**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 June 30, 2006





Commission
      File Number 001-32534








**ZAP**


(Name
      of
      small business issuer in its charter)





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





**501
      Fourth Street**


**Santa
      Rosa, CA 95401**


**(707)
      525-8658**


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


registrant’s
      principal
      executive offices)







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




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




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




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





***35,569,195*** ** shares
      of common stock as of August 11, 2006.





Transitional
      Small Business Disclosure Format  Yes o No x


















**ZAP**





**FORM
      10-QSB**




**INDEX**





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









Part
      I.  FINANCIAL
      INFORMATION


Item
      1.  Financial
      Statements


**ZAP**


**CONDENSED
      CONSOLIDATED BALANCE SHEET (UNAUDITED)**


***(In
      thousands)***




**June
                30,**
              **2006****ASSETS****CURRENT
                ASSETS******Cash
                and cash equivalents
            
            $
            1,663Accounts
                receivable, net of allowance for doubtful accounts of $215
            
            
            312Advances
                on Smart Car inventory
            
            
            460Inventories
            
            
            1,852Prepaid
                expenses and other current assets
            
            
            425Total
                current assets
            
            
            4,712**PROPERTY
                AND EQUIPMENT,**net
                of accumulated depreciation of $983
            
            
            5,144**OTHER
                ASSETS**Smart
                Automobile license, net
            
            
            2,314Patents
                and trademarks, net
            
            
            54Goodwill
            
            
            175Deposits
                and other assets
            
            
            576Total
                assets
            
            $
            12,975**LIABILITIES
                AND SHAREHOLDERS’ EQUITY****CURRENT
                LIABILITIES**Current
                portion of long-term debt
            
            $
            104Accounts
                payable
            
            
            50Accrued
                liabilities
            
            
            1,533Liability
                to Smart Auto
            
            
            7,052Deferred
                revenue
            
            
            1,089Put-option
              Liability
            
            
            291Total
                current liabilities
            
            
            10,119**LONG-TERM
                LIABILITIES**Long-term
                debt, less current portion
            
            
            1,854Total
                liabilities
            
            
            11,973**SHAREHOLDERS’
                EQUITY**PrPreferred
                stock, authorized 50 million shares; no par value, no shares issued
                and
                outstanding
            
            
            —Common
                stock, authorized 200 million shares; no par value; 35,321,980 shares
                issued and outstanding
            
            
            84,272Common
                stock issued as loan collateral
            
            
            (2,929
            )Notes
                receivable from shareholders, net
            
            
            (56
            )Accumulated
                deficit
            
            
            (80,285
            )Total
                shareholders’ equity
            
            
            1,002Total
                liabilities and shareholders’ equity
            
            $
            12,975


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


-2-




**ZAP**


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


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




**Three
                Months**
              **ended**
              **June
                30, 2006**
            
            **Three
                Months**
              **ended**
              **June
                30, 2005**
            
            **Six
                Months**
              **ended**
              **June
                30, 2006**
            
            **Six
                Months**
              **ended**
              **June
                30, 2005****NET
                SALES**
            
            $
            4,359
            
            $
            923
            
            $
            7,288
            
            $
            2,085**COST
                OF GOODS SOLD**
            
            
            4
                ,071
            
            
            792
            
            
            6,576
            
            
            1,920**GROSS
                PROFIT**
            
            
            288
            
            
            131
            
            
            712
            
            
            165**OPERATING
                EXPENSES**Sales
                and marketing
            
            
            353
            
            
            299
            
            
            604
            
            
            492General
                and administrative (non-cash of $1.1 million and $.1 million and
                $2.9
                million and $.7 million for the three and six months ended June 30,
                2006
                and 2005)
            
            
            2,865
            
            
            1,790
            
            
            5,933
            
            
            4,650Research
                and development
            
            
            
            
            
            60
            
            
            —
            
            
            1003,218
            
            
            2,149
            
            
            6,537
            
            
            5,242**LOSS
                FROM OPERATIONS**
            
            
            (2,930
            )
            
            (2,018
            )
            
            (5,825
            )
            
            (5,077
            )**OTHER
                INCOME (EXPENSE)**Gain on
                revaluation of warrant and put option liabilities
            
            
            169
            
            
            —
            
            
            304
            
            
            1,519Interest
                income (expense), net
            
            
            (3
            )
            
            5
            
            
            (9
            )
            
            2Other
                income (expense)
            
            
            7
            
            
            129
            
            
            4
            
            
            125173
            
            
            134
            
            
            299
            
            
            1,646**LOSS
                BEFORE INCOME TAXES**
            
            
            (2,757
            )
            
            (1,884
            )
            
            (5,526
            )
            
            (3,431
            )**PROVISION
                FOR INCOME TAXES**
            
            
            —
            
            
            —
            
            
            4
            
            
            4**NET
                LOSS**
            
            $
            (2,757
            )
            $
            (
                1,884
            )
            $
            (5,530
            )
            $
            (3,435
            )**NET
                LOSS PER COMMON SHARE****BASIC
                AND DILUTED**
            
            $
            (0.08
            )
            $
            (0.06
            )
            $
            (0.16
            )
            $
            (0.11
            )**WEIGHTED
                AVERAGE OF COMMON SHARES OUTSTANDING —****BASIC
                AND DILUTED**
            
            
            34,748
            
            
            31,459
            
            
            33,753
            
            
            30,877




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





-3-




**ZAP**


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


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


**Six
                months ended June 30,****2006**
            
            **2005****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                loss
            
            $
            (5,530
            )
            $
            (3,435
            )Items
                not requiring the use of cash:Amortization
                of note discount
            
            
            —
            
            
            10Stock-based
                compensation for consulting and other services
            
            
            1,987
            
            
            6,292Stock-based
                employee compensation
            
            
            946
            
            
            (5,000
            )Gain
                on revaluation of warrant and put option liabilities
            
            
            (304
            )
            
            (1,519
            )Depreciation
                and amortization
            
            
            1,036
            
            
            702Loss
                on disposal of equipment
            
            
            4
            
            
            —Allowance
                for doubtful accounts
            
            
            (118
            )
            
            199Changes
                in other items affecting operations:Receivables
            
            
            (9
            )
            
            (220
            )Note
                receivable from Smart Auto
            
            
            —
            
            
            (1,000
            )Smart
                car inventory
            
            
            918
            
            
            188Inventories
            
            
            20
            
            
            362Prepaid
                expenses and other assets
            
            
            (541
            )
            
            (88
            )Accounts
                payable
            
            
            (139
            )
            
            191Accrued
                liabilities
            
            
            (223
            )
            
            313Deferred
                revenue
            
            
            39
            
            
            —Net
                cash used for operating activities
            
            
            (1,914
            )
            
            (3,005
            )**CASH
                FLOWS FROM INVESTING ACTIVITES**Purchase
                of equipment
            
            
            (357
            )
            
            (419
            )Proceeds
                from sale of equipment
            
            
            35
            
            
            —Net
                cash used for investing activities
            
            
            (322
            )
            
            (419
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Repurchase
                of common stock
            
            
            —
            
            
            (500
            )Payments
                on note receivable to stockholder
            
            
            —
            
            
            14Issuance
                of common stock and warrants, net of offering costs
            
            
            2,396
            
            
            2,225Borrowings
                and repayments of long-term debt
            
            
            (44
            )
            
            (85
            )Net
                cash provided by financing activities
            
            
            2,352
            
            
            1,654**NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**
            
            
            116
            
            
            (1,770
            )**CASH
                AND CASH EQUIVALENTS,**beginning
                of period
            
            
            1,547
            
            
            5,354**CASH
                AND CASH EQUIVALENTS,**end
                of period
            
            $
            1,663
            
            $
            3,584


See
      accompanying notes to condensed consolidated financial statements
      (Unaudited)





-4-





**ZAP**


**NOTES
      TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS**





**(1)    BASIS
      OF PRESENTATION**





The
      financial statements included in this Form 10-QSB have been prepared by us,
      and
      have not been audited. Certain information and footnote disclosures normally
      included in financial statements prepared in accordance with U.S. generally
      accepted accounting principles have been condensed or omitted, although
      management believes the disclosures are adequate to make the information
      presented not misleading. The results of operations for any interim period
      are
      not necessarily indicative of results for a full year. These statements should
      be read in conjunction with the financial statements and related notes included
      in the Company’s Annual Report on Form 10-KSB for the year ended December 31,
      2005.





The
      financial statements presented herein, for the three and six months ended June
      30, 2006 and 2005 reflect, in the opinion of management, all material
      adjustments consisting only of normal recurring adjustments necessary for a
      fair
      presentation of the financial position, results of operations and cash flow
      for
      the interim periods.





The
      risks
      related to our business. The Company has a history of losses and might not
      achieve profitability. The Company will need additional capital to achieve
      its business plan. There can be no assurance that additional capital will be
      available, or if it is available, that it will be on acceptable terms. A
      substantial portion of the Company’s growth in the past four years has come
      through acquisitions and the Company may not be able to identify, complete
      and
      integrate future acquisitions.





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


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





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


ZAP
        has
        shipped and sold approximately 270 smart cars in the first 6 month of 2006 and
        anticipates selling at least another 50 smart cars over the next quarter.
        However, due to the actions by Daimler Chrysler Corporation and others named
        in
        ZAP’s suit, ZAP cannot predict how many more smart cars the Company will be able
        to sell in the future. As part of ZAP’s business plan, ZAP had anticipated that
        Smart Car availability was uncertain and over the past 18 months was
        aggressively seeking out other advanced transportation vehicles for
        distribution. The Xebra is now under production and sales are accelerating
        beyond original expectations. The pre-production unit for Obvio the gas/ethanol
        vehicle from Brasil is now undergoing road testing and is slated for
        distribution in 2008. Other vehicles are also in the planning
        phase.





-5-




**(2)    SIGNIFICANT
      ACCOUNTING POLICIES**




**NET
      LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS**


Basic
      and
      diluted loss per common share is based on the weighted average number of common
      shares outstanding in each period. Potential dilutive securities associated
      with
      stock options, warrants and convertible preferred stock and debt have been
      excluded from the diluted per share amounts, since the effect of these
      securities would be anti-dilutive. At June 30, 2006, these potentially dilutive
      securities include options for 6,392,508 shares of common stock, warrants for
      53,693,415 shares of common stock and debt convertible into 930,000 shares
      of
      common stock.





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





**REVENUE
      RECOGNITION**


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





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





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





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





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





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




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





**DEFERRED
      REVENUE -** One
      of
      the Company’s subsidiaries, Voltage Vehicles, sold licenses to auto dealerships
      under the ZAP name. The license agreements call for the licensee to purchase
      a
      minimum number of vehicles from ZAP each year. The Company collected $1,100,000
      related to these agreements, which is classified as deferred revenue until
      the
      Company begins delivering a substantial number of vehicles to these dealerships
      on a regular basis. Accordingly, the Company has recognized approximately
      $11,000 of revenue for the six month period ended June 30, 2006 resulting in
      an
      ending balance of $1,089,000.





**USE
      OF ESTIMATES -** The
      preparation of financial statements in accordance with U.S. generally accepted
      accounting principles requires management to make estimates and assumptions
      that affect the amounts reported in the Company’s financial statements and
      accompanying notes. Actual results could differ materially from those estimates.
      Significant estimates include:





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





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





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




-6-




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





**STOCK
      ISSUED AS COLLATERAL -** In
      December 2004, the Company issued 2.9 million common shares as collateral for
      a
      $1 million loan. The $3.529 million market value of these shares at the date
      of
      issuance was recorded in common stock with an offsetting contra equity account.
      These shares were previously issued to Mercatus Partners LLP in January 2003
      as
      collateral for a loan that never funded. The shares were reported as lost to
      the
      Company in December 2003. In December 2004, the shares were reissued to Mercatus
      Partners who then assigned the shares and their interests to Phi-Nest Fund,
      L.P.
      as collateral for the $1 million loan commitment. The Company amended the Loan
      Agreement allowing them to purchase 500,000 shares for $1.16 per share. On
      March
      30, 2006, the Company received $500,000 in net proceeds from the sale. The
      collateral was reduced to 2,441,176 shares and the loan is still pending.




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




The
      Company also has an agreement with an outside company to provide a 36 month
      or
      36,000 mile warranty on the Smart Car Americanized by ZAP. At June 30, 2006,
      the
      Company has recorded a warranty liability for $210,800.




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




**(3)  
      STOCK-BASED COMPENSATION**





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





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





Under
      the
      provisions of SFAS 123R, we recorded $423,010 and $916,275 of stock
      compensation, net of estimated forfeitures, in selling, general and
      administrative expenses, in our unaudited condensed consolidated statement
      of
      operations for the three months and six months ended June 30, 2006 . We utilized
      the Black-Scholes valuation model for estimating the fair value of the stock
      compensation granted after the adoption of SFAS 123R, with the following
      weighted-average assumptions:




2006Dividend
                yield
            
            —Expected
                volatility
            
            
            154.43
            %Risk-free
                interest rate
            
            
            5.21
            %Expected
                life (in years)
            
            
            6.0




-7-





The
      dividend yield of zero is based on the fact that we have never paid cash
      dividends and have no present intention to pay cash dividends. Expected
      volatility is based upon historical volatility of our common stock over the
      period commensurate with the expected life of the options. The risk-free
      interest rate is derived from the average U.S. Treasury Constant Maturity Rate
      during the period, which approximates the rate in effect at the time of the
      grant. Our unvested options vest over the next three years. Our options
      generally have a 10-year term. The expected term is calculated using the
      simplified method prescribed by the SEC’s Staff Accounting Bulletin 107. Based
      on the above assumptions, the weighted-average fair values of the options
      granted under the stock option plans for the three months and six months ended
      June 30, 2006 was $1.97 and $0.51.  As required by SFAS No. 123R, we
      now estimate forfeitures of employee stock options and recognize compensation
      cost only for those awards expected to vest. Forfeiture rates are determined
      based on historical experience.  Estimated forfeitures are now adjusted to
      actual forfeiture experience as needed.





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





Three
                months
              ended
              June30,
            
            Six
                months
              ended
              June30,2005
            
            2005Net
                loss as reported
            
            $
            (1,884
            )
            $
            (3,435
            )Add:
                Stock-based employee/director compensationincluded
                in reported net loss
            
            
            (3,355
            )
            
            (5,000
            )Deduct:
                total stock-based employee compensationdetermined
                under fair value method for all awards
            
            
            (1,432
            )
            
            (1,850
            )Pro-forma
                net loss
            
            $
            (6,671
            )
            $
            (10,285
            )Loss
                per share:Basic
                and diluted, as reported
            
            $
            (0.06
            )
            $
            (0.11
            )Basic
                and diluted, as adjusted
            
            $
            (0.21
            )
            $
            (0.33
            )





The
      assumptions used to determine the pro forma expenses under the Black-Scholes
      option model for the three months ended June 30, 2005 under SFAS 123 were based
      on the following assumptions: expected dividend yield: 0; expected volatility:
      154.43%; expected lives, in years: 6; and risk-free interest rate: 5.21%. In
      the
      pro forma information for periods prior to 2006, we accounted for forfeitures
      as
      they occurred.











-8-





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




Number
                  of
                Shares
              
              Weighted
                Average
                Exercise
                  Price
              
              Weighted
                Average
                Remaining
                Contractual
                Term
                (in
                  years)
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  December 31, 2005
              
              
              6,416,350
              
              $
              1.04
              
              
              8.32Options
                  granted under the plan
              
              
              150,000
              
              $
              0.68Options
                  exercised
              
              
              (196,000
              )
              $
              0.30Options
                  forfeited and expired
              
              
              —
              
              
              —Outstanding
                  March 31, 2006
              
              
              6,370,350
              
              $
              1.00
              
              
              8.11Options
                  granted under the plan
              
              
              12,000
              
              $
              2.13Options
                  exercised
              
              
              (239,842
              )
              $
              0.32Options
                  forfeited and expired
              
              
              (250,000
              )
              
              (1.27
              )Outstanding
                  June 30, 2006
              
              
              5,892,508
              
              $
              1.02
              
              
              8.15
              
              $
              1,453,558Options
                  vested and exercisableat
                  June 30, 2006
              
              
              3,490,655
              
              $
              1.02
              
              
              7.86
              
              $
              1,048,800





Aggregate
      intrinsic value is the sum of the amounts by which the quoted market price
      of
      our stock exceeded the exercise price of the options at June 30, 2006, for
      those
      options for which the quoted market p rice
      was
      in excess of the exercise price (“in-the-money-options”). The total intrinsic
      value of options exercised was $198,328 and $0 for the three month period end
      June 30, 2006 and 2005, respectively, and $420,918 and $0 for the six months
      ended June 30, 2006 and 2005.





As
      of
      June 30, 2006, total compensation cost of unvested employee stock options is
      $2.17 million. This cost is expected to be recognized through November 2008.
      We
      recorded no income tax benefits for stock-based compensation expense
      arrangements for the three months and six months ended June 30, 2006, as we
      have
      cumulative operating losses, for which a valuation allowance has been
      established.




As
      of
      June 30, 2006, total compensation cost of unvested options and warrants to
      consultants total $1.3 million. This cost is expected to be recognized through
      December 2008.




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





Vehicles
                - conventional
            
            $
            205Advanced
                Transportation vehicles
            
            
            686Parts
                and supplies
            
            
            286Finished
                Goods
            
            
            8792,056Less-inventory
                reserve
            
            
            (204
            )$
            1,852




**(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.




-9-





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





A
      more
      detailed agreement was signed and completed on October 25, 2004. Under this
      agreement, SA exchanged their original Preferred Shares for new Preferred Shares
      with the designation of SA. These SA preferred shares convert to ZAP common
      shares under the following formula: For every 1,000 Smart vehicles delivered
      to
      ZAP in the years 2004, 2005 and 2006 which are fully EPA compliant to sell
      in
      the United States as new cars, the holder shall convert 500 shares of preferred
      stock SA to $500,000 of common stock, and allow the holder to receive 505,000
      warrants with an exercise price of $2.50 per share exercisable through July
      7,
      2009, or when all the preferred have been converted. During 2004, ZAP allowed
      SA
      to convert 500 preferred shares to $500,000 of common stock prior to delivering
      any EPA compliant Smart Cars.


On
        June
        19, 2006, ZAP agreed in principal to modify the October 25, 2004 agreement
        with
        Smart Automobile LLC (“SA”) in regard to payments due to SA from ZAP and the
        acquisition of certain rights and assets. As a result, SA returned to
        ZAP all of the remaining shares of preferred stock of 7,500 shares valued
        at $7.5 million in exchange for issuing 300,000 shares of common stock valued
        at
        approximately $400,000 and one million warrants with an exercise price of
        $1.75,
        valued at $950,000 using the Black-Scholes pricing model. The agreement also
        provides that SA will receive 700,000 shares of common stock at the rate
        of
        50,000 shares per 100 cars delivered to ZAP. In exchange, SA agreed to transfer
        to ZAP all ownership interest for the intellectual property that helped engineer
        the Smart Car Americanized for ZAP to meet U.S. Department of Transportation
        (“DOT) compliance. However, due to the actions of Damler Chrysler and others
        named in ZAP’s suit, ZAP cannot predict how many more Smart Cars Americanized by
        ZAP will be able to be sold in the future. This new agreement will replace
        the
        previous agreements by providing ZAP full ownership in the DOT rights and
        intellectual property which makes the Smart Car DOT compliant, including
        all
        testing related to various crash and engineering, analyses, tests performed
        by
        SA and those contracted out to third parties. In addition, ZAP received
        cancellation of future license fees due under the previous agreements totaling
        $906,000 at June 30, 2006.
 
 ZAP
        has
        also agreed to purchase of all the remaining assets and rights of SA by
        issuing common stock and warrants. This purchase will include all equipment,
        technologies, licenses and distribution rights (concerning conversions and
        otherwise) of SA and technical updates to service computers purchased earlier
        by
        ZAP. The purchase price is subject to negotiation and arbitration. At June
        30,
        2006, the Company has established an estimated liability of $7.1 million
        in
        connection with the ultimate settlement of its agreements with Smart Automobile
        LLC. See further discussion below in Note 6- Shareholders’ Equity-Preferred
        Stock.
  The
        Company recorded the cost of the Smart Automobile license at $10.6 million,
        based on: 1) the $10 million the Company paid to Smart Automobile LLC as
        consideration for a Purchase, License and Supply Agreement dated April 19,
        2004;
        and 2) the fair value of five-year warrants issued under the Agreement for
        the
        purchase of 505,000 common shares at $2.50 per share and expiring in July
        1,
        2009. The warrants were valued at $1.16 per share using the Black-Scholes
        option
        pricing model with the following assumptions: expected dividend yield of
        0.0%;
        risk free interest rate of 3.08%; contractual life of 4.5 years; and volatility
        of 229.43%.





During
      the fourth quarter of 2005, the Company filed a lawsuit against Daimler Chrysler
      Corporation ("Daimler Chrysler") and others alleging that Daimler Chrysler
      has
      engaged in a series of anti-competitive tactics aimed at defaming ZAP and
      disrupting its third party relationships including this arrangement.
      Shortly thereafter, the Company commenced its annual impairment assessment.
      An
      independent valuation of the Smart Automobile license as of December 31, 2005
      estimated the fair value to be $3.1 million with a remaining life of two years
      which was less than the $10.6 million recorded cost of the license. The carrying
      cost of the license was $8.8 million prior to the impairment calculation and
      accordingly, the Company recorded an impairment charge of $5.721 million for
      the
      year ended December 31, 2005. The valuation of the license was based on the
      Company’s discounted projected cash flows from projected sales of Smart Cars
      over the estimated life of the license agreement. The remaining value of the
      license is being amortized using the straight-line method over the next two
      years, which is the revised estimated life of the license. License amortization
      for the six month period ended June 30, 2006 was $775,200.








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





Preferred
      Stock


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




-10-




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




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





**Issuances
                of Common Stock for:**Exercise
                of options and warrants for cash
            
            1,444,842
            
            1,390,490Consulting
            
            178,660
            
            252,921Employee
                Compensation
            
            3,703
            
            5,000Liability
                to Smart Auto
            
            300,000
            
            405,000**1,927,205**
            
            **2,053,411****Stock
                Option and Warrant Transactions**Fair
                value of stock-based compensation for consulting and other
                services
            
            
            
            451,210Fair
                value of stock-based employee compensation
            
            
            
            423,010Fair
                value of warrants issued related to the liability
                to Smart Auto
            
            
            
            949,369**1,823,589****Balance
                at June 30, 2006**
            
            
            35,321,980
            
            **$**
            **84,272,000**




-11-




The
      Company issued common stock as consideration under agreements for consulting
      and
      employee services during the three months ended June 30, 2006. The Company
      recorded the cost based on the market value of the stock at the date of grant.
      The cost of consulting services resulting from issuing stock and warrants and
      stock options is being recognized as expense over the term of their
      respective agreements.  Unrecognized compensation on consulting contracts
      at June 30, 2006 is $1,254,000 and will be recognized as expense through
      2007.





In
      December 2004, the Company issued 2.9 million common shares as collateral for
      a
      $1 million loan. The $3.529 million market value of these shares at the date
      of
      issuance was recorded in common stock with an offsetting contra equity account.
      These shares were previously issued to Mercatus Partners LLP in January 2003
      as
      collateral for a loan that never funded. The shares were reported as lost to
      the
      Company in December 2003. In December 2004, the shares were reissued to Mercatus
      Partners who then assigned the shares and their interests to Phi-Nest Fund,
      L.P.
      as collateral for the $1 million loan commitment. The Company amended the Loan
      Agreement allowing them to purchase and sell 500,000 shares for $1.16 per share.
      On March 30, 2006, the Company received $500,000 in net proceeds from the sale.
      The collateral was reduced to 2,441,176 shares and the loan is still pending.




The
      Company also issued options and warrants to consultants for professional
      services.  During the six months ended June 30, 2006, the Company issued
      warrants to consultants to purchase 2,527,000 shares of common stock at
      prices ranging from $0.32 per share to $2.13 per share, with a contractual
      life
      ranging from 1 to 2 years. The options and warrants were nonforfeitable and
      fully vested at the date of issuance and were valued using the Black-Scholes
      option pricing model with the following range of assumptions:




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





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





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





-12-




**(7)    LITIGATION
      -** Other
      than the following, we are not party to any pending material legal proceedings
      and are not aware of any threatened or contemplated proceedings by any
      government authority against us.





*Marieta
      Cruz Hansel v. Robert Warren Johnson, Jr, ZAP, et.al* .,
      A
      dormant complaint filed in 2005 against Robert Johnson, ZAP, et al, was
      reactivated by the plantiff Ms. Marieta Cruz Hansell.  The compliant was
      filed against Robert Johnson (a former employee of ZAP) and ZAP for personal
      injury, property damage and permanent disability based on an alleged automobile
      collision between Ms. Hansell and Mr. Johnson.  The Company and Mr. Johnson
      have both filed answers and case management statements containing a general
      denial of all of the plaintiff’s claims, and the Company has agreed to defend
      Mr. Johnson in this matter. The plaintiff is claiming permanent disability,
      and
      has submitted a Statement of Damages in the amount of $108,727.34, plus
      unspecified amounts of future general damages, future wage loss, diminution
      of
      earning capacity damages, and incidental, consequential and special damages.
      The
      plaintiff has not yet made any demand for settlement. The Company intends to
      vigorously defend both itself and Mr. Johnson against these
      claims.




*First
      Class Auto Sales, Inc. d/b/a First Class Imports v. Voltage Vehicles and
      ZAP* ,
      American Arbitration Association Case No. 74 133 00081 06 NOCA. ** First
      Class Imports executed a licensing and distributorship agreement with Voltage
      Vehicles, in May 2004. On January 14, 2006, First Class Imports and its
      principal, Leon Atkind, filed an arbitration demand with the American
      Arbitration Association.  First Class Imports and Mr.Atkind alleged that
      the Company and Voltage Vehicles breached the licensing agreement by not
      delivering new SMART-branded vehicles to First Class Imports and demanded return
      of the $100,000 licensing fees paid to Voltage Vehicles under the agreement,
      plus interest. Voltage Vehicles filed a counterclaim against both First Class
      Imports and Mr. Atkind. The counterclaim alleges breach of contract due to
      First
      Class Imports refusal to accept SMART-branded vehicles offered to it pursuant
      to
      the parties’ licensing agreement.  Voltage
      Vehicles seeks as damages the lost revenue it otherwise would have gained
      through First Class Imports’ purchase of SMART-branded vehicles, as well as
      damages based on the depreciation of a SMART-branded vehicle it loaned to First
      Class Imports.




In
      a ** separate
      cause of action, Mr. Atkind alleged Voltage Vehicles breached a second contract
      by failing to timely deliver a stock certificate in exchange for a Mercedes
      vehicle that he sold to the Company. Voltage Vehicles countered-claim alleging
      breach of contract against Mr. Atkind based on his failure to deliver title
      to
      the Mercedes identified above seeking as damages the depreciation of the
      Mercedes during the time in which it has been unable to sell the vehicle. An
      arbitrator has been selected, but the arbitration has been continued while
      the
      parties discuss settlement. The court overseeing the arbitration has scheduled
      a
      case management conference for November 2, 2006.




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




-13-




On
      October 28, 2005, we filed a complaint against DaimlerChrysler 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 DaimlerChrysler has engaged in a series
      of anti-competitive tactics aimed at defaming ZAP and disrupting its third-party
      business relationships. As a result of the allegations, the complaint requests
      damages in excess of $500 million and such other relief as the court deems
      just
      and proper. DaimlerChrysler has successfully filed a motion to quash that
      compliant for lack of personal jurisdiction, and the court’s ruling on that
      matter is in the process of being appealed.




*James
      A. Arnold,et al.v. Steven Schneider, et al* ., A
      dormant
      complaint filed in 2002 against the RAP Group and Steve Schneider the Chief
      Executive Officer of ZAP, individually was reactivated by the plaintiff -Jim
      Arnold Trucking. The complaint alleges breach of contract, promissory estoppel
      and fraud and seeks contract damages in the amount $71,000 plus monthly storage
      fees and punitive damages of $750,000. The Company has cross-claimed against
      Jim
      Arnold Trucking seeking compensatory damages, attorneys’ fees and equitable
      relief for breach of oral contract, common count for goods sold and delivered,
      conversion, liability of surety, violation of statute, and violation of the
      Unfair Practices Act. On February 17, 2005, the court referred the matter to
      non-binding arbitration. The non binding arbitration hearing was held on July
      27, 2005 where the arbitrator awarded the plaintiff damages in the amount of
      $68,290 plus prejudgment interest of 7%. On May 2, 2006 a trial was held with
      the parties agreeing to settle the matter for $40,000 and execute mutual
      releases of all claims arising out of the subject matter of the litigation.
      RAP
      Group has made the first payment to the plaintiff for $20,000; the second
      payment of $20,000 is due on or before January 5, 2007.





**(8)   
      RELATED PARTY TRANSACTIONS**





Rental
      agreements





The
      Company leases office space, land and warehouse space from its CEO and major
      shareholder. These properties are used to operate the car outlet and to store
      inventory. Rental expense under these leases was approximately $77,000 and
      $84,000 for the six months ended June 30, 2006 and 2005,
      respectively.





Consulting
      services and other services





In
      November and December 2003, the Company entered into certain agreements with
      two
      cousins of Steven M. Schneider, the CEO. One cousin received 25,000 B-2
      Restricted warrants and 25 shares of preferred stock, which was later converted
      into 50,000 shares of restricted common stock. The stock and warrants were
      issued for website design services. The other cousin received 200,000 shares
      of
      unrestricted common stock in January 2004. The shares were issued for consulting
      services. In April 2004, the Company issued 2 million B-2 restricted warrants
      and 1 million K-2 restricted warrants to Sunshine 511 Holdings for consulting
      services. The managing partner of Sunshine 511 Holdings is the cousin of the
      CEO
      of ZAP. In the fourth quarter of 2005 the Company expensed approximately $2.2
      million, the carrying value of the prepaid services, since limited services
      had
      not been received and there were no assurances that future services would be
      received. Also in 2004, certain leasehold improvements in the amount of $65,000
      made by the Company on rental properties were abandoned in favor of the
      landlord, who is the CEO of ZAP.





Inventory
      Purchase





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




-14-




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





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




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





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




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





•   
      general economic and industry conditions;


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


•   
      our limited operating history;


•   
      industry competition;


•   
      environmental and government regulation;


•   
      protection and defense of our intellectual property rights;


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


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




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




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





-15-




**Overview**





ZAP
      stands for Zero Air Pollution(R). The Company’s mission is to be the leading
      distribution portal of socially responsible and environmentally sustainable,
      advanced transportation technology vehicles.





Founded
      on September 23, 1994, ZAP has over the years invented, designed, manufactured,
      and marketed numerous innovative products. The Company began marketing electric
      transportation on the internet through the website www.zapworld.com .
      It has
      pioneered electric vehicles such as a zero-emission ZAP(R)electric bicycle
      and
      the ZAPPY(R) electric scooter. We were also one of the first to offer electric
      motorbikes, electric dive scooters and electric ATVs. To date, ZAP has delivered
      more than 90,000 electric vehicles to customers in more than 75 countries,
      establishing the Company firmly as a leader in the niche for alternative
      transportation.





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. The Company has already set the pace with the introduction
      of
      the first micro-car to be brought to the US with the smart car, the most fuel
      efficient all gas vehicle available in the United States. In June of this year
      we began delivery of our Xebra, the only full production electric vehicle
      available in the United States capable of speeds in excess of 25 miles per
      hour.
      And also recently we entered into a partnership with OBVIO!, a new Brazilian
      automobile manufacturer, to import a unique micro-car capable of running on
      ethanol, gasoline or any combination thereof.





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.





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





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





**Subsidiaries**





We
      have
      the following wholly owned subsidiaries: Voltage Vehicles, a Nevada company
      (“Voltage Vehicles”), RAP Group, Inc., a California company (“RAP Group”), ZAP
      Rental Outlet, a Nevada company (“ZAP Rentals”), ZAP Stores, Inc., a California
      company (“ZAP Stores”), ZAP Manufacturing, Inc., a Nevada company (“ZAP
      Manufacturing”) and ZAP World Outlet, Inc., a California company (“ZAP World”).
      Voltage Vehicles is engaged primarily in the distribution and sale of advanced
      technology and conventional automobiles; RAP Group is engaged primarily in
      the
      sale and liquidation of conventional automobiles; ZAP Stores is engaged
      primarily in consumer sales of ZAP products and ZAP Manufacturing is not
      currently an operating subsidiary. ZAP World Outlet is not currently an
      operating subsidiary. Voltage Vehicles and RAP Group were acquired by the
      Company in July 2002.





-16-





**Recent
      Developments**





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




1.
            ZAP
                reported record revenues for the three and six months ended June
                30, 2006
                primarily due to sales of various models of the Smart Car Americanized
                by
                ZAP. Sales for 2006 have surpassed all of 2005. The autos were shipped
                to
                ZAP Dealers in various states. The Company has sold over 270 Smart
                Cars
                Americanized by ZAP.






2.
            ZAP
                announced amid new record oil prices that it has delivered the first
                of
                its new XEBRA(TM) electric vehicles to five ZAP car dealerships in
                California, Arizona, Florida and two in Oregon. Some are already
                making
                the choice to start driving electric. So far this summer, ZAP has
                seen
                interest surge for the XEBRA, with concerns over rising gas prices
                generating over a $500,000 backlog in XEBRA orders from dealers and
                fleet
                buyers. ZAP calls the XEBRA a ’City-Car,’ designed to travel at a top
                speed of 40 MPH and pricing under $10,000. ZAP’s idea with the XEBRA is to
                create an economical alternative to gas cars, useful for around town
                fleet
                driving or multi-car families.




3.
            ZAP
                announced the introduction of a new series of lithium battery packs
                designed specifically to work with the iPod. Called iZAP, the battery
                accessories for the iPod are part of a new line of ZAP Portable Energy
                systems to power a wide range of mobile electronics. The iZAP’s Portable
                Energy(TM) chargers and power packs are designed to work in conjunction
                with the iPod, including the iPod mini, iPod shuffle, iPod nano and
                the
                iPod with video. The iZAP designed for the iPod shuffle can extend
                listening time up to 60 hours. The new rechargeable power packs can
                power
                a wide range of mobile electronics like cell phones, digital cameras,
                laptops and more.




4.
            Business
                2.0 magazine features automotive pioneer ZAP in an article entitled
                the
                “Top 31 Best Business Ideas in the World,” (August 2006 issue)for the idea
                of creating a line of fuel-efficient and renewable energy vehicles
                to tap
                into the market created by rising energy costs. ZAP was recognized
                for the
                Smart Car Americanized for ZAP, a fuel-efficient all-gas turbo car
                from
                Europe that the company is distributing in the US. ZAP also recently
                launched sales for a new electric car called the XEBRA and has announced
                a
                partnership with OBVIO ! of Brazil for the manufacture and distribution
                of
                cars using ethanol, electric and other technologies for the US market.
                ZAP
                has started a dealership network throughout the country for its advanced
                technology vehicles. “ We are extremely honored that Business 2.0, one of
                America’s most prestigious new business magazines, has confirmed our
                business plan of establishing a portal and a brand for consumers
                looking
                for fuel-efficient vehicles," said Steven Schneider, ZAP
                CEO.





5.
            ZAP
                began selling a new and improved line of electric scooters such as
                the
                ZAPPY ® 3 Pro and the ZAPPY® 3 EZ. In addition, the ZAP BUZZZ All Terrain
                Vehicle and the ZAP MUD’E Trail Bike have also been introduced into the
                consumer market place.




**CRITICAL
      ACCOUNTING POLICIES**





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




-17-




SFAS
      123(R) apply to new awards and to awards that are outstanding on the effective
      date and subsequently modified or cancelled. Under the modified prospective
      application, prior periods are not revised for comparative purposes. Share-based
      compensation expense recognized under SFAS 123(R) for the three and six months
      ended June 30, 2006 was $423,010 and $916,275, respectively. At June 30, 2006,
      total unrecognized estimated compensation expense related to non-vested stock
      options granted prior to that date was $2.17 million, which is expected to
      be
      recognized through November, 2008.





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





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





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





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





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




-18-







**Results
      of Operations**


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


**Three
                  months ended June 30**
              
              **Six
                  months ended June 30****2006**
              
              **2005**
              
              **2006**
              
              **2005****Statements
                  of Operations Data:**Net
                  sales
              
              
              100
              %
              
              100
              %
              
              100
              %
              
              100
              %Cost
                  of sales
              
              
              93.3
              
              
              85.8
              
              
              90.2
              
              
              92.1Operating
                  expenses
              
              
              73.8
              
              
              238.8
              
              
              89.7
              
              
              251.4Loss
                  from operations
              
              
              (67.2
              )
              
              (218.6
              )
              
              (79.9
              )
              
              (243.5
              )Net
                  loss
              
              
              (67.2
              )
              
              (204.0
              )
              
              (75.9
              )
              
              (164.7
              )




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





**Net
      sales** for the
      quarter ended June 30, 2006 were $4.4 million compared to $923,000 in 2005.
      RAP’s net sales for the period accounted were $306,000 versus $ 659,000 in 2005.
      The net sales for ZAP (including Voltage Vehicles) were $4.1 million versus
      $264,000 in 2005. The sales for RAP for gas automobiles were less than last
      year
      while ZAP experienced an increase of $3.8 million primarily due to the sales
      of
      the Smart Cars Americanized by ZAP and various models of electric
      vehicles.





**Gross
      profit** was
      $288,000 for the second quarter ended June 30, 2006 compared to $131,000 for
      the
      quarter ended June 30, 2005. The RAP Group accounted for $103,000 of the gross
      profit for the quarter ended June 30, 2006 versus $105,000 in 2005. ZAP’s gross
      profit, excluding the RAP Group, increased from $26,000 in 2005 to a gain
      of $185,000 in 2006. The increase in gross profit was due to higher sales of
      the
      Smart Cars Americanized by ZAP.





**Sales**  **and
      marketing expenses** in the
      second quarter of 2006 were $353,000 as compared to $299,000 in 2005. RAP’s
      expenses were $27,000 in 2006 and $38,000 in 2005 and ZAP’s expenses were
      $326,000 versus $261,000 in 2005. As a percentage of sales, total selling
      expenses decreased from 32% of sales to 8% due to a higher sales base even
      though ZAP only expenses increased for the quarter ended June 30, 2006. The
      higher expenses for ZAP were primarily due to higher salaries for sales and
      marketing personnel with more new hires plus higher expenses for trade shows
      to
      promote the Company’s products.





**General
      and administrative**  **expenses** for 2006
      were $2.9 million for the quarter ended June 30, 2006 as compared to $1.8
      million in 2005. RAP’s portion of the expenses was $88,000 in 2006 versus
      $383,000 in 2005. RAP’s decrease of $295,000 was primarily due to lower bad debt
      expenses in the 2006 second quarter. For ZAP, the expenses increased from $1.5
      million to $2.8 million. As a percentage of sales, general and administration
      expenses decreased from 195% of sales to 65.9% of sales. ZAP’s net increase of
      $1.3 million in general and administration expenses was due
      to stock-based compensation expense due to the adoption of SFAS 123R and
      higher professional and consulting fees.





**Interest
      income (** **expense),
      net** decreased from
      $5,000 income in second quarter 2005 to $3,000 expense in second
      quarter 2006.





**Other
      income (expense)**in creased
      $39,000 from $134,000 for the second quarter of 2005 to $173,000
      in the second quarter of 2006. The other income increase resulted from the
      change in the value of the put option liabilities.





**Net
      Loss** was
      $2.8
      million for the quarter ended June 30, 2006 as compared to a net loss of $1.9
      million for period ended June 30, 2005. The increase was primarily due to higher
      consulting and professional fees, as well as stock-based compensation expense
      due to the adoption of SFAS 123R.





-19-




**Six
      Months Ended June 30, 2006 Compared to Six Months Ended June 30,
      2005**





**Net
      sales** for the
      six months ended June 30, 2006, were $7.3 million compared to $2.1 million
      for
      the six months ended June 30 in the prior year. RAP accounted for $981,000
      of
      overall net sales for the six months ended June 30, 2006 versus $1.7 million
      for
      the six months ended June 30,2005. The net sales for ZAP, excluding the RAP
      Group, were $6.3 million and $426,000 for the six months ended June 30,
      2006 and 2005. RAP experienced a decline in the sales of traditional automobiles
      due to the less demand for pre-owned automobiles and higher interest rates.
      ZAP,
      including Voltage Vehicles, has experienced significant growth due to sales
      of
      the Smart Car Americanized by ZAP and other various models of electric sales.
      The Company has shipped over 270 Smart Cars Americanized by ZAP through June
      30,
      2006.





**Gross
      profit** was
      $712,000 for the six months ended June 30, 2006 compared to $165,000 for the
      six
      months ended June 30, 2005. The RAP Group accounted for $296,000 of the gross
      profit for the six months ended June 30, 2006 versus $159,000 for the six months
      ended June 30, 2005. ZAP’s gross profit, excluding the RAP Group, increased
      from $6,000 in 2005 to $416,000 in 2006. The increase in RAP’s profits
      reflect higher sales volume with better margins on car sales. ZAP’s increase in
      gross profits was due to higher sales of Smart Cars Americanized by ZAP with
      better profit margins.





**Sales
      and marketing expenses** in the
      first six months of 2006 were 604,000 as compared to $492,000 in 2005. RAP’s
      expenses were $64,000 in 2006 which is comparable to $65,000 for the six months
      ended June 30, 2005. As a percentage of sales of the Company, sales and
      marketing expenses decreased from 23.4% to 8.3% for the six months ended June
      30, 2006. ZAP’s portion of selling expenses was $540,000 in 2006 compared to
      $427,000 in 2005. This was a increase of $113,000 or 26% from 2005 to 2006.
      The
      higher expenses were primarily for the promotion of the Smart Car and new
      consumer products at various trade shows.





**General
      and administrative**  **expenses** for
      the
      six months ended June 30, 2006 were $5.9 million as compared to $4.6 million
      in
      the six months ended June 30, 2005. As a percentage of sales of the Company
      general and administrative expenses decreased from 219% to 81%. RAP’s portion of
      the expenses was $185,000 in 2006 versus $564,000 in 2005. General and
      administrative expenses for ZAP, excluding the RAP Group, increased from $4.1
      million to $5.7 million, this is a increase of $1.6 million or 39% from 2005.
      The increase in general and administrative expense is primarily due to
      stock-based compensation for the six months ended June 30, 2006 of approximately
      $1 million due to the adoption of FAS123R . The Company also incurred higher
      consulting and professional fees.





**Research
      and development expenses** decreased
      from $100,000 for the six months ended June 30, 2005 to zero for the same period
      in 2006. The primary focus of the Company in 2006 was the production of existing
      models of various electric vehicles and consumer products.





**Gain
      on revaluation of warrant liability** decreased from
      $1.5
      million in 2005 to $304,000 in 2006. For last year’s period ended June 30, 2005
      a one-time transaction accounted for $1.5 million representing the difference
      between the fair market value of the warrant liability at December 31, 2004
      and
      the fair market value on February 22, 2005, the date when the warrant liability
      was settled and transferred to equity.  The balance for the six months
      ended June 30, 2006 resulted from favorable changes in the value of warrant
      and
      put option liabilities.





**Interest
      income (expense), net** decreased
      by $11,000 to an interest expense of $9,000 for the first six months of 2006
      as
      compared to interest income of $2,000 for the first six months of 2005. This
      was
      due to lower overall cash balances in the money market investments offset by
      interest expense primarily due to the note on the corporate office
      building.





**Other
      income** decreased  from
      $125,000 of income in the firs six months of 2005 to $4,000 in 2006. The other
      income in 2005 represents a one time adjustment to the reorganization
      reserve.





**Net
      Loss** was
      $5.5
      million for the six months ended June 30, 2006 as compared to a net loss of
      $3.4
      million for period ended June 30, 2005. The increase was primarily due to higher
      consulting and professional fees, as well as stock-based compensation expense
      due to the adoption of SFAS 123R.





-20-




**Liquidity
      and Capital Resources**


In
      the
      first six months of 2006 net cash used for operating activities was $1.9
      million. In the first six months of 2005, the Company used cash for operations
      of $3.0 million. Cash used in the first six months of 2006 was comprised of
      the
      net loss incurred for the first six months of $5.5 million plus net non-cash
      expenses of $3.5 million plus the net change in operating assets and liabilities
      of $0.1million. Cash used in operations in the first six months of 2005 was
      comprised of the net loss of $3.4 million plus net non-cash expenses of $0.7
      million, and the net change in operating assets and liabilities resulting in
      a
      use of cash of $0.3 million.





Investing
      activities used cash of $322,000 in the first six months ended June 30, 2006
      and
      used $419,000 during the first six months ended June 30, 2005.




Financing
      activities provided cash of $2.4 million and $1.7 million during the first
      six
      months ended June 30, 2006 and 2005, respectively.





In
      September 2005, the Company signed a $425 million revolving financing facility
      with Surge Capital II, LLC that, subject to certain conditions can be used
      by
      ZAP to import Smart Cars Americanized by ZAP and other advanced transportation
      vehicles for ZAP dealers. The financing agreement has a term of one year, but
      may be extended upon agreement by both parties. The financing is based on orders
      ZAP receives from dealers who must be approved in advance by Surge Capital
      II,
      LLC and is secured by a first lien on substantially all of ZAP’s assets. No
      funds have been drawn on the financing facility as of August 11, 2006. Each
      financing incurs an interest charge equal to 2% of the principal amount for
      the
      first 30 days and thereafter at a Per Diem Rate of .067%.





At
      June
      30, 2006 the Company had cash of $1.6 million compared to $3.6 million at June
      30, 2005. At June 30, 2006, the Company had a working capital deficit of $5.4
      million, as compared to working capital of $10.4 million at June 30, 2005.
      The
      decrease was due to the following: cash used in operations, the liability to
      Smart Auto, and the expensing of prepaid non-cash professional fees. The
      Company, at present, does not have a credit facility for working capital in
      place with a bank or other financial institution.





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





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





**Seasonality
      and Quarterly Results**


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





**Inflation**


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




-21-




**Item
      3. Controls and
      Procedures**





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





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





**Changes
      in Internal Control over Financial Reporting**





There
      were no changes in our internal control over financial reporting that occurred
      during the quarter ended June 30, 2006 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.





*Marieta
      Cruz Hansel v. Robert Warren Johnson,Jr, ZAP, et.al* .,
      A
      dormant complaint filed in 2005 against Robert Johnson, ZAP , et al, was
      reactivated by the plantiff .Ms.Marieta Cruz Hansell .The compliant was filed
      against Robert Johnson ( a former employee of ZAP) and ZAP for personal
      injury,property damage and permanent disability based on an alleged automobile
      collision between Ms. Hansell and Mr. Johnson. The Company and Mr. Johnson
      have
      both filed answers and case management statements containing a general denial
      of
      all of the plaintiff’s claims, and the Company has agreed to defend Mr. Johnson
      in this matter. The plaintiff is claiming permanent disability, and has
      submitted a Statement of Damages in the amount of $108,727.34, plus unspecified
      amounts of future general damages, future wage loss, diminution of earning
      capacity damages, and incidental, consequential and special damages. The
      plaintiff has not yet made any demand for settlement. The Company intends to
      vigorously defend both itself and Mr. Johnson against these claims.







*First
      Class Auto Sales, Inc. d/b/a First Class Imports v. Voltage Vehicles and
      ZAP* ,
      American Arbitration Association Case No. 74 133 00081 06 NOCA. ** First
      Class Imports executed a licensing and distributorship agreement with Voltage
      Vehicles, in May 2004. On January 14, 2006, First Class Imports and its
      principal, Leon Atkind, filed an arbitration demand with the American
      Arbitration Association.  First Class Imports and Mr.Atkind alleged that
      the Company and Voltage Vehicles breached the licensing agreement by not
      delivering new SMART-branded vehicles to First Class Imports and demanded return
      of the $100,000 licensing fees paid to Voltage Vehicles under the agreement,
      plus interes. Voltage Vehicles filed a counterclaim against both First Class
      Imports and Mr. Atkind. The counterclaim alleges breach of contract due to
      First
      Class Imports refusal to accept SMART-branded vehicles offered to it pursuant
      to
      the parties’ licensing agreement.  Voltage
      Vehicles seeks as damages the lost




-22-




revenue
      it otherwise would have gained through First Class Imports’ purchase of
      SMART-branded vehicles, as well as damages based on the depreciation of a
      SMART-branded vehicle it loaned to First Class Imports.




In
      a ** separate
      cause of action, Mr. Atkind alleged Voltage Vehicles breached a second contract
      by failing to timely deliver a stock certificate in exchange for a Mercedes
      vehicle that he sold to the Company. Voltage Vehicles countered-claim alleging
      breach of contract against Mr. Atkind based on his failure to deliver title
      to
      the Mercedes identified above seeking as damages the depreciation of the
      Mercedes during the time in which it has been unable to sell the vehicle. An
      arbitrator has been selected, but the arbitration has been continued while
      the
      parties discuss settlement. The court overseeing the arbitration has scheduled
      a
      case management conference for November 2, 2006.




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




On
      October 28, 2005, we filed a complaint against DaimlerChrysler 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 DaimlerChrysler has engaged in a series
      of anti-competitive tactics aimed at defaming ZAP and disrupting its third-party
      business relationships. As a result of the allegations, the complaint requests
      damages in excess of $500 million and such other relief as the court deems
      just
      and proper. DaimlerChrysler has successfully filed a motion to quash that
      compliant for lack of personal jurisdiction, and the court’s ruling on that
      matter is in the process of being appealed.




*James
      A. Arnold,et al.v. Steven Schneider, et al* ., A
      dormant
      complaint filed in 2002 against the RAP Group and Steve Schneider the Chief
      Executive Officer of ZAP, individually was reactivated by the plaintiff -Jim
      Arnold Trucking. The complaint alleges breach of contract, promissory estoppel
      and fraud and seeks contract damages in the amount $71,000 plus monthly storage
      fees and punitive damages of $750,000. The Company has cross-claimed against
      Jim
      Arnold Trucking seeking compensatory damages, attorneys’ fees and equitable
      relief for breach of oral contract, common count for goods sold and delivered,
      conversion, liability of surety, violation of statute, and violation of the
      Unfair Practices Act. On February 17, 2005, the court referred the matter to
      non-binding arbitration. The non binding arbitration hearing was held on July
      27, 2005 where the arbitrator awarded the plaintiff damages in the amount of
      $68,290 plus prejudgment interest of 7%. On May 2, 2006 a trial was held with
      the parties agreeing to settle the matter for $40,000 and execute mutual
      releases of all claims arising out of the subject matter of the litigation.
      RAP
      Group has made the first payment to the plaintiff for $20,000; the second
      payment of $20,000 is due on or before January 5, 2007.




-23-





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




Not
      Applicable




Item
      3. Defaults Upon Senior
      Securities





Not
      Applicable




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





The
      following matters were submitted to a vote of security holders during our annual
      meeting of shareholders held on June 18, 2006.





To
                elect Louis Auletta to serve until the next annual meeting and until
                their
                successors are elected and qualified.FOR
            WITHHELD
            ABSTAIN
            BROKER
                NON-VOTES17,190,176
            5,751,468To
                elect Renay Cude to serve until the next annual meeting and until
                their
                successors are elected and qualified.FOR
            WITHHELD
            ABSTAIN
            BROKER
                NON-VOTES22,777,947
            163,697To
                elect Steve Schneider to serve until the next annual meeting and
                until
                their successors are elected and qualified.FOR
            WITHHELD
            ABSTAIN
            BROKER
                NON-VOTES22,798,778
            142,866To
                elect Gary Starr to serve until the next annual meeting and until
                their
                successors are elected and qualified.FOR
            WITHHELD
            ABSTAIN
            BROKER
                NON-VOTES22,578,204
            363,440To
                elect Guy Fieri to serve until the next annual meeting and until
                their
                successors are elected and qualified.FOR
            WITHHELD
            ABSTAIN
            BROKER
                NON-VOTES22,782,294
            159,350To
                elect Matthias Heinze to serve until the next annual meeting and
                until
                their successors are elected and qualified.FOR
            WITHHELD
            ABSTAIN
            BROKER
                NON-VOTES22,602,986
            338,658To
                elect Mark Haywood to serve until the next annual meeting and until
                their
                successors are elected and qualified.FOR
            WITHHELD
            ABSTAIN
            BROKER
                NON-VOTES22,613,320
            328,324Approval
                of amendment to the Company’s Amended and Restated Articles of
                Incorporation to effect a reverse stock split of all outstanding
                common
                stock in one of the following ratios:1-for-4 or 1-for-6, in the event
                that
                the Company’s common stock fails to satisfy the minimum bid price
                requirement of the NYSE Arca.FOR
            AGAINST
            ABSTAIN
            BROKER
                NON-VOTES22,245,626
            532,143
            163,875Approval
                of amendment to the Company’s Amended and Restated Articles of
                Incorporation to increase the authorized common stock from 100 million
                to
                200 million shares.FOR
            AGAINST
            ABSTAIN
            BROKER
                NON-VOTES22,129,589
            588,346
            223,709




-24-




Approval
                of the Company’s Prior Equity Compensation Issuances.FOR
            AGAINST
            ABSTAIN
            BROKER
                NON-VOTES11,040,086
            636,260
            391,387
            10,873,911Approval
                of the Company’s 2006 Incentive Stock Plan.FOR
            AGAINST
            ABSTAIN
            BROKER
                NON-VOTES11,071,725
            719,626
            276,382
            10,873,911To
                ratify the appointment of Odenberg, Ullakko, Muranishi & Co. LLP as
                the Company’s independent accountant.FOR
            AGAINST
            ABSTAIN
            BROKER
                NON-VOTES22,662,317
            115,308
            164,019




Item
      5. Other
      Information





Not
      Applicable




Item
      6. Exhibits





**A.**
            **Exhibits**


3.4
            Certificate
              of Amendment to Amended and Restated Articles of
              Incorporation31.1
            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.






-25-







**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 
                 August 14, 2006
            By:
            /s/ Steven
              SchneiderName:  
                Steven SchneiderTitle:    
                Chief Executive Officer (Principal Executive
                Officer)  **ZAP**Dated 
                   August 14, 2006
              By:
              /s/ William
                HartmanName:  
                  William HartmanTitle:    
                  Chief Financial Officer (Principal Financial and Accounting
                  Officer)
 -26-