitration.  The RAP Group, Inc. filed a demand for arbitration with
      the American Arbitration Association (the “Association”) on April 7, 2005, but
      the parties later stipulated that the arbitration would proceed before
      JAMS.  The Repo Outlet made a Code of Civil Procedure 998 offer
      to settle and have Dominguez dismiss the matter with prejudice for the sum
      of
      $1,001.  Because Dominguez failed to timely respond to The Repo Outlet’s
      Section 998 offer, that offer expired on March 2, 2006.  The Repo
      Outlet made another settlement offer of $1,857 to settle this matter as to
      both
      defendants on January 8, 2007, but this offer was rejected as plaintiff’s
      counsel seeks to recover all of his attorneys’ fees.  Although the
      case was sent to arbitration before JAMS, and set for arbitration in February
      2007, on January 9, 2007, The Repo Outlet informed the arbitrator and
      plaintiff’s counsel that it would be ceasing operations and its counsel would be
      withdrawing as attorneys of record.  At a status conference on
      February 8, 2007, the court was informed that counsel for RAP Group had moved
      to
      withdraw for non-payment of fees.  Since that time, Credit West has
      substituted its own counsel of record, and so RAP Group is no longer tendering
      a
      defense to Credit West.  On April 4, plaintiff Dominguez filed with
      the Court a Request for Entry of Default Judgment against RAP
      Group.  On May 2, 2007, the Court granted Donahue Gallagher Woods
      LLP’s motion to withdraw as counsel of record.  Thus, RAP Group is
      currently unrepresented by counsel in this matter.




*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




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          39
          -


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.  On November 2, 2006, the court denied
      this motion, although it did require the Company to post a $300,000 bond to
      enforce the writ.  The Company has not yet posted that bond, and
      consequently Mr. Alvis has threatened to move to revoke the writ.  The
      Company, Rotoblock and Schneider then demurred to the cross-complaint, and
      Alvis
      responded by filing an amended cross-complaint. The first amended
      cross-complaint again seeks breach of contract and common count damages against
      the Company and Rotoblock, as well as fraud damages against the Company and
      Schneider.  The Company and Schneider answered the first amended
      cross-complaint with general denials; Rotoblock responded by filing a second
      demurrer in which it has alleged it was an improperly named
      party.  The hearing on Rotoblock’s demurrer was heard
      on  March 21, 2007, at which time the demurrer was denied. Rotoblock
      intends to file an answer to the amended cross-compliant with general denials.
      Counsel has given notice of the claims against Schneider to the Company’s
      D&O insurer, which has acknowledged receipt of the notice. Mr. Alvis has
      filed a motion to “recall” the writ of possession for which the court authorized
      issuance respecting the disputed motor home currently in Mr. Alvis’ possession.
      The hearing on that motion was heard on July 25, 2007, at which time Mr.
      Alvis’  motion was denied. The parties then confirmed, on the record
      in court, the original order granting ZAP the writ of possession, including
      ZAP’s ability to post the $300,000 bond at any time during the pendency of the
      suit. In the meantime, discovery is on-going, and the parties are discussing
      mediation and attempting to schedule the same. The next case conference has
      now
      been continued until January 10, 2008.




*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.)




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*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.  A hearing on those demurrers is currently
      set for November 14, 2007, but the parties have filed a stipulation with the
      court to reschedule that hearing to December 12, 2007.  The parties
      are now simply awaiting the court’s approval of that stipulation.  At
      the case management conference held on October 24, 2007, Cross-Complainants
      indicated that they would be filing an amended Cross-Complaint, but the
      Cross-Defendants have not been served with any such document.  The
      next case management conference is scheduled for January 23, 2008.  In
      the meantime, discovery is ongoing.




*ZAP
      v. International Monetary
      Group,(Patrick J Harrington President and CEO) Inc., a Delaware corporation;
      Michael C. Sher dba the Law Offices of Michael C. Sher*, Case No. SCV
      240277,complaint
      filed March 1, 2007 in Sonoma County Superior Court.  ZAP sued
      International Monetary Group (“IMG”) whose President and CEO is Patrick D.
      Harrington and Michael Sher for declaratory relief, rescission, and breach
      of
      contract.  ZAP had entered into an agreement with IMG, a merchant
      banking company, to procure financing, and ZAP alleges that IMG, contrary to
      the
      parties’ agreement, is seeking to enforce a $500,000 promissory
      note.  ZAP also alleges that IMG and Sher have taken $12,500 and
      10,000 shares of ZAP common stock that they held in trust for ZAP without
      authorization.  ZAP also alleges that IMG and Sher continue to hold
      1,291,176 shares of ZAP stock that was supposed to have been used as collateral
      for a $1 million loan to be procured by IMG and Sher that never
      materialized.




The
      Amended Complaint filed October 11, 2007.  The Amended Complaint
      alleges that ZAP and International Monetary Group (“IMG”) entered into a
      consulting agreement whereby IMG was advanced 750,000 shares of ZAP stock as
      pre-payment for consulting services.  ZAP alleges that IMG failed to
      perform the services as contemplated and asks the court (a) to declare the
      parties’ respective rights and duties under the consulting agreement and (b) for
      damages for IMG’s breach of the consulting agreement.  The
      Amended Complaint also alleges that ZAP, IMG, and Michael Scher
      (“Scher”) entered into a funding agreement whereby ZAP advanced 1,291,176
      shares of ZAP stock to the defendants, which stock defendants were to use to
      procure $1 million in financing for ZAP.  ZAP alleges that defendants
      failed to procure the financing yet have continued to retain the stock. 
The Amended Complaint asks the court (a) to declare the parties rights and
      duties under the funding agreement and (b) for damages for defendants’ breach of
      the agreement.  The Amended Complaint also asks the court to declare
      whether or not IMG may enforce a $500,000 promissory note against
      ZAP.  Defendants’ response to the Amended Complaint is due November
      15, 2007 and a case management conference is scheduled for November 28,
      2007. The parties believe they may have reached a settlement however no
      definitive agreement has been signed as of November 13, 2007. Management has
      recorded an estimated liability for any potential exposure related to this
      transaction which is included in the accompanying consolidated balance
      sheet.  In addition, management believes that the ultimate resolution
      of this claim will not have a material adverse effect on our consolidated
      financial position or on results of operations.




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





The
      following lists sales of unregistered securities during the quarter ended
      September 30, 2007 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




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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
      July
      2, 2007, the Company issued 54,348 shares of common stock valued at $50,000
      in
      settlement of a legal dispute with an outside party.





On
      July
      30, 2007, the Company issued 55,000 shares of common stock valued at $61,600
      in
      settlement of a legal dispute with an outside party.  On this same
      date the Company also issued 6,696 shares for professional services valued
      at
      $7,500.





On
      August
      8, 2007, the Company issued 240,386 shares of common stock for professional
      services valued at $250,000.





On
      August
      17, 2007, the Company issued 3,464 shares of common stock for professional
      services valued at $3,325. On
      this
      same date the Company also issued 56,000 shares for an asset purchase valued
      at
      $53,760. In addition, another 7,813 shares were issued for professional services
      valued at $7,500.





On
      September 4,2006 we issued 5,813,954 shares of common stock for a private
      placement to a qualified investor in exchange for $5 million.





On
      September 6, 2007 the Company also issued 2,500 shares for an asset purchase
      valued at $2,400. On this same date the Company also issued 7,813 shares for
      professional services valued at $7,500.





**Item
      3.    Defaults Upon Senior Securities**





Not
      Applicable





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





ZAP
      held
      its Annual Shareholders’ Meeting on July 29, 2007. See ZAP’s Form 10QSB as of
      June30, 2007 filed on August 13, 2007 for a detailed discussion of the meeting
      results.








**Item
      5.    Other Information**





Not
      Applicable





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**Item
      6.    Exhibits**




10.36
            Agreement
                dated July 14, 2006 between ZAP, Thomas Heidemann and Smart Automobile
                (incorporated by reference from our Current Report on Form 8-K filed
                on
                July 20, 2006)10.37
            Amendment
                Agreement Dated August 30, 2006 between ZAP and Smart Automobile LLC
                (incorporated by reference from our Current Report on Form 8-K filed
                on
                September 6, 2006)10.38
            Exclusive
                Distribution Agreement dated May 1, 2005, as supplemented by a letter
                dated June 9, 2006 (incorporated by reference from our Current Report
                on
                Form 8-K filed on November 6, 2006)10.39
            ZAP
                Guarantee (incorporated by reference from our Current Report on Form
                8-K
                filed on November 6, 2006)10.40
            Shandong
                Jindalu Vehicle Co., Ltd. Guarantee (incorporated by reference from
                our
                Current Report on Form 8-K filed on November 6, 2006)10.41
            Joint
                Venture Agreement Dated September 21, 2006 (incorporated by reference
                from
                our Current Report on Form 8-K filed on November 6,
                2006)10.42
            Memorandum
                of Company’s Extension of Warrants issued to Executives, January 26,
                200710.43
            Purchase
                and Amendment Agreement, dated February 20, 2007 (incorporated by
                reference from our Current Report on Form 8-K filed on February 26,
                2007)10.44
            Form
                of Convertible Note (incorporated by reference from our Current Report
                on
                Form 8-K filed on February 26, 2007)10.45
            Form
                or Warrant (incorporated by reference from our Current Report on
                Form 8-K
                filed on February 26, 2007)10.46
            Purchase
                order from the Electric Vehicle Company, LLC (“EVC”) for 10,000 of its
                Xebra 2007 model year electric vehicles(incorporated by reference
                from our
                Current Report on Form 8-K filed on April 26, 2007)10.47
            Distribution
                agreement this week with PML FlightLink Limited (PML) for the purchase
                of
                an advanced propriety wheel motor and control system(incorporated
                by
                reference from our Current Report on Form 8-K filed on May 3,
                2007)10.48
            Joint
                Venture Agreement with Youngman Automobile Co., Ltd to manufacture,
                market
                and distribute electric and hybrid vehicles for the worldwide passenger
                car, truck and bus markets (incorporated by reference from our Current
                Report on Form 8-K filed on September 17, 2007)


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


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


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






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**SIGNATURES**





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







**ZAP**Dated 
 November
                  13,
                  2007
            By:
            /s/ Steven
              SchneiderName:  
                Steven SchneiderTitle:    
                Chief Executive Officer (Principal Executive
                Officer)




**ZAP**Dated 
 November
                  13,
                  2007
            By:
            /s/ William
                HartmanName:  
                William HartmanTitle:    
                Chief Financial Officer (Principal Financial and Accounting
                Officer)


















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