**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, 2005
 
 Commission
        File Number 0-303000
 
 
 **ZAP**
 **(Name
        of small business issuer in its charter)**
 
 **CALIFORNIA**
              **94-3210624****(State
                  or other jurisdiction of**
              **(I.R.S.
                  Employer Identification No.)****incorporation
                  or organization)**
 
 **501
        Fourth Street**
 **Santa
        Rosa, CA 95401**
 **(707)
        525-8658**
 (Address,
        including zip code, and telephone number, including area code, of
 registrant's
        principal executive offices)
 
 **Securities
        registered under section 12(b) of the Exchange Act:**
 None
 
 
 **Securities
        registered under section 12(g) of the Exchange Act:**
 Common
        Shares
 
 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
 
 State
        the
        number of shares outstanding of each of the issuer's classes of common equity,
        as of the latest practicable date.
 
 ***31,922,000*** shares
        of common stock as of August 12, 2005.
 
 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 ofJune
                  30, 2005
              2Condensed
                  Consolidated Statements of Operations for the
                Three
                  and Six Months Ended June 30, 2005 and 2004
              3Consolidated
                  Statements of Cash Flows for the Six Months
                Ended
                  June 30, 2005 and 2004
              4Notes
                  to Condensed Consolidated FinancialStatements
              5Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition
                and
                  Results of Operations
              11Item
                  3.
              Controls
                  and Procedures
              19**PART
                  II.**
              **Other
                  Information**Item
                  1.
              Legal
                  Proceedings
              19Item
                  2.
              Changes
                  in Securities and Use of Proceeds
              20Item
                  3.
              Defaults
                  Upon Senior Securities
              21Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              21Item
                  5.
              Other
                  Information
              21Item
                  6.
              Exhibits
                  and Reports on Form 8-K
              21SIGNATURES
              
              22
  
  Part
        I.  FINANCIAL
        INFORMATION
 Item
        1.  Financial
        Statements
  **ZAP**
 **CONDENSED
        CONSOLIDATED BALANCE SHEET (UNAUDITED)**
 ***(In
        thousands)***
 June
                  30,
                2005**ASSETS****CURRENT
                  ASSETS******Cash
                  and cash equivalents
              
              $
              3,584Accounts
                  receivable, net of allowance for doubtful accounts of $747
              
              
              215Advances
                  on Smart Car inventory
              
              
              1,378Inventories
              
              
              1,902Prepaid
                  non-cash professional fees
              
              
              6,941Prepaid
                  expenses and other current assets
              
              
              186Total
                  current assets
              
              
              14,206**PROPERTY
                  AND EQUIPMENT,**net
                  of accumulated depreciation of $775
              
              
              5,221**OTHER
                  ASSETS**Smart
                  Automobile license, net
              
              
              9,346Prepaid
                  non-cash professional fees, less current portion
              
              
              2,355Notes
                  Receivable Smart Automobile
              
              
              1,000Patents
                  and trademarks, net
              
              
              89Goodwill
              
              
              476Deposits
                  and other
              
              
              441Total
                  assets
              
              $
              33,134**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY****CURRENT
                  LIABILITIES**Current
                  portion of long-term debt
              
              $
              104Accounts
                  payable
              
              
              341Accrued
                  liabilities
              
              
              1,476License
                  fee payable
              
              
              906Deferred
                  revenue
              
              
              975Total
                  current liabilities
              
              
              3,802**LONG-TERM
                  LIABILITIES**Long-term
                  debt, less current portion
              
              
              1,959Total
                  liabilities
              
              
              5,761**SHAREHOLDERS’
                  EQUITY**Preferred
                  stock, authorized 50 million shares; no par value,
                7,500
                  shares issued and outstanding
              
              
              7,500Common
                  stock, authorized 100 million shares;no
                  par value; 31,845,210 shares issued and outstanding
              
              
              78,146Common
                  stock issued as loan collateral
              
              
              (3,529
              )Notes
                  receivable from shareholders, net
              
              
              (56
              )Accumulated
                  deficit
              
              
              (54,688
              )Total
                  shareholders’ equity
              
              
              27,373Total
                  liabilities and shareholders’ equity
              
              $
              33,134
  See
        accompanying notes to condensed consolidated financial statements
        (unaudited).
  
  **ZAP**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**
 **(Thousands,
        except share amounts)**
 
 **Three
                  Months ended June 30**
              
              **Six
                  Months ended June 30****2005**
              
              **2004**
              
              **2005**
              
              **2004****NET
                  SALES**
              
              $
              923
              
              $
              1,072
              
              $
              2,085
              
              $
              2,392**COST
                  OF GOODS SOLD**
              
              
              792
              
              
              833
              
              
              1,920
              
              
              1,817**GROSS
                  PROFIT**
              
              
              131
              
              
              239
              
              
              165
              
              
              575**OPERATING
                  EXPENSES**Sales
                  and marketing
              
              
              299
              
              
              209
              
              
              492
              
              
              408General
                  and administrative
              
              
              1,790
              
              
              1,636
              
              
              4,650
              
              
              3,192(non-cash
                  of $.1 million and $1.3 million and$.7million
                  and $1.2 million for the three and six monthsended
                  June 30, 2005 and 2004)Research
                  and development
              
              
              60
              
              
              —
              
              
              100
              
              
              —Loss
                  on disposals of fixed assets
              
              
              —
              
              
              63
              
              
              —
              
              
              632,149
              
              
              1,908
              
              
              5,242
              
              
              3,663**LOSS
                  FROM OPERATIONS BEFORE****REORGANIZATION
                  ITEMS, OTHER****INCOME(EXPENSE)AND
                  INCOME TAXES**
              
              
              (2,018
              )
              
              (1,669
              )
              
              (5,077
              )
              
              (3,088
              )**OTHER
                  INCOME (EXPENSE)******Gain
                  on revaluation of warrant liability
              
              
              —
              
              
              —
              
              
              1,519
              
              
              —Interest
                  income (expense)
              
              
              5
              
              
              (30
              )
              
              2
              
              
              (60
              )Other
                  income
              
              
              129
              
              
              385
              
              
              125
              
              
              393134
              
              
              355
              
              
              1,646
              
              
              333**LOSS
                  BEFORE REORGANIZATION ITEMS****AND
                  INCOME TAXES**
              
              
              (1,884
              )
              
              (1,314
              )
              
              (3,431
              )
              
              (2,755
              )**Reorganization
                  items:**Professional
                  fees
              
              
              —
              
              
              5
              
              
              —
              
              
              13**LOSS
                  BEFORE INCOME TAXES**
              
              
              (1,884
              )
              
              (1,319
              )
              
              (3,431
              )
              
              (2,768
              )**PROVISION
                  FOR INCOME TAXES**
              
              
              —
              
              
              —
              
              
              4
              
              
              2**NET
                  LOSS**
              
              **$**
              (1,884
              )
              $
              (1,319
              )
              $
              (3,435
              )
              $
              (2,770
              )**NET
                  LOSS PER COMMON SHARE****BASIC
                  AND DILUTED**
              
              $
              (0.06
              )
              $
              (0.09
              )
              $
              (0.11
              )
              $
              (0.19
              )**WEIGHTED
                  AVERAGE OF****COMMON
                  SHARES OUTSTANDING --****BASIC
                  AND DILUTED**
              
              
              31,459
              
              
              14,139
              
              
              30,877
              
              
              14,678
  See
        accompanying notes to condensed consolidated financial statements
        (unaudited).
  
  
 **ZAP**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**
 ***(In
        thousands*** *)*
 **Six
                  months ended June 30,**2005
              
              2004**CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  loss
              
              $
              (3,435
              )
              $
              (2,770
              )Items
                  not requiring the use of cash:Amortization
                  of note discount
              
              
              10
              
              
              24Stock-based
                  compensation for consulting and other services
              
              
              6,292
              
              
              1,278Loss
                  on disposal of assets
              
              
              —
              
              
              63Stock-based
                  employee compensation
              
              
              (5,000
              )
              
              —Gain
                  on revaluation of warrant liability
              
              
              (1,519
              )
              
              —Depreciation
                  and amortization
              
              
              702
              
              
              312Allowance
                  for doubtful accounts
              
              
              199
              
              
              74Allowance
                  for notes receivable
              
              
              —
              
              
              111Changes
                  in other items affecting operations:Receivables
              
              
              (220
              )
              
              (40
              )Advances
                  on SmartCar
              
              
              188
              
              
              —Inventories
              
              
              362
              
              
              360Prepaid
                  expenses and other assets
              
              
              (88
              )
              
              (147
              )Accounts
                  payable
              
              
              191
              
              
              (439
              )Accrued
                  liabilities
              
              
              313
              
              
              (292
              )Deferred
                  revenue
              
              
              —
              
              
              245Net
                  cash used in operating activities
              
              
              (2,005
              )
              
              (1,221
              )**CASH
                  FLOWS FROM INVESTING ACTIVITES**Acquisition
                  of distribution license
              
              
              
              
              
              (1,000
              )Purchase
                  of equipment
              
              
              (419
              )
              
              (15
              )Net
                  cash used for investing activities
              
              
              (419
              )
              
              (1,015
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Repurchase
                  of common stock
              
              
              (500
              )
              
              —Payments
                  on note receivable to stockholder
              
              
              14
              
              
              —Issuance
                  of preferred stock
              
              
              —
              
              
              1,128Issuance
                  of common stock and warrants, net of offering costs
              
              
              2,225
              
              
              2,028Issuance
                  of note receivable to Smart Auto
              
              
              (1,000
              )
              
              —Proceeds
                  from issuance of long-term debt
              
              
              —
              
              
              1,000Repayments
                  of long-term debt
              
              
              (85
              )
              
              (4
              )Net
                  cash provided by financing activities
              
              
              654
              
              
              4,152**NET
                  INCREASE ( DECREASE) IN CASH AND CASH EQUIVALENTS**
              
              
              (1,770
              )
              
              1,916**CASH
                  AND CASH EQUIVALENTS,**beginning
                  of period
              
              
              5,354
              
              
              551**CASH
                  AND CASH EQUIVALENTS,**end
                  of period
              
              $
              3,584
              
              $
              2,467
 
 See
        accompanying notes to condensed consolidated financial statements
        (Unaudited)
  
  
 **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,
        without audit. Certain information and footnote disclosures normally included
        in
        financial statements prepared in accordance with accounting principles generally
        accepted in the United States of America 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, 2004.
 
 The
        financial statements presented herein, for the three and six months ended
        June
        30, 2005 and 2004 reflect, in the opinion of management, all material
        adjustments consisting only of normal recurring adjustments necessary for
        a fair
        presentation of the financial position, results of operations and cash flow
        for
        the interim periods.
 
 The
        risks
        related to our business. The Company has a history of losses, and the Company
        might not achieve profitability. There can be no assurance that additional
        capital would be available, or if it is available, that it would 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 Smart Automobile LLC to supply pre-Americanized Smart ®cars
        and 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 Smart
        Automobile LLC is unable to supply Americanize or service 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. The Company also believes that certain competitors may have
        used un-business like tactics to harm the Company, and to slow the flow of
        Smart
        cars to ZAP.
  **(2)**
              **SIGNIFICANT
                  ACCOUNTING POLICIES**
 
 **Accounting
        For Stock-Based Compensation**
 
 Statement
        of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
        Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
        Compensation - Transition and Disclosure, establishes a fair-value method
        of
        accounting for stock options and similar equity instruments. The fair-value
        method requires that compensation cost be measured on the value of the award
        at
        the grant date, and recognized over the service period. SFAS No.123 as amended
        allows companies to either account for stock-based compensation to employees
        under the provisions of SFAS No. 123 as amended or under the provisions of
        Accounting Principles Board (APB) Opinion No. 25 or its related interpretations.
        The company accounts for its stock-based compensation to employees in accordance
        with the provisions of APB opinion No. 25.
 
 The
        Company has recorded deferred compensation for the difference, if any, between
        the exercise price and the deemed fair market value of the common stock for
        financial reporting purposes of stock options granted to employees. The
        compensation expense related to such grants is amortized over the vesting
        period
        of the related stock options on a straight-line basis.
 
 The
        Company accounts for equity instruments issued to non-employees in accordance
        with the provisions of SFAS No. 123, as amended, and Emerging Issues Task
        Force
        (EITF) Issues No.96-18 Accounting for Equity Instruments that Are Issued
        to
        other than Employees for Acquiring, or in Conjunction with Selling, Goods
        or
        Services.
 
 
  Had
        the
        Company determined compensation cost based on the fair value at the grant
        date
        for its employee stock options and purchase rights under SFAS No. 123, the
        Company’s net loss would have been increased to the pro forma amounts indicated
        below for the three and six month period.
 
 
 **In
                  thousands except per share amounts**
              
              **Three
                  months ended June 30**
              
              **Six
                  months ended June 30****2005**
              
              **2004**
              
              **2005**
              
              **2004**Net
                  Loss
              
              $
              (1,884
              )
              $
              (1,319
              )
              $
              (3,435
              )
              $
              (2,770
              )Add:
                  Employee stock-based compensation expense included in reported
                  net
                  loss,net of related tax effects
              
              $
              (3,355
              )
              
              —
              
              $
              (5,000
              )
              
              —Deduct:
                  Employee stock-based compensation expense determined under fair
                  value
              
              
              (1,432
              )
              
              (27
              )
              
              (1,850
              )
              
              (42
              )Pro
                  forma
              
              $
              (6,671
              )
              $
              (1,346
              )
              $
              (10,285
              )
              $
              (2,812
              )Basic
                  and diluted per share:As
                  reported
              
              $
              (0.06
              )
              $
              (0.09
              )
              $
              (0.11
              )
              $
              (0.19
              )Pro
                  forma
              
              $
              (0.21
              )
              $
              (0.10
              )
              $
              (0.33
              )
              $
              (0.19
              )
 
 **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, 2005, these potentially dilutive
        securities include options for 6,401,000 common shares, warrants for 53,385,083
        shares of common stock, debt convertible into 930,000 shares of common stock
        and
        preferred shares that can be converted into 2.78 million common shares.
  **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
 
 -The
        Company deems the collection of the amount invoiced probable
 
 The
        Company provides no price protection. Product sales are net of promotional
        discounts, rebates and return allowances.
  **DEFERRED
        REVENUE-** One
        of
        the Company’s subsidiaries, Voltage Vehicles, sold licenses to auto dealerships
        under the ZAP name. The license agreements call for the licensee to purchase
        a
        minimum number of vehicles from ZAP each year. The Company collected $975,000
        related to these agreements, which is classified as deferred revenue until
        such
        time as the Company begins delivering vehicles to these
        dealerships.
 
 **USE
        OF ESTIMATES -** The
        preparation of financial statements in accordance with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the amounts reported in the Company’s
        financial statements and accompanying notes. Actual results could differ
        materially from those estimates. Significant estimates include;
 
 **ACCOUNTS
        RECEIVABLE** -
        The
        Company performs ongoing credit evaluations of its customers' financial
        condition and generally requires no collateral from its customers. The Company
        maintains allowances for doubtful accounts for estimated losses resulting
        from
        the inability of its customers to make required payments. If the financial
        condition of the Company’s customers should deteriorate, resulting in an
        impairment of their ability to make payments, additional allowances may be
        required.
  
  **INVENTORY** -The
        Company maintains reserves for estimated excess, obsolete and damaged inventory
        based on projected future shipments using historical selling rates, and taking
        into account market conditions, inventory on-hand, purchase commitments,
        product
        development plans and life expectancy, and competitive factors. If markets
        for
        the Company's products and corresponding demand were to decline, then additional
        reserves may be deemed necessary.
 
 **LEGAL
        ACCOUNTS** -The
        Company estimates the amount of potential exposure it may have with respect
        to
        litigation claims and assessments.
 
 **RECOVERY
        OF LONG-LIVED ASSETS-** The
        Company evaluates the recovery of its long-lived assets periodically 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.
  **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.
  **RECENT
        ACCOUNTING PRONOUNCEMENTS:**
 In
        November 2004, the FASB issued SFAS No. 151, Inventory Costs, An Amendment
        of
        ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 amends ARB 43, Chapter 4, to
        clarify that abnormal amounts of idle facility expense, freight, handling
        costs
        and wasted materials (spoilage) be recognized as current period charges.
        It also
        requires that allocation of fixed production overheads to the costs of
        conversion be based on the normal capacity of the production facilities.
        SFAS
        151 is effective for inventory costs incurred during fiscal years beginning
        after June 15, 2005. The Company does not believe that the adoption of SFAS
        151
        will have a material impact on its results of operations or financial
        position.
 
 In
        December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-based Payment,
        ("SFAS 123R"). SFAS 123R addresses the accounting for share-based payments
        to
        employees, including grants of employee stock options. Under the new standard,
        companies will no longer be able to account for share-based compensation
        transactions using the intrinsic method in accordance with APB Opinion No.
        25,
        Accounting for Stock Issued to Employees.
 
 Instead,
        companies will be required to account for such transactions using a fair-value
        method and recognize the expense in the consolidated statement of operations.
        As
        a small business issuer, SFAS 123R will become effective for the Company
        for
        periods beginning after December 15, 2005. The Company has not yet determined
        which fair-value method and transitional provision it will follow, however,
        it
        expects that the adoption of SFAS 123R will have a significant impact on
        its
        results of operations. The Company does not expect the adoption of SFAS 123R
        to
        materially impact its overall financial position. See Stock-based Compensation
        earlier in this Note 1 for the pro forma impact on net loss and net loss
        per
        share from calculating stock-based compensation costs under the fair value
        alternative of SFAS 123. The determination of compensation cost for share-based
        payment transactions after the effective date of SFAS 123R may be different
        from
        the determination of compensation cost under SFAS 123; however the Company
        has
        not yet quantified such differences.
 
 In
        December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
        an
        Amendment of APB Opinion No. 29 ("SFAS 153"). The guidance in APB Opinion
        No.
        29, Accounting for Nonmonetary Transactions, is based on the principle that
        exchanges of nonmonetary assets should be measured based on the fair value
        of
        the assets exchanged. The guidance in APB Opinion No. 29, however, included
        certain exceptions to that principle. SFAS 153 amends APB Opinion No. 29
        to
        eliminate the exception for nonmonetary exchanges of similar productive assets
        and replaces it with a general exception for exchanges of nonmonetary assets
        that do not have commercial substance. A nonmonetary exchange has commercial
        substance if the future cash flows of the entity are expected to change
        significantly as a result of the exchange. SFAS 153 is effective for nonmonetary
        asset exchanges in fiscal periods beginning after June 15, 2005. The Company
        does not believe that the adoption of SFAS 153 will have a material impact
        on
        its results of operations or financial position.
  
  **(3)**
              **INVENTORIES-**The****Inventories
                  at June 30, 2005 are summarized as follows
                  (thousands):
 
 Vehicles
              
              $
              1,036Parts
                  and supplies
              
              
              440Finished
                  Goods
              
              
              6262,102Less-inventory
                  reserve
              
              
              (200
              )$
              1,902
 
 **(4)**
              **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(R) cars. Smart is the brand name for a
        3-cyclinder gas turbo engine car manufactured by Daimler Chrysler AG. SA
        is not
        affiliated with Daimler Chrysler, but is a direct importer.
 
 Under
        the
        agreement, ZAP purchased the rights to be the exclusive distributor and licensee
        of the right to manufacture and distribute Smart(R) cars in the United States
        and the non-exclusive distributor and licensee outside of the United States
        for
        a period of ten years from SA. Subject to the terms of the agreement, ZAP
        will
        pay SA a license and distribution fee of $10,000,000: $1 million was paid
        in
        cash upon the 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(R) 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 may convert 500 shares of preferred
        stock SA to $500,000 of common stock, and the holder will 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, and issued a warrant to purchase 505,000 common
        shares at $2.50 per share exercisable through July 7, 2009. As of August
        2005,
        SA has only delivered a few cars to ZAP.
 
 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 warrant issued under the Agreement for
        the
        purchase of 505,000 common shares at $2.50 per share and expiring on July
        7,
        2009. The warrant was 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%.
 
 An
        independent valuation of the fair value of the Smart Automobile license exceeded
        the $10.6 million recorded cost of the license. The valuation of the license
        was
        based on the Company's discounted projected cash flows from projected sales
        of
        Smart Cars over the term of the license agreement. Should deliveries of Smart
        Cars be delayed, or less than anticipated, the Company may need to adjust
        the
        recorded cost of the license. The cost of the license is being amortized
        using
        the straight-line method over the ten year term of the agreement. However
        , as
        of August 12, 2005, only a few cars have been delivered to ZAP. At present
        , ZAP
        is exploring all options to rectify this situation.
 
 **(5)**
              **NOTES
                  RECEIVABLE SMART AUTOMOBILE
                  LLC**
 
 In
        January 2005, the Company paid $1,000,000 to Smart Automobile, LLC and Thomas
        Heidemann (President of Smart Automobile, LLC) in exchange for a note
        receivable. The note bears interest at 5% per annum and is payable in 24
        equal
        monthly installments beginning January 7, 2006. The loan was secured by an
        interest in certain equipment owned by Smart Automobile, LLC. The Company
        has
        also earlier prepaid $1.6 million to Smart Automobile, LLC as deposits on
        Smart
        cars.
 
 **(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 new
          stock symbol of ZAPZ. On July 1, 2005, the Company filed with the Commission
          a
          Current Report on Form 8-K to announce that the Company’s stock ticker symbol
          currently used on the Archipelago Exchange (ArcaEX) will change from “ZAPZ” to
“ZP” effective July 7, 2005. ZAP recently switched from trading on the Over
          the
          Counter Bulletin Board (OTCBB) to the ArcaEx Exchange which is a facility
          of the
          Pacific Exchange and is the nation’s first totally open, all-electronic stock
          exchange.
 
 
  The
        Company’s shareholder equity activity for the three and six months ended June
        30, 2005 is summarized as follows:
  **Common****Shares**
              
              **Amount****Balance
                  at December 31, 2004**
              
              
              **29,524,000**
              
              **$**
              **63,616,000****Issuances
                  of Common Stock for:**Automobile
                  inventory
              
              
              22,246
              
              
              48,689Furniture,
                  fixtures and equipment
              
              
              1,504
              
              
              3,973Exercise
                  of warrants for cash
              
              
              625,177
              
              
              705,366Repurchased
                  shares from Fusion Capital
              
              
              (200,000
              )
              
              (500,000
              )Legal
                  fees
              
              
              35,249
              
              
              98,100Repairs
                  and maintenance
              
              
              14,940
              
              
              41,235Rent
              
              
              29,781
              
              
              81,600Consulting
              
              
              137,775
              
              
              337,451Other
                  services
              
              
              13,675
              
              
              39,400Investment
                  in joint venture in China
              
              
              90,000
              
              
              247,500Private
                  placement of shares and warrants for cash, including shares toplacement
                  agents, net of issuance costs
              
              
              630,000
              
              
              1,250,125Employee
                  compensation
              
              
              429
              
              
              2,025**1,400,776**
              
              
              **2,355,464****Warrant
                  Transactions**Reclassification
                  of warrant liability
              
              
              
              
              
              6,711,250Fair
                  value of Warrants issuedfor consulting and other
                  services
              
              
              
              
              
              8,317,750Employee
                  warrants variableaccounting
                  adjustment
              
              
              
              
              
              (1,644,500
              )—
              
              
              13,384,500**Balance
                  at March 31, 2005**
              
              
              30,924,776
              
              $
              79,355,964Purchase
                  ofland
                  and building
              
              
              455,442
              
              
              1,100,000Automobile
                  inventory
              
              
              3,349
              
              
              4,785Furniture,
                  fixtures and equipment
              
              
              42,235
              
              
              95,681Exercise
                  of warrants for cash
              
              
              250,333
              
              
              270,400Legal
                  fees
              
              
              56,859
              
              
              122,578Rent
              
              
              42,000
              
              
              63,000Consulting
              
              
              9,370
              
              
              24,920Other
                  services
              
              
              38,869
              
              
              57,764Employee
                  compensation
              
              
              21,977
              
              
              57,539920,434
              
              
              1,796,667**Warrant
                  Transactions**Fair
                  value of warrants issuedfor
                  consulting and other services
              
              
              
              
              
              409,000Employee
                  warrants variable accounting adjustment
              
              
              
              
              
              (3,415,500
              )—
              
              
              (3,006,500
              )**Balance
                  at June 30, 2005**
              
              
              **31,845,210**
              
              **$**
              **78,146,131**
 
 The
        Company issued common shares and warrants to purchase common shares during
        the
        six months ended June 30, 2005. The stock grants were issued as consideration
        under agreements for consulting and other services; for real property,
        furniture, fixtures and equipment, automobile inventory and for employee
        services. For inventory and other assets, the Company recorded the cost as
        the
        market value of the stock or as the fair value of the assets, whichever was
        more
        reliably measurable. For the stock issued for
  
  consulting
        and other services, and for employee compensation, the Company recorded the
        cost
        as the market value of the stock at the date of grant.
 
 The
        Company also issued warrants for consulting and other services. During the
        six
        months ended June 30, 2005, the Company issued warrants to vendors and
        consultants to purchase 5.5 million common shares at prices ranging from
        $3.05
        per share to $4.75 per share, with a contractual life ranging from .5 to
        2.5
        years. The 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
              $3.05
              $4.75Market
                  price
              $2.74
              $3.41Assumptions:Expected
                  dividend yield
              0.0%
              0.0%Risk
                  free rate of return
              2.87%
              3.34%Contractual
                  life
              .5
                  years
              2.5
                  yearsVolatility
              147.1%
              168%Fair
                  market value
              $1.00
              $2.06
 
 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.
  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.
 
 In
        late
        2004, the Company repriced B and B2 and C and C2 warrants, including warrants
        held by employees. As a result, the warrants held by current employees are
        being
        accounted for using the variable method of accounting under APB No. 25 and
        FIN
        44. Accordingly, the intrinsic value of the employee warrants at March 31
        and
        June 30, 2005 was used to calculate compensation expense for the and
        resulted in a reduction in compensation expense of $1.6 million and $3.4
        million
        for the three and six month periods ended June 30, 2005
        respectively.
 
 
 **(7)** **** **LITIGATION-** Other
        than the following, we are not party to any pending material legal proceedings
        and are not aware of any threatened or contemplated proceedings by any
        government authority against us.
 
 A
        dormant
        complaint filed in 2002 against the RAP Group and Steve Schneider (CEO of
        ZAP)
        individually was reactivated by the plaintiff (Jim Arnold Trucking). The
        Compliant alleges Breach of Contract, Promissory Estoppel and Fraud and seeks
        contract damages in the amount $71,000 plus monthly storage fees and punitive
        damages of $750,000. The Company has cross-claimed against Plaintiffs seeking
        compensatory damages, attorneys' fees and equitable relief for breach of
        oral
        contract, common count for goods sold and delivered, conversion, liability
        of
        surety, violation of statue, and violation of the Unfair Practices Act. On
        February 17, 2005, the court referred the matter to non-binding arbitration.
        The
        non binding arbitration hearing was held on July 27, 2005 with no agreement
        reached. ZAP intends to assert its defenses vigorously and to litigate its
        cross-compliant aggressively. Management believes that the ultimate resolution
        of this claim will not have a material adverse effect on our financial position
        or on results of operations.
  
 
 **(8)**
              **SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW
                  INFORMATION:**
 
 Six
                  Months EndedJune
                  30,**2005**
              
              2004Cash
                  paid during the period for interest
              
              $
              20
              
              
              —Cash
                  paid during the period for income taxes
              
              $
              4
              
              
              2Non-cash
                  investing and financing activities:Stock
                  and warrants issued for:Stock
                  issued to acquire distribution license
              
              
              
              
              
              8,000Purchase
                  of equipment
              
              $
              1,200
              
              
              68Inventory
                  purchases
              
              $
              54
              
              
              480Prepaid
                  expenses
              
              $
              —
              
              
              1,083Other
                  assets
              
              $
              247
              
              
              —Reclassification
                  of warrant liability
              
              $
              6,711
              
              
              —
 
 Item
                2.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF
                  OPERATIONS.
 
 THIS
        QUARTERLY REPORT, INCLUDING THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS,
        AND OTHER REPORTS FILED BY THE REGISTRANT FROM TIME TO TIME WITH THE SECURITIES
        AND EXCHANGE COMMISSION (COLLECTIVELY THE "FILINGS") CONTAIN FORWARD-LOOKING
        STATEMENTS WHICH ARE INTENDED TO CONVEY OUR EXPECTATIONS OR PREDICTIONS
        REGARDING THE OCCURRENCE OF POSSIBLE FUTURE EVENTS OR THE EXISTENCE OF TRENDS
        AND FACTORS THAT MAY IMPACT OUR FUTURE PLANS AND OPERATING RESULTS. THESE
        FORWARD-LOOKING STATEMENTS ARE DERIVED, IN PART, FROM VARIOUS ASSUMPTIONS
        AND
        ANALYSES WE HAVE MADE IN THE CONTEXT OF OUR CURRENT BUSINESS PLAN AND
        INFORMATION CURRENTLY AVAILABLE TO US AND IN LIGHT OF OUR EXPERIENCE AND
        PERCEPTIONS OF HISTORICAL TRENDS, CURRENT CONDITIONS AND EXPECTED FUTURE
        DEVELOPMENTS AND OTHER FACTORS WE BELIEVE TO BE APPROPRIATE IN THE
        CIRCUMSTANCES. YOU CAN GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS THROUGH
        WORDS AND PHRASES SUCH AS "SEEK", "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT",
        "INTEND", "PLAN", "BUDGET", "PROJECT", "MAY BE", "MAY CONTINUE", "MAY LIKELY
        RESULT", AND SIMILAR EXPRESSIONS. WHEN READING ANY FORWARD-LOOKING STATEMENT
        YOU
        SHOULD REMAIN MINDFUL THAT ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY
        UNCERTAIN AS THEY ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS CONCERNING
        FUTURE EVENTS OR FUTURE PERFORMANCE OF OUR COMPANY, AND ARE SUBJECT TO RISKS,
        UNCERTAINTIES, ASSUMPTIONS AND OTHER FACTORS RELATING TO OUR INDUSTRY AND
        RESULTS OF OPERATIONS, INCLUDING BUT NOT LIMITED TO THE FOLLOWING
        FACTORS:
 
 -
        WHETHER
        THE ELECTRIC AND GAS-EFFICIENT VEHICLE MARKET FOR OUR PRODUCTS **** CONTINUES
        TO GROW AND, IF IT DOES, THE PACE AT WHICH IT MAY GROW;
 -
        OUR
        ABILITY TO ATTRACT AND RETAIN THE PERSONNEL QUALIFIED TO IMPLEMENT OUR GROWTH
        STRATEGIES,
 -
        OUR
        ABILITY TO OBTAIN APPROVAL FROM GOVERNMENT AUTHORITIES FOR OUR
        PRODUCTS;
 -
        OUR
        ABILITY TO PROTECT THE PATENTS ON OUR PROPRIETARY TECHNOLOGY;
 -
        OUR
        ABILITY TO FUND OUR SHORT-TERM AND LONG-TERM FINANCING NEEDS;
 -
        OUR
        ABILITY TO COMPETE AGAINST LARGE COMPETITORS IN A RAPIDLY CHANGING MARKET
        FOR
        ELECTRIC AND GAS-EFFICIENT VEHICLES;
 -
        CHANGES
        IN OUR BUSINESS PLAN AND CORPORATE STRATEGIES; AND
 -
        OTHER
        RISKS AND UNCERTAINTIES DISCUSSED IN GREATER DETAIL IN VARIOUS SECTIONS OF
        THIS
        REPORT.
 
 
  **Overview**
 
 ZAP
        stands for Zero Air Pollution®. ZAP was founded on September 23, 1994, during an
        era when government and industry were debating how to solve our growing
        transportation problems. ZAP forged ahead with a bold, grass-roots marketing
        campaign and innovative products like its zero-emission ZAP ® electric bicycles
        and ZAPPY ® folding electric scooters that were cost-effective and practical for
        world markets. Today ZAP is still moving forward with an aggressive campaign
        to
        stay at the forefront of fuel-efficient transportation with new technologies,
        including energy efficient gas systems, hydrogen, electric and other innovative
        power systems. ZAP is also investing in advanced energy solutions, utilizing
        advanced batteries and innovative fuel cell designs.
 
 In
        the
        process of building ZAP, the Company has pioneered a growing niche for
        alternative transportation. In 1995, ZAP began marketing electric transportation
        on the Internet through its website at www.zapworld.com .
        In
        1996-1998, ZAP continued to add to its product line; in 1999 ZAP added electric
        motorbikes; in 2001 it added electric dive scooters; in 2003 ZAP announced
        its
        first electric automobiles, including the first-ever production electric
        automobiles imported from its manufacturing partner in China; in 2004 ZAP
        introduced electric ATVs and the fuel-efficient Smart Car.
 
 Today,
        ZAP is a one-stop portal for a diverse lineup of quality, affordable advanced
        automotive technologies. ZAP has delivered more than 90,000 vehicles to
        customers in more than 75 different countries. Our goal is to become the
        largest
        and most complete distribution portal in the United States for advanced
        technology vehicles. We are focused on creating a distribution channel for
        our
        automobile and consumer products by establishing qualified automobile-dealers
        and developing relationships with mass-merchandisers throughout the United
        States. We currently market and sell our automobile products through qualified
        automotive dealers including our subsidiary, Voltage Vehicles. We currently
        market and sell our consumer products directly to consumers through our Internet
        Web Site, independent representatives, retail outlets and qualified automobile
        dealers. We continue to develop new products independently and through
        development and acquisition agreements with companies and manufacturers,
        and by
        the purchase of products manufactured to our specifications but for which
        we do
        not have proprietary interest. We have grown from a single product line to
        a
        full line of electric vehicle and advanced transportation products. Most
        of ouir
        domestic manufacturing has been transferred to lower-cost overseas contract
        manufacturers.
 
 ZAP
        was
        incorporated under the laws of the State of California, on September 23,
        1994,
        as “ZAP Power Systems.” The name of the Company was changed to “ZAPWORLD.COM” on
        May 16, 1999 in order to increase our visibility in the world of electronic
        commerce. We subsequently changed our name to ZAP on June 18, 2001 in order
        to
        reflect our growth and entry into larger, more traditional markets. Our
        principal executive offices are located at 501 Fourth Street Santa Rosa,
        California, 95401. Our telephone number is (707) 525-8658.
 
 **Subsidiaries**
 
 We
        have
        several subsidiaries as follows: RAP Group, Inc., a California company (“RAP
        Group”), Voltage Vehicles, a Nevada company (“Voltage Vehicles”), ZAP
        Rental Outlet, a Nevada company (“ZAP Rentals”), ZAP Stores, Inc., a
        California company (“ZAP Stores”), ZAP Manufacturing, Inc., a Nevada company
        (“ZAP Manufacturing”) and ZAP World Outlet, Inc., a California company (“ZAP
        World”). We wholly own each of our subsidiaries. RAP Group is engaged primarily
        in the sale and liquidation of conventional automobiles ***;*** Voltage
        Vehicles is engaged primarily in the distribution and sale of advanced
        technology and conventional automobiles; ZAP Rentals is engaged primarily
        in
        rental of ZAP products, ZAP Stores is engaged primarily in consumer sales
        of ZAP
        products and ZAP Manufacturing is engaged primarily in the manufacture of
        ZAP
        products. ZAP World Outlet is not currently an operating subsidiary. RAP
        Group
        and Voltage Vehicles were acquired by the Company in a merger and acquisition
        transaction in July 2002. RAP Group has active operations and generated
        approximately 80% of the Company’s consolidated revenues in 2005.
 
 **Business
        Development**
 
 Our
        business strategy has been to develop, acquire and commercialize advanced
        transportation vehicles and technology, including electric vehicles and electric
        vehicle power systems, low emissions vehicles, fuel cell powered vehicles,
        and
        fuel-efficient vehicles which have fundamental, practical, environmental
        advantages over conventional internal combustion modes of transportation
        that
        can be produced commercially on an economically competitive basis.
 
 In
        2004,
        we continued to enhance and broaden our electric vehicle product line and
        we
        contracted for the exclusive right in the United States and the nonexclusive
        right world-wide to distribute the Smart Cars Americanized by ZAP. We acquired
        those rights in our agreement with Smart Automobile, LLC, a California limited
        liability company (“Smart Automobile”). Smart Automobile is importing the cars,
        assembled by Mercedez Benz in Europe, and then making them compliant for
        sale in
        the United States with all applicable Federal and state regulations concerning
        automobiles. In an effort to become the largest distributor of advanced
        technology vehicles in the United States, we are actively developing a network
        of automobile dealers that will be qualified to sell our automobile and consumer
        products. In connection with establishing such dealers, we have arranged
        for a
        secured inventory floor line of credit for the first 150 such dealers through
        our agreement with Clean Air Motor, LLC (CAMCO”). We have already established
        dealers in California, Oklahoma, Pennsylvania, New York, Florida, and
        Michigan.
 
 In
        addition, we have introduced a new consumer product, the ZAP Portable Energy
        (PE), which is a portable power source and battery charger for consumer
        electronic devices.
 
 We
        also
        announced in 2004, Voltage Vehicles' agreement with Apollo Energy Systems,
        Inc.
        ("Apollo") for the exclusive distribution rights in the United States of
        Apollo's automobile fuel-cells, and we announced our exclusive distribution
        agreement with Anuvu of Sacramento, California for its patented Power-X(TM)
        hydrogen fuel cell engine systems for on road applications in the United
        States.
        We continuously seek to develop new vehicle designs, products and technology
        to
        expand and compliment our current product offerings.
  
  **Product
        Summary**
 
 We
        market
        many forms of advanced transportation vehicles, including electric automobiles,
        fuel-efficient vehicles, motorcycles, bicycles, scooters, neighborhood electric
        vehicles and all terrain vehicles. We market products designed solely by
        us, as
        well as products we design together with other companies. Most of our products
        are manufactured in China. Our automobiles are assembled outside of the United
        States, but made to comply with United States laws inside the United States.
        The
        Smart Car Americanized by ZAP is manufactured and made compliant for sale
        in the
        United States by Smart Automobile, and we make the ZAP WORLD CAR compliant
        for
        the United States market. Our automobile products require registration with
        state vehicle registration departments and must be sold through licensed
        dealers, while our consumer vehicles can be sold directly to consumers without
        registration.
 
 Our
        automobile vehicles are subject to environmental and safety compliance with
        various Federal and State governmental regulations, including regulations
        promulgated by the EPA, NHTSA and Air Resource Board of the State of California
        (CARB). The costs of these compliance activities can be
        substantial.
 
 Our
        existing product line, which includes completed, market ready products and
        planned introductions, is as follows:
 
 Automotive
        Line
 
 The
        Company possesses exclusive licenses, know-how, and technology that enable
        the
        Company to import various foreign made vehicles.
 
 SMART
        CAR
        AMERICANIZED BY ZAP. The Smart Car Americanized by ZAP, which is assembled
        by
        Mercedes Benz, is imported by Smart Automobile LLC through a registered importer
        and made compliant for sale in the United States by Smart Automobile LLC
        and G
& K Automotive. As of this date and to our knowledge, Smart Automobile
        LLC is the only company, through its proprietary recalibration technology
        and
        its compliance contractor G & K Automotive, with clearance from the DOT and
        a letter of conformity from the EPA, that allowed a model of the Smart Car,
        as
        modified, to be sold in the U.S. ZAP is the exclusive distributor of these
        cars.
        Additional clearances will be needed to sell this vehicle in volumes and
        to sell
        other models of the Smart Car. The California Air Resources Board must certify
        the car before it could be sold in California and four other states. ZAP
        will
        need to set up large contractors to handle the demand for this vehicle. ZAP
        anticipates that the current EPA and DOT clearance will afford ZAP the
        opportunity to distribute Smart Cars as Americanized by ZAP in the U.S. Neither
        ZAP nor Smart Automobile is affiliated with, or authorized by, Smart Gmbh,
        the
        manufacturer of SMART automobiles, or the smartUSA division of Mercedes-Benz
        LLC, the exclusive authorized U.S. importer and distributor of those vehicles.
        ZAP purchases its vehicles from Smart Automobile LLC.
 
 This
        Smart Car has a gas turbo engine. This car is a two-passenger coupe that
        is
        eight feet in length that provides ample room for two adult passengers. Other
        "smart" features and options of the Smart Car Americanized by ZAP include
        a
        61-hp, 3-cyclinder turbocharged engine, equipped with an advanced electronic
        stabilization program, or ESP, an anti-skid design that throttles the engine
        torque along with an anti-lock braking system. The unique 6-speed automatic
        gear
        transmission with kick down function allows the user to switch between
        "automatic" and "manual" gear shifting via a control program that changes
        `gears
        in response to varying driving characteristics. These cars will be
        sold
        through Voltage Vehicles to qualified ZAP dealers.
 
 ZAP
        WORLDCAR(TM). This electric vehicle is the first of its kind to utilize an
        advanced drive train powered by an asynchronous AC motor system delivering
        up to
        four times the horsepower of other models in its class. We signed an exclusive
        agreement to import this nearly completed vehicle into the United States.
        This
        vehicle is assembled in China and we make it compliant with NHTSA, EPA, and
        various state regulatory standards. This vehicle is a "Neighborhood Electric
        Vehicle" or classified as a "Low Speed Vehicle." This new category of automobile
        was created for use in intra-city transportation, planned communities,
        commercial zones and tourist areas where the distances traveled are short
        and
        the need for large capacity is limited. The smaller, low-speed electric cars
        are
        a new transportation alternative for communities concerned with air and noise
        pollution, high fuel prices, traffic congestion or parking shortages. The
        ZAP
        Worldcar has speeds up to 25 mph, room for two and can be plugged into any
        normal household electric outlet to recharge its battery. This vehicle was
        certified by the Air Resources Board of the State of California as being
        a Zero
        Emission Vehicle in September 2004. This vehicle is subject to state vehicle
        registration laws and must be sold through an automobile dealer.
 
 ZAP
        LIGHT
        UTILITY VEHICLE (LUV). This vehicle is also a Neighborhood Electric Vehicle
        (NEV). A new category of automobile was created for the many car trips people
        take for inter-city transportation, planned communities, commercial zones
        and
        tourist areas. The LUV sports a European design. The vehicle has speeds up
        to 25
        mph, has room for two and plugs into any normal household electric outlet.
        The
        LUV was selected as a finalist for Tech-TV's Best of the Consumer Electronic
        Show held in Las Vegas in January 2003.
 
 
 
  Personal
        Transportation
 
 ZAPPY(R).
        This electric scooter is a stand-up, portable, lightweight scooter featuring
        a
        12-volt battery with a built-in charger and a collapsible frame. The design
        includes a unique folding mechanism and proprietary circuitry, which increases
        the efficiency and range of the vehicle. In the fourth quarter of 2003, we
        introduced a new ZAPPY(R) Scooter which offered significant upgrades over
        the
        previous design with respect to performance, construction and appearance.
 
 ZAPPY(R)
        Express Scooter. In the fourth quarter last year, we introduced a new which
        offered significant upgrades over the previous design, including a seat and
        carrying case. We exclusively own the design of this product. This product
        is
        not subject to state vehicle registration laws and may be sold directly to
        consumers.
 
 ZAPPY
        3.
        The ZAPPY 3 is a three-wheeled scooter that uses a wheel-motor drive technology
        built into the hub of the front wheel to enable increased stability while
        enhancing maneuverability. The riding platform has two smaller wheels on
        either
        side with the larger wheel motor in front, so a person can ride in standing
        position with both feet placed side-by-side, rather than skateboard-style
        standing sideways which was the design of the original ZAPPY(R). We exclusively
        own the design of this vehicle. This vehicle is not subject to state vehicle
        registration laws, and may be sold directly to consumers.
 
 ZAP(R)
        SEASCOOTER(R). The ZAP SeaScooter (TM) is an affordable underwater propulsion
        device designed to pull swimmers and snorkelers through the water. It can
        run at
        speeds up to 2 mph at a depth of 60 feet and has built in buoyancy regulation
        for maximum comfort.
 
 POWERBIKE(R).
        The Powerbike resembles a mountain bicycle with an electric motor attached.
        This
        vehicle is not subject to state vehicle registration laws and may be sold
        directly to consumers.
 
 OTHER
        ELECTRIC AND FUEL-EFFICIENT VEHICLES. Under various distribution agreements,
        we
        have the right to distribute a wide spectrum of personal and industrial electric
        vehicles. In 2004, we announced the introduction of our electric all-terrain
        vehicles, which we began selling at the end of 2004.
 
 Energy
        Products
 
 ZAP
        PORTABLE ENERGY(TM). This is a portable lithium energy power source and battery
        charger for low-voltage consumer electronic products. This device uses a
        "smart"
        microprocessor control system to power multiple hand-held electronic devices
        or
        to charge batteries. The ZAP PE can be used to power a variety of mobile
        consumer electronic devices, such as PDAs, digital cameras, cellular telephones,
        MP3 players, laptops and equivalent low-voltage devices. We manufacture the
        ZAP
        PE in China for distribution and sale in the United States under our name.
        We
        are marketing and planning to sell this product through independent
        representatives for resale and distribution to retail stores, as well as
        directly to consumers over our Internet sales portal.
 
 MICROPROCESSOR
        DRIVE CONTROLLERS. We are working to develop, independently and in collaboration
        with other companies, a series of low cost proprietary controller
        microprocessors for all of our products. These devices will increase efficiency
        and lower costs of operation by providing more efficient use of power to
        charge
        our products.
 
 FUEL
        CELL
        TECHNOLOGIES. In August 2004, Voltage Vehicles entered into an exclusive
        distribution agreement with Apollo to acquire certain exclusive rights to
        purchase, market and sell up to $100 million of Apollo products including
        Alkaline Fuel Cell products, Tri-Polar Lead-Cobalt battery technology, and
        certain propulsion systems, together with related advanced technology products
        owned by Apollo. We believe this agreement compliments our existing product
        line
        of environmentally friendly transportation and power products. Our Chief
        Executive Officer, Mr. Steven Schneider is a member of the Advisory Board
        of
        Directors of Apollo. The Company expects to demonstrate its first hybrid
        fuel
        cell vehicle in 2005. In December 2004, we entered into an exclusive purchase
        and distribution agreement with Anuvu for their patented fuel cell for on
        road
        applications.
  **Distribution
        and Market Outlets**
 
 We
        employ
        the following methods to distribute our products:
 
 ELECTRIC
        VEHICLE DEALER PROGRAM. The Company began establishing ZAP qualified electric
        vehicle dealers in various locations in the United States in the fourth quarter
        of 2003. Each dealer pays the Company a fee and in return that dealer may
        apply
        within their state to become a licensed new car electric vehicle dealer.
        We also
        receive a commitment from each qualified dealer to purchase a minimum number
        of
        electric automobiles annually. In 2004, we expanded this network to include
        the
        gas-efficient Smart Car Americanized by ZAP. Currently, we have qualified
        dealers in New York, Michigan, Oklahoma, Colorado, Pennsylvania, Florida
        and
        California. We intend to use these ZAP qualified dealers to sell the ZAP
        Worldcar and the Smart Car Americanized by ZAP. Some ZAPqualified dealers
        will
        also sell our consumer and other vehicle products, such as scooters and bikes,
        depending on demand.
  
  RAP
        GROUP, INC. The Company distributes its conventional cars through RAP, a
        wholly
        owned subsidiary, located in Fulton, California.
 
 MASS
        MERCHANDISE AND RETAIL OUTLETS. The Company markets its consumer products
        to
        independent representatives, mass merchandisers and retail outlets, as well
        as
        undertaking direct marketing activities with these entities.
 
 ELECTRIC
        VEHICLE RENTAL PROGRAM. The Company established ZAP Rental Outlets in 2002
        to
        rent neighborhood electric vehicles in tourist locations. In September 2003,
        we
        acquired a fleet of approximately 100 neighborhood electric vehicles. Some
        of
        these have been sold and others are being rented from time to time in various
        locations.
 
 INTERNET
        SALES. The Company markets and sells its consumer products directly to consumers
        on its Web site.
 
 **Acquisition
        of New Businesses and Assets**
 
 The
        Company has acquired from Smart Automobile LLC the exclusive distribution,
        marketing, and technology rights throughout the United States to make the
        Smart
        Cars US compliant, through registered importer G & K Automotive, for a
        period of ten years. These rights also included the proprietary computer
        technology and process for making vehicles DOT and EPA compliant. These rights
        were acquired through the payment of $1 million in cash upon execution of
        the
        agreements, $1 million in cash upon delivery of the first 1,000 Smart Cars,
        and
        $8 million in preferred stock. A more detailed conversion agreement was
        completed and signed on October 25, 2004. Under this agreement Smart Automobile,
        LLC (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 that are fully EPA compliant to sell in the
        United States allow the holder of 500 preferred stock SA to convert 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 until July 7, 2009, or when
        all
        the preferred shares have been converted. Upon EPA compliance, and the legal
        right to sell the first 98 vehicles currently in inventory, the holder can
        convert 500 preferred shares to $500,000 common stock immediately, and received
        505,000 warrants. These were issued in 2004. The Company delivered
        the
        first U.S. Compliant Smart Car Americanized by ZAP during May 2005.  Smart
        Automobile is not affiliated with Mercedes Benz. ZAP has not agreed to accept
        all orders for the Smart Cars Americanized by ZAP at this time. ZAP will
        need
        the support of a major manufacturer to be able to deliver this volume of
        cars.
        The Company is actively seeking this support. The delivery schedule has not
        yet
        been determined.
  **Environmental
        Initiatives and Legislation**
 
 In
        1992,
        Federal legislation (United States Energy Policy Act of 1992) was enacted
        to
        promote the use of alternative fuel vehicles, including electric vehicles.
        Acquisition of a qualified electric vehicle entitles the owner to a Federal
        tax
        credit equal to 10% of the cost of the vehicle. Several states have also
        adopted
        legislation that sets mandates for the introduction of electric vehicles.
        Many
        foreign countries have also initiated either mandates or incentives for electric
        vehicles or are planning such programs in the future. As we commercialize
        new
        transportation technology, we have been required to expend our resources
        in
        educating legislators of the benefits of these vehicles. In November 2002,
        President Bush signed into law legislation, which transfers regulation of
        electric bicycles from the National Highway Traffic Safety Administration
        to the
        Consumer Product Safety Commission. This effectively changes the regulating
        standards for electric vehicles from motor vehicles standards to consumer
        standards such as those governing bicycles, relieving the need for regulatory
        compliance in connection with the sale of our bicycle products.
 
 Although
        many government agencies are concerned about rising global air pollution,
        it is
        expected that we will need to continue to expend considerable resources in
        the
        future in the governmental process to continue the current favorable
        governmental climate for the zero emission vehicles. Any Research and
        Development activities for the Company are subcontracted to outside
        organizations.
 
 **Research
        and Product Development; Product Distribution**
 
 We
        are
        primarily a marketer and distributor of ZAP products and products manufactured
        for ZAP, such as the ZAP Worldcar and the Smart Car Americanized by ZAP.
        Thus,
        we do not currently require large expenditures for internal research and
        development costs. In order to maintain our competitive advantage, we search
        globally for the latest technological advances in advanced technology vehicles
        and then assess the feasibility of including the new item into our product
        lines. We have determined to rely less exclusively on internal research and
        development for the generation of new products and product enhancements,
        and
        instead look to acquire new technologies through development agreements,
        licenses and distribution agreements. We are primarily focused on developing
        ZAP
        qualified dealers throughout the United States that will sell our automobile
        and
        consumer products, in creating relationships with independent representatives
        and mass merchandisers for the distribution and sale of our products to
        consumers, and in direct sales to consumers through our Internet sales
        portal.
 
 
  **Sources
        and Availability of Parts and Supplies**
 aterials,
        parts, supplies and services used in our business are generally available
        from a
        variety of sources. However, interruptions in production or delivery of these
        goods could have an adverse impact on our general operations, or our
        manufacturer's operations and production of ZAP products.
 
 **Backlog**
 
 As
        of
        August 12, 2005, the Company had $23,000 in backlog orders for our consumer
        products which it expects to fill within the current fiscal year. The Company
        also has over $1 billion in backlog orders from auto-dealer purchase contracts
        for the Smart Cars Americanized by ZAP. To date only a few cars have been
        delivered to selected dealers who have been trained in service,diagnostics
        and
        parts. At present, we have not accepted all the received orders from auto
        dealers and have not determined a current schedule to fill our current backlog
        orders for the Smart Cars Americanized by ZAP. The Company will need assistance
        from a major manufacturer and the full approval of all necessary governmental
        agencies to complete the existing volume of Smart Car orders. The Company
        is
        actively seeking this support however it cannot be assured that we will get
        this
        support.
 
 **Competitive
        Conditions**
 
 The
        competition to develop and market advanced technology vehicles has been intense
        and is expected to continue to increase. Our principal competitive advantages
        over our competitors are our ownership of fundamental technology, our trade
        name
        and brand recognition, our ability to be a low cost manufacturer through
        domestic and international contract manufacturing arrangements and our growing
        distribution network. We benefit from our high name recognition in the advanced
        transportation vehicle industry coupled with a rapidly developing consumer
        sales
        business on our website. In order to reduce costs, our production activities
        have been transferred to lower cost contract manufacturers outside the United
        States, which enables us to offer our products at competitive prices. This
        also
        enables us to concentrate on our marketing and sales efforts and the growth
        of
        our distribution network. We offer one of the broadest lines of personal
        electric vehicles currently available, which we believe reinforces our name
        recognition in the market place.
 
 In
        the
        advanced technology vehicle market in the United States, we compete with
        large
        manufacturers, including Honda, Toyota, and Daimler-Chrysler, who have more
        significant financial resources, established market positions, longstanding
        relationships with customers and dealers, and who have more significant name
        recognition, technical, marketing, sales, manufacturing, distribution and
        other
        resources than we do. Each of these companies is currently working to develop,
        market and sell advanced technology vehicles in the United States market.
        The
        resources available to our competitors to develop new products and introduce
        them into the market place exceed the resources currently available to our
        Company. We also face competition from smaller companies with respect to
        our
        consumer products, such as our electric bicycle and scooter. We expect to
        face
        competition from the makers of consumer batteries and small electronics with
        respect to the ZAP PE. This intense competitive environment may require us
        to
        make changes in our products, pricing, licensing, services, distribution
        or
        marketing to develop, maintain and extend our current technology and market
        position.
 
 Some
        of
        the significant events for the Company that occurred during the second quarter
        of 2005 and through the date of this report are as follows:
  1.
              The
                  Company delivered the first U. S. Compliant Smart Car Americanized
                  by ZAP.
                  The Company also delivered additional Smart Cars to qualified dealers
                  in
                  eight states. The future delivery schedule has not yet been determined.
                  ZAP will need the support of a major manufacturer and additional
                  governmental approvals to be able to deliver existing customer
                  orders for
                  Smart Cars.
 
 2.
              The
                  Company signed an agreement of intent with Advanced Battery Technologies
                  to develop the next-generation of Lithium Polymer batteries and
                  chargers
                  to be used in its Electric Cars.. It is believed that if the density
                  of
                  the batteries can be increased the range of the batteries would
                  also
                  increase threefold.
  3.
              In
                  June ZAP received approval to list it’s common stock on the Archipelago
                  Exchange (ArcaEx) under the symbol “ZP”. This exchange is a facility of
                  the Pacific Exchange and is the nation’s first totally open,
                  all-electronic stock exchange.
  
  **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****2005**
                
                **2004**
                
                **2005**
                
                **2004****Statements
                    of Operations Data:**Net
                    sales
                
                
                100
                %
                
                100
                %
                
                100
                %
                
                100
                %Cost
                    of sales
                
                
                85.8
                
                
                77.7
                
                
                92.1
                
                
                76.0Gross
                    profit
                
                
                14.2
                
                
                22.3
                
                
                7.9
                
                
                24.0Operating
                    expenses
                
                
                232.8
                
                
                178.0
                
                
                251.4
                
                
                153.1Loss
                    from operations before other income and expense
                
                
                (218.6
                )
                
                (155.7
                )
                
                (243.5
                )
                
                (129.1
                )Other
                    income
                
                
                14.5
                
                
                33.1
                
                
                78.9
                
                
                13.9Net
                    loss
                
                
                (204.0
                )
                
                (123.0
                )
                
                (164.7
                )
                
                (115.8
                )
  **Quarter
        Ended June 30, 2005 Compared to Quarter Ended June 30,
        2004**
 
 **Net
        sales** for the
        quarter ended June 30, 2005 were $923,000 compared to $1.1 million in 2004.
        RAP’s net sales for the period accounted were $659,000 versus $780,000 in 2004.
        The net sales for ZAP were $267,000 versus $292,000 in 2004. The sales for
        RAP
        for gas automobiles were less than last year while ZAP experienced a decline
        in
        the sales of consumer products. ZAP has introduced new products that need
        more
        time to gain consumer demand.
 
 **Gross
        profit** was
        $131,000 for the second quarter ended June 30, 2005 compared to $239,000
        for the
        quarter ended June 30, 2004. The RAP Group accounted for $105,000 of the
        gross
        profit for the quarter ended June 30, 2005 versus $133,000 in 2004. ZAP’s gross
        loss excluding the RAP Group, decreased from $106,000 gross profit in 2004
        to a
        gross loss of $6,397 in 2005. The decrease in gross profit was due to product
        mix and lower sales for ZAP.
 
 **Sales**  **and
        marketing expenses** in the
        second quarter of 2005 were $299,000 as compared to $209,000 in 2004. RAP’s
        expenses were $38,000 in 2005 and $41,000 in 2004 and ZAP’s expenses were
        $261,000 versus $168,000 in 2004. As a percentage of sales, total selling
        expenses increased from 19% of sales to 32% of sales. The higher expenses
        were primarily for the promotion of the Smart Car.
 
 **General
        and administrative** expenses
        for 2005 were $1.8 million as compared to $1.6 million in 2004. RAP’s portion of
        the expenses was $383,000 versus $157,000 in 2004. For ZAP the expenses
        decreased from $1.5 million to $1.1 million As a percentage of sales, general
        and administration expenses increased from 153% of sales to 194 % of sales.
        RAP’s increase of $226,000 was primarily due to higher bad debt expenses . ZAP’s
        net decrease of $400,000 in general and administration expenses was net of
        a
        variable accounting adjustment for employee warrants.
 
 **Research
        and development expenses** represents
        expenditures for the further development of hybrid fuel cell technology for
        automobiles.
 
 **Interest**  **expense
        net of interest income** decreased by $35,000 in the second quarter of 2005, is due to higher interest
        income from money market investments which reduces the interest expense as
        reported for the quarter ended June 30, 2005.
 
 **Other
        income decreased** by
        $256,000 in the second quarter of 2005 since there were no favorable adjustments
        of legal reserves which occurred in the second quarter of 2004.
 
 **Reorganization
        items** reflect
        the quarterly trustee fee in the prior year.
 
 **Net
        Loss -** The
        net
        loss was $1.9 million for the quarter ended June 30, 2005 as compared to
        a net
        loss of $1.3 million for period ended June 30, 2004. The increase was primarily
        due to higher general and administration expenses for consulting, advertising
        and professional fees.
 
 
  **Six
        Months Ended June 30, 2005 Compared to Six Months Ended June 30,
        2004**
 
 **Net
        sales** for the
        six months ended June 30, 2005, were $2.1 million compared to $2.4 for the
        six
        months ended June 30 in the prior year. RAP accounted for $1.7 million of
        overall net sales for the six months ended June 30, 2005 versus $1.7 million
        for
        the six months ended June 30,2004. The net sales for ZAP excluding the RAP
        Group
        were $426,000 and $702,000 for the six months ended June 30, 2005
        and 2004.
        ZAP experienced a decline in the sales of consumer products. ZAP has introduced
        new products that need more time to gain consumer demand.
 
 **Gross
        profit** was
        $165,000 for the six months ended June 30, 2005 compared to $575,000 for
        the six
        months ended June 30, 2004. The RAP Group accounted for $158,000 of the gross
        profit for the six months ended June 30, 2005 versus $382,000 for the six
        months
        ended June 30, 2004. ZAP’s gross profit excluding the RAP Group, decreased from
        a $193,000 in 2004 to $6,000 in 2005. The decrease in RAP’s profits reflect
        lower margins on pre-owned cars due to a difficult consumer market with many
        car
        manufacturers offering rebates on new cars. ZAP’s decrease in gross profits was
        due to lower sales.
 
 **Sales
        and marketing expenses** in the
        first six months of 2005 were 492,000 as compared to $408,000 in 2004. RAP’s
        expenses were $65,000 in 2005 versus $68,000 for the six months ended June
        30,
        2004. As a percentage of sales of the Company, sales and marketing expenses
        increased from 17% to 24% for the six months ended June 30, 2005. ZAP’s portion
        of selling expenses was $427,000 in 2005 compared to $340,000 in 2004. This
        was
        a increase of $87,000 or 26% from 2004 to 2005. The higher expenses were
        primarily for the promotion of the Smart Car.
 
 **General
        and administrative** expenses
        for the six months ended June 30, 2005 were $4.6 million as compared to $3.2
        million in the six months ended June 30, 2004. As a percentage of sales of
        the
        Company general and administration expenses increased from 133% to 223%.
        RAP’s
        portion of the expenses was $564,000 in 2005 versus $388,000 in 2004 . General
        and administration expenses for ZAP excluding the RAP Group increased from
        $2.8
        million to $4.1 million, this is a increase of $1.3 million or 46% from 2004.
 The
        $1.4
        million increase in general and administration expenses was net of a reduction
        in warrant expenses for previous employment compensation of another $5.1
        million. These warrants held by current employees are accounted for under
        variable accounting.
 The
        primary increase for general and administration is due to expenses for the
        six
        months ended June 30, 2005 for non-cash professional fees where the Company
        has
        issued warrants and stock for services which reflected the increased activity
        in
        2005 of stock and warrants issued for services.
 
 **Research
        and development expenses** represents
        expenditures for the further development of hybrid fuel cell technology for
        automobiles.
 
 **Gain
        on revaluation of warrant liability** of
        $1.5
        million represents the difference between the fair market value of the warrant
        liability at December 31, 2004 and the fair market value on February 22,
        2005
        which was the date the warrant liability was settled and transferred to
        equity.
 
 **Interest
        expense net of income**  decreased by $58,000 for the first six months of 2005 as compared to interest
        expense of $60,000 for the first six months of 2004. This is due to higher
        interest income from money market investments which reduces the interest
        as
        reported for the six months ended June 30, 2005.
 
 **Other
        income decreased**  from
        $393,000 of income in the first six months of 2004 to $125,000 in 2005, since
        there were no favorable adjustments of legal reserves which occurred in the
        first six months of 2004.
  **Net
        Loss** - The net loss was $3.4 million for the six months ended June 30,
        2005 as compared to a loss of $2.8 million for the six months period ended
        June
        30, 2004. The increase was primarily due to higher general and administrative
        expense for consulting and professional fees.
  **Liquidity
        and Capital Resources**
 In
        the
        first six months of 2005 net cash used by the Company for operating activities
        was $2 million. In the first six of 2004, the Company used cash for operations
        of $1.2 million. Cash used in the first six months of 2005 was comprised
        of the
        net loss incurred for the first six months of $3.4 million plus net non-cash
        expenses of $684,000 plus the net change in operating assets and liabilities
        of
        $746,000. Cash used in operations in the first six months of 2004 was comprised
        of the net loss before reorganization items incurred for the quarter of $2.8
        million plus net non-cash expenses of $1.9 million, and the net change in
        operating assets and liabilities resulting in a further use of cash of
        $313,000.
 
 Investing
        activities used cash of $419,000 in the first six months of 2005 and used
        $1,015,000 during the first six months ended June 30, 2004. In 2005 the majority
        of the cash was used to acquire equipment and leashold improvements.
        While
        in 2004, the cash was primarily used for a distribution license for the Smart
        Cars respectively.
 
 Financing
        activities provided cash of $654,000 and $4.2 million during the first six
        months ended June 30, 2005 and 2004, respectively.
 
 
  At
        June
        30, 2005 the Company had cash of $3.6 million compared to $2.5 million at
        June
        30, 2004. At June 30, 2005, the Company had working capital of $10.4 million,
        as
        compared to working capital of $3.5 million at June 30, 2004. The Company,
        at
        present, does not have a credit facility in place with a bank or other financial
        institution.
 
 We
        do not
        have a bank operating line of credit and there can be no assurance that any
        required or desired financing will be available through bank borrowings,
        debt,
        or equity offerings, or otherwise, on acceptable terms. If future financing
        requirements are satisfied through the issuance of equity securities, investors
        may experience significant dilution in the net book value per share of common
        stock and there is no guarantee that a market will exist for the sale of
        the
        Company’s shares.
 
 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® Car and
        electrical vehicles, increasing its internet shopping mall presence, increasing
        distribution channels, establish company owned and franchised ZAP stores,
        introducing new products, improving existing product lines and development
        of a
        strong corporate infrastructure.
 
 **Seasonality
        and Quarterly Results**
 The
        Company’s business is subject to seasonal influences. Sales volumes in this
        industry typically slow down during the winter months, November to March
        in the
        U.S. The Company intends to develop a wide auto distribution network to counter
        any seasonality effects.
 
 **Inflation**
 Our
        raw
        materials and finished products and automobiles are sourced from stable,
        cost-competitive industries. As such, we do not foresee any material
        inflationary trends for our product sources.
 
 **Item
                3.**
              **Controls
                  and Procedures**
 
 Within
        90
        days prior to the date of this Form 10-QSB, the Company carried out an
        evaluation, under the supervision and with the participation of the Company's
        management, including the Company's President and Chief Executive Officer
        along
        with the Company's Chief Financial Officer, of the effectiveness of the design
        and operation of the Company's disclosure controls and procedures pursuant
        to
        Exchange Act Rule 13a-14. Based upon that evaluation, the Company's President
        and Chief Executive Officer along with the Company's Chief Financial Officer
        concluded that the Company's disclosure controls and procedures are effective
        in
        timely alerting them to material information relating to the Company required
        to
        be included in this Form 10-QSB.
 
 There
        have been no significant changes in the Company's internal controls or in
        other
        factors, which could significantly affect the internal controls subsequent
        to
        the date the Company carried out its evaluation. The Company has recently
        engaged an outside accountant to assist in analyzing complex transactions
        which
        addresses a previous weakness noted by our auditors.
 
 **PART
        II - OTHER INFORMATION**
 
 Item
                1.
              Legal
                  Proceedings
 Other
        than the following, we are not party to any pending material legal proceedings
        and are not aware of any threatened or contemplated proceedings by any
        government authority against us.
 
 A
        dormant
        complaint filed in 2002 against the RAP Group and Steve Schneider (CEO 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 Plantiffs seeking
        compensatory damages, attorneys' fees and equitable relief for breach of
        oral
        contract, common count for goods sold and delivered, conversion, liability
        of
        surety, violation of statue, and violation of the Unfair Practices Act. On
        February 17, 2005, the court referred the matter to non-binding arbitration.
        The
        non binding arbitration hearing was held on July 27, 2005 with no agreement
        reached. ZAP intends to assert its defenses vigorously and to litigate its
        cross-compliant aggressively. Management believes that the ultimate resolution
        of this claim will not have a material adverse effect on our financial position
        or on results of operations.
  Item2.
                Unregistered
                    Sales of Equity Securities and Use of
                    Proceeds
  During
        the second quarter ended June 30, 2005 the Company issued unregistered common
        stock and various series of warrants as outlined below.
 Common
        Stock issued for the second quarter ended June 30, 2005 were as
        follows
 
 On
        April
        6, 2005, we issued 100,000 shares of common stock to B Warrant Holders, in
        connection with its exercise of warrants.
 On
        April
        6, 2005, we issued 29,754 shares of common stock to Lawyers in settlement
        of
        indebtedness arising from the provision of legal services rendered to the
        Company valued at $85,986.
 On
        April
        7, 2005, we issued 41,095 shares of common stock to Contractors in payment
        for
        professional services valued at $92,681.
 On
        April
        14, 2005, we issued 16,716 shares of common stock to Employees for commission
        bonuses valued at $47,141.
  
  On
        April
        14, 2005, we issued 3,546 shares of common stock to Contractors in payment
        for
        professional services valued at $10,000.
 On
        April
        27, 2005, we issued 4,000 shares of common stock to Employees for commission
        bonuses valued at $11,802.
 On
        April
        29, 2005, we issued 177 shares of common stock to Contractors in payment
        for
        professional services valued at $500.
 On
        April
        29, 2005, we issued 333 shares of common stock to B Warrant Holders, in
        connection with its exercise of warrants.
 On
        May 3,
        2005, we purchased real estate with a value of $1,100,000 from Property Owners
        with 355,442 shares of common stock.
 On
        May 9,
        2005, we purchased assets with value of $3,000 from Suppliers with 1140 shares
        of common stock.
 On
        May 9,
        2005, we issued 1826 shares of common stock to Employees for commission bonuses
        valued at $4,802.
 On
        May
        18, 2005, we purchased assets with value of $1,000 from Suppliers with 377
        shares of common stock.
 On
        May
        19, 2005, we issued 150,000 shares of common stock to K Warrant Holders,
        in
        connection with its exercise of warrants.
 On
        May
        25, 2005, we issued 3,093 shares of common stock to Employees for commission
        bonuses valued at $6,000.
 On
        May
        25, 2005, we issued 258 shares of common stock to Consultants in payment
        for
        professional services valued at $500.
 On
        June
        1, 2005, we issued 19,108 shares of common stock to Contractors in payment
        for
        professional services valued at $30,000.
 On
        June
        7, 2005, we issued 3,571 shares of common stock to Contractors in payment
        for
        professional services valued at $3,321.
 On
        June
        7, 2005, we issued 1,000 shares of common stock to Employees for bonuses
        valued
        at $930.
 On
        June
        7, 2005, we issued 100,000 shares of common stock related to the May 3, 2005
        real estate purchase.
 On
        June
        7, 2005, we purchased inventory with value of $1,639 from Suppliers with
        844
        shares of common stock.
 On
        June
        14, 2005, we purchased inventory with value of $3,000 from Suppliers with
        2,128
        shares of common stock.
 On
        June
        17, 2005, we settled an obligation with Lessors, for $63,000, which was paid
        with 42,000 shares of common stock.
 On
        June
        17, 2005, we issued 13,333 shares of common stock to Contractors in payment
        for
        professional services valued at $20,000.
 On
        June
        27, 2005, we settled an obligation with Contractors, for $1,784, which was
        paid
        with 1,166 shares of common stock.
 On
        June
        30, 2005, we issued 27,105 shares of common stock to Lawyers in settlement
        of
        indebtedness arising from the provision of legal services rendered to the
        Company valued at $36,592.
 On
        June
        30, 2005, we issued 941 shares of common stock to Contractors in payment
        for
        professional services valued at $1,270.
 On
        June
        30, 2005, we issued 1,481 shares of common stock to Contractors in payment
        for
        professional services valued at $2,000.
  The
        $3.25
        Warrants issued for the second quarter ended June 30, 2005 were as
        follows:
 
 On
        April
        1, 2005 the Company issued 300,000 shares of $3.25 warrants to Consultants
        for
        serving on the Advisory Board.
 On
        April
        14, 2005, we issued 100,000 shares of $3.25 warrants to Consultant in connection
        with professional services.
 On
        April
        19, 2005, we issued 500,000 shares of $3.25 warrants to the seller of real
        estate acquired by the Company.
  The
        K2
        Warrants issued for the second quarter ended June 30, 2005 were as
        follows:
 
 On
        June
        7, 2005, we issued 1,450,694 K-2 warrants to Employees for employment contracts
        and bonuses.
  ZAP
        ESOP
        Options Issued during the second quarter ended June 30, 2005 were as
        follows
 
 On
        June
        7, 2005, we issued 1,248,194 ESOP options with $0.93 exercise price to ZAP
        Employees for employment compensation.
  During
        the first quarter ended March 31, 2005 the Company issued unregistered common
        stock and various series of warrants as outlined below.
 
 Common
        Stock issued for the first quarter ended March 31, 2005 were as
        follows:
 
 On
        January 1, 2005, we issued 116,099 shares of common stock to B Warrant Holders,
        in connection with its exercise of warrants.
 On
        January 1, 2005, we issued 288 shares of common stock to C Warrant Holders,
        in
        connection with its exercise of warrants.
 On
        January 5, 2005, we purchased assets with value of $15,989 from Suppliers
        with
        5,420 shares of common stock.
 On
        January 13, 2005, we issued 30,000 shares of common stock to Lawyers in
        settlement of indebtedness arising from the provision of legal services rendered
        to the Company valued at $83,100.
 On
        January 14, 2005, we issued 51,376 shares of common stock to B Warrant Holders,
        in connection with its exercise of warrants.
 On
        January 14, 2005, we issued 42 shares of common stock to C Warrant Holders,
        in
        connection with its exercise of warrants.
 On
        January 14, 2005, we purchased an interest in a China Joint Venture with
        value
        of $247,500 with 90,000 shares of common stock.
 On
        January 20, 2005, we issued 100,000 shares of common stock to Consultant
        in
        payment for professional services valued at $235,000.
 On
        January 20, 2005, we settled an obligation with a professional organization,
        for
        $13,600, which was paid with 5,787 shares of common stock.
 On
        January 24, 2005, we issued 12,832 shares of common stock to B and B2 Warrant
        Holders, in connection with its exercise of warrants.
 On
        January 28, 2005, we issued 382 shares of common stock to Professional
        Organization in payment for professional services valued at $1000.
 On
        January 28, 2005, we issued 11,699 shares of common stock to Employees for
        employment bonuses valued at $30,651.
 On
        January 28, 2005, we purchased assets with value of $3,500 from Suppliers
        with
        1,336 shares of common stock.
 On
        January 28, 2005, we issued 3,817 shares of common stock to Professional
        Contractors in payment for professional services valued at $10,000.
 On
        January 28, 2005, we issued 84,527 shares of common stock to B Warrant Holders,
        in connection with its exercise of warrants.
 On
        February 2, 2005, we issued 70,000 shares of common stock to B Warrant Holders,
        in connection with its exercise of warrants.
 On
        February 2, 2005, we purchased assets with value of $72.75 from Suppliers
        with
        25 shares of common stock.
 On
        February 8, 2005, we issued 2,631 shares of common stock to B Warrant Holders,
        in connection with its exercise of warrants.
 On
        February 8, 2005, we issued 1,678 shares of common stock to Lawyers in
        settlement of indebtedness arising from the provision of legal services rendered
        to the Company valued at $5,000.
 On
        February 15, 2005 the Company issued 600,000 shares of common stock to Lazarus
        Investment Partners LLLP for $1,260,000.
 On
        February 15, 2005, we settled an obligation with lessors, for $81,600, which
        was
        paid with 29,781 shares of common stock.
 On
        February 15, 2005, we issued 32,920 shares of common stock to various
        Consultants in payment for professional services valued at $90,200.
 On
        February 23, 2005, we issued 727 shares of common stock to B Warrant Holders,
        in
        connection with its exercise of warrants.
 On
        February 23, 2005, we settled an obligation with a Dealer, for $10,000, which
        was paid with 12,000 shares of common stock.
 On
        March
        1, 2005, we issued 955 shares of common stock to B Warrant Holders, in
        connection with its exercise of warrants.
 On
        March
        2, 2005, we purchased inventory with value of $7,250 from Suppliers with
        3,593
        shares of common stock.
 On
        March
        8, 2005, we settled an obligation with Professional Organization, for $10,000,
        which was paid with 2,932 shares of common stock.
 On
        March
        9, 2005, we issued 150,000 shares of common stock to B Warrant Holders, in
        connection with its exercise of warrants.
  
  On
        March
        11, 2005, we issued 100,000 shares of common stock to B Warrant Holders,
        in
        connection with its exercise of warrants.
 On
        March
        14, 2005, we issued 5,000 shares of common stock to B Warrant Holders, in
        connection with its exercise of warrants.
 On
        March
        14, 2005, we issued 3,571 shares of common stock to Lawyers in settlement
        of
        indebtedness arising from the provision of legal services rendered to the
        Company valued at $10,000.
 On
        March
        14, 2005, we purchased assets with value of $25,850 from Suppliers with 13,376
        shares of common stock.
 On
        March
        14, 2005, we issued 929 shares of common stock to Employees for employment
        bonuses valued at $2,600.
 On
        March
        17, 2005 the Company cancelled 200,000 shares of common stock to Fusion Capital
        Fund 11,LLC in connection with cancellation of a financing deal. Money was
        returned to the institutional investor.
 On
        March
        23, 2005, we issued 700 shares of common stock to B Warrant Holders, in
        connection with its exercise of warrants.
 On
        March
        23, 2005, we issued 19,940 shares of common stock to Professional Contractors
        in
        payment for professional services valued at $55,035.
 On
        March
        28, 2005, we issued 30,000 shares of common stock to B2 Warrant Holders,
        in
        connection with its exercise of warrants.
 On
        March
        28, 2005, we issued 1,544 shares of common stock to Employees for employment
        bonuses valued at $4,600.
 On
        March
        28, 2005, we issued 5,369 shares of common stock to Consultant in payment
        for
        professional services valued at $16,000.
 
 $2.50
        Warrants issued for the first quarter ended March 31, 2005 were as
        follows:
 
 On
        February 15, 2005 the Company issued 300,000 shares of $2.50 warrants to
        accredited investors in connection with an investment.
 On
        February 15, 2005, we issued 30,000 shares of $2.50 warrants to Consultant
        in
        payment for professional services.
 
 $3.05
        Warrants issued for the first quarter ended March 31, 2005 were as
        follows:
 
 On
        February 15, 2005, we issued 1,125,000 shares of $3.05 warrants to Consultants
        in connection to a consulting agreement.
 
 The
        $3.25
        Warrants issued for the first quarter ended March 31, 2005 were as
        follows:
 
 On
        January 20, 2005, we issued 200,000 shares of $3.25 warrants to Consultants
        in
        connection to a consulting agreement.
 On
        February 7, 2005, we issued 1,000,000 shares of $3.25 warrants to Consultants
        in
        connection to a consulting agreement.
 On
        February 15, 2005 the Company issued 300,000 shares of $3.25 warrants to
        accredited investors in connection with an investment.
 On
        February 15, 2005, we issued 30,000 shares of $3.25 warrants to Consultant
        in
        payment for professional services.
 On
        March
        3, 2005, we issued 1,000,000 shares of $3.25 warrants to Lawyers in settlement
        of indebtedness arising from the provision of legal services rendered to
        the
        Company.
 On
        March
        8, 2005, we issued 600,000 shares of $3.25 warrants to Consultants in payment
        for professional services.
 
 The
        $4.00
        Warrants issued for the first quarter ended March 31, 2005 were as
        follows:
 
 On
        February 15, 2005 the Company issued 300,000 shares of $4.00 warrants to
        accredited investors in connection with an investment.
 On
        February 15, 2005, we issued 30,000 shares of $4.00 warrants to Consultant
        in
        payment for professional services.
  The
        $4.05
        Warrants issued for the first quarter ended March 31, 2005 were as
        follows:
 
 On
        February 15, 2005, we issued 562,500 shares of $4.05 warrants to Consultants
        in
        connection to a consulting agreement.
 
 The
        $4.75
        Warrants issued for the first quarter ended March 31, 2005 were as
        follows:
 
 On
        February 15, 2005, we issued 562,500 shares of $4.75 warrants to Consultants
        in
        connection to a consulting agreement.
 
 On
        January 2, 2005, the Company modified its series C warrants to increase the
        $3.25 exercise price per warrant to $5.00 per warrant the expiration date
        of
        June 30, 2007.
 
 Item
                3.
              Defaults
                  Upon Senior Securities
 
 There
        were no defaults upon senior securities.
 
 Item
                4.
              Submission
                  of Matters to a Vote of Security
                  Holders
 
 At
        the Annual Meeting of Shareholders held on June 18, 2005, the following
        proposals were requested and approved as follows:
 
 ( a)
        To
        elect six Directors, Louis Auletta, Renay Cude, Guy Fieri, Gerald Gallagher,
        Steve Schneider and Gary Starr to serve until the next annual meeting and
        until
        their successors are elected and qualified.
 
 For: 18,240,270
              Withheld: 190,296
              Abstain:
                None
  (b)
        To
        ratify the appointment of Odenberg, Ullakko, Muranishi & Co. LLP as the
        Company’s independent
 accountant
 
 For: 18,384,992
              Against: 30,901
              Abstain:
                14,723
  Gerald
        Gallagher resigned in July from the Board of Directors for personal reasons
        and
        has no disputes with the Company.
  
 Item
                5.
              Other
                  Information
 
 There
        is
        no other information to report
 
 Item
        6.  Exhibits
        and Reports on Form 8-K
 
 **A. 
        Exhibits**
  31.1
              Certification of Chief Executive
                  Officer
                  Pursuant to Section 302 of the Sarbanes-Oxley
                  Act.
 31.2
                Certification
                    of Principal Financial and Accounting Officer Pursuant to Section
                    302 of
                    the Sarbanes-Oxley Act.
 32.1
                  Certification
                      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
                      Act
 32.2
                    Certification
                        of Principal Financial and Accounting Officer Pursuant to
                        Section 906 of
                        the Sarbanes-Oxley Act.
 **B.
        Reports on Form 8-K**
 
 On
        May 9,
        2005, the Company filed with the Commission a Current Report on Form 8-K
        to
        report the appointment of Gerald Gallagher to the Board of Directors. Mr.
        Gallagher was also appointed as a member of the Audit Committee of the Board
        of
        Directors. However, Gerald Gallagher resigned in July from the Board of
        Directors for personal reasons and has no disputes with the Company
 
 On
        June
        20, 2005, the Company filed with the Commission a Current Report on Form
        8-K to
        announce the approval to list it’s common stock on the Archipelago Exchange
        (ArcaEx) under the symbol “ZAPZ”. This exchange is a facility of the Pacific
        Exchange and is the nation’s first totally open, all-electronic stock exchange.
        After listing on AcraEx, ZAP will ensure a smooth transition from the Over
        the
        Counter Bulletin Board (OTCBB) where the common stock is currently
        traded.
 
 On
        July
        1, 2005, the Company filed with the Commission a Current Report on Form 8-K
        to
        announce that the Company’s stock ticker symbol currently used on the
        Archipelago Exchange (ArcaEX) will change from “ZAPZ” to “ZP” effective July 7,
        2005. ZAP recently switched from trading on the Over the Counter Bulletin
        Board
        (OTCBB) to the ArcaEx Exchange which is a facility of the Pacific Exchange
        and
        is the nation’s first totally open, all-electronic stock exchange.
 
 On
        August
        9, 2005, the Company filed with the Commission a Current Report on Form 8-K
        to
        announce the appointments of Mr. Matthias Heinze and Ms. Virginia Medeiros
        to
        the Board of Directors of ZAP. At the same time the Company accepted the
        resignation of Mr. Gerald Gallagher from the Board of Directors.
  **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 12, 2005
              By:
              /s/ Steven
                  SchneiderName:Steven
                  SchneiderTitle:
                  Chief Executive Officer (Principal Executive
                  Officer)
 
 
 Dated
                  August 12, 2005
              By:
              /s/ William
                  HartmanName:William
                  HartmanTitle:
                  Chief Financial Officer (Principal Accounting
                  Officer)