UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








Form
10-Q




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


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





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





61,465,768
shares of common stock as of November 12, 2008.













ZAP





FORM
10-Q




INDEX





Page
      No.PART
      I.
            Financial
      InformationItem
      1.
            Condensed
      Consolidated Financial Statements (unaudited) :Condensed
      Consolidated Balance Sheets as of September 30, 2008 unaudited and
      December 31, 2007 (audited).
            1Condensed
      Consolidated Statements of Operations for the Three and Nine Months Ended
      September 30, 2008 and 2007, unaudited.
            2Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended September
      30, 2008 and 2007, unaudited.
            3Notes
      to Condensed Consolidated Financial Statements
            4Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            14Item
      4T.
            Controls
      and Procedures
            28PART
      II.
            Other
      InformationItem
      1.
            Legal
      Proceedings
            29Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            30Item
      3.
            Defaults
      Upon Senior Securities
            31Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            31Item
      5.
            Other
      Information
            31Item
      6.
            Exhibits
            31SIGNATURES
            
            35





- ii
-


Part I.
     FINANCIAL INFORMATION
 Item
1.    Financial Statements
 ZAP AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In
thousands)
 September
      30,
                2008
                Unaudited
              
              
              December
      31,
                2007
                AuditedASSETSCURRENT
      ASSETSCash
      and cash equivalents
              
              $
              996
              
              
              $
              4,339Accounts
      receivable, net of allowance for doubtful accounts of $49 and
      $172
              
              
              538
              
              
              
              373Inventories,
      net
              
              
              2,055
              
              
              
              1,437Prepaid
      non-cash professional fees
              
              
              179
              
              
              
              283Other
      prepaid expenses and other current assets
              
              
              1,195
              
              
              
              747Total
      current assets
              
              
              4,963
              
              
              
              7,179Property,
      and equipment, net of accumulated depreciation
              
              
              4,300
              
              
              
              4,471OTHER
      ASSETSPatents
      and trademarks, net
              
              
              2
              
              
              
              10Prepaid
      non-cash professional fees, less current portion
              
              
              109
              
              
              
              82Deferred
      offering costs
              
              
              —
              
              
              
              20Deposits
      and other assets
              
              
              294
              
              
              
              176Total
      Other Assets
              
              
              405
              
              
              
              288TOTAL
      ASSETS
              
              $
              9,668
              
              
              $
              11,938LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESCurrent
      portion of secured convertible note
              
              $
              —
              
              
              $
              1048%
      Senior convertible notes, net of discount of  $136 in
      2007
              
              
              475
              
              
              
              546Accounts
      payable
              
              
              244
              
              
              
              128Notes
      Payable Short Term
              
              
              1,917
              
              
              
              —Accrued
      liabilities
              
              
              1,466
              
              
              
              2,259Deferred
      revenue
              
              
              626
              
              
              
              752Total
      Current Liabilities
              
              
              4,728
              
              
              
              3,789LONG-TERM
      LIABILITIESSecured
      convertible note, less current portion
              
              
              —
              
              
              
              1,724Long
      term note payable
              
              
              1,774
              
              
              
              —Total
      liabilities
              
              
              6,502
              
              
              
              5,513SHAREHOLDERS’
      EQUITYCommon
      stock, authorized 400 million shares; no par value; 60,688,927 and
      57,478,158 shares and shares issued and outstanding  at
      September 30, 2008 and December 31, 2007, respectively
              
              
              125,384
              
              
              
              122,672Common
      stock issued as loan collateral
              
              
              —
              
              
              
              (1,549
              )Accumulated
      deficit
              
              
              (122,218
              )
              
              
              (114,698
              )Total
      shareholders’ equity
              
              
              3,166
              
              
              
              6,425Total
      liabilities and shareholders’ equity
              
              $
              9,668
              
              
              $
              11,938
 
 See
accompanying notes to condensed consolidated financial statements
(unaudited)
 
 - 1
-
 ZAP
AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 (Thousands,
except share amounts)
 
  Three
      Months
                ended
                September
      30,
                2008
              
              
              Three
      Months
                ended
                September
      30,
                2007
              
              
              Nine
      Months
                ended
                September
      30,
                2008
              
              
              NineMonths
                ended
                September
      30,
                2007NET
      SALES
              
              $
              3,062
              
              
              $
              2,019
              
              
              $
              6,041
              
              
              $
              4,561COST
      OF GOODS SOLD
              
              
              2,692
              
              
              
              1,476
              
              
              
              5,354
              
              
              
              3,748GROSS
      PROFIT
              
              
              370
              
              
              
              543
              
              
              
              687
              
              
              
              813OPERATING
      EXPENSESSales
      and marketing
              
              
              438
              
              
              
              519
              
              
              
              1,240
              
              
              
              1,154General
      and administrative (non-cash stock-based compensation of $1.5million and
      $2.8million and $4.1million and $17.3million for the three and nine months
      ended September 30, 2008 and 2007, respectively)
              
              
              2,224
              
              
              
              3,525
              
              
              
              6,133
              
              
              
              20,313Research
      and development
              
              
              138
              
              
              
              23
              
              
              
              456
              
              
              
              4122,800
              
              
              
              4,067
              
              
              
              7,829
              
              
              
              21,879LOSS
      FROM OPERATIONS
              
              
              (2,430
              )
              
              
              (3,524
              )
              
              
              (7,142
              )
              
              
              (21,066
              )OTHER
      INCOME (EXPENSE)Interest
      expense, net
              
              
              (54
              )
              
              
              (210
              )
              
              
              (284
              )
              
              
              (810
              )Other
      Income( expense)
              
              
              1
              
              
              
              (10
              )
              
              
              (42
              )
              
              
              (11
              )(53
              )
              
              
              (220
              )
              
              
              (326
              )
              
              
              (821
              )LOSS
      BEFORE INCOME TAXES
              
              $
              (2,483
              )
              
              $
              (3,744
              )
              
              $
              (7,468
              )
              
              $
              (21,887
              )PROVISION
      FOR INCOME TAXES
              
              
              —
              
              
              
              —
              
              
              
              (4
              )
              
              
              (4
              )NET
      LOSS
              
              $
              (2,483
              )
              
              $
              (3,744
              )
              
              $
              (7,472
              )
              
              $
              (21,891
              )NET
      LOSS PER COMMON SHAREBASIC
      AND DILUTED
              
              $
              (0.04
              )
              
              $
              (0.08
              )
              
              $
              (0.13
              )
              
              $
              (0.49
              )WEIGHTED
      AVERAGE OF COMMON SHARES OUTSTANDING --BASIC
      AND DILUTED
              
              
              59,372
              
              
              
              46,957
              
              
              
              58,665
              
              
              
              44,683
 
  See
accompanying notes to condensed consolidated financial statements
(unaudited).
  - 2
-
 ZAP
AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 (In thousands)
 Nine
      months ended September 30,2008
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
              
              $
              (7,472
              )
              
              $
              (21,891
              )Items
      not requiring the use of cash:Amortization
      of note discount and deferred offering costs
              
              
              156
              
              
              
              332Stock-based
      compensation for consulting and other services
              
              
              2,679
              
              
              
              3,019Stock-based
      employee compensation
              
              
              1,381
              
              
              
              14,291Stock
      based compensation for interest and registration penalties
              
              
              —
              
              
              
              314Depreciation
      and amortization
              
              
              199
              
              
              
              251Allowance
      for doubtful accounts
              
              
              (123
              )
              
              
              6Changes
      in other items affecting operations:Receivables
              
              
              (42
              )
              
              
              (719
              )Inventories
              
              
              (618
              )
              
              
              466Prepaid
      expenses and other assets
              
              
              (450
              )
              
              
              (71
              )Other
      assets
              
              
              (207
              )
              
              
              —Accounts
      payable
              
              
              116
              
              
              
              (98
              )Accrued
      liabilities
              
              
              (791
              )
              
              
              391Deferred
      revenue
              
              
              (126
              )
              
              
              (427
              )Net
      cash used for operating activities
              
              
              (5,298
              )
              
              
              (4,136
              )CASH
      FLOWS FROM INVESTING ACTIVITESPurchase
      of equipment
              
              
              (236
              )
              
              
              (20
              )Proceeds
      from sale of equipment
              
              
              176
              
              
              
              —Net
      cash provided by ( used for) investing activities
              
              
              (60
              )
              
              
              (20
              )CASH
      FLOWS FROM FINANCING ACTIVITIESIssuance
      of common stock and warrants, net of offering costs
              
              
              —
              
              
              
              1,640Pay-off
      of Convertible debt
              
              
              (431
              )
              
              
              —Re-issuance
      of convertible debt
              
              
              475
              
              
              
              —Proceeds
      from short-term debt
              
              
              1,917
              
              
              
              1,185Repayments
      of long-term debt
              
              
              54
              
              
              
              (90
              )Net
      cash provided by (used for) financing activities
              
              
              2,015
              
              
              
              2,735NET  DECREASE
      IN CASH AND CASH EQUIVALENTS
              
              
              (3,343
              )
              
              
              (1,421
              )CASH AND CASH EQUIVALENTS,beginning of period
              
              
              4,339
              
              
              
              2,160CASH AND CASH EQUIVALENTS,end of period
              
              $
              996
              
              
              $
              739
  
 See
accompanying notes to condensed consolidated financial statements
(unaudited)
 
 - 3
-
 ZAP
AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 NOTE
1   BASIS OF PRESENTATION
  The
accompanying unaudited condensed financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (“GAAP”) for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by U.S. GAAP for complete financial statements. All
adjustments (all of which are of a normal recurring nature) considered necessary
for a fair presentation have been included. Operating results for the three and
nine months ended September 30, 2008 are not indicative of the results that may
be expected for the year ending December 31, 2008 or for any other future
period. These condensed consolidated financial statements and the notes thereto
should be read in conjunction with the audited financial statements and notes
thereto included in our Annual Report on Form 10-KSB for the year ended December
31, 2007 filed with the Securities and Exchange Commission (the “SEC”) on April
14, 2008 (our “2007 10-K”).
 
 We face
intense competition, which could cause us to lose market share. Changes in the
market for electrical or fuel-efficient vehicles could cause our products to
become obsolete or lose popularity. We cannot assure you that growth in the
electric vehicle industry or fuel-efficient cars will continue and our business
may suffer if growth in the electric vehicle industry or fuel-efficient market
decreases or if we are unable to maintain the pace of industry demands. We may
be unable to keep up with changes in electric vehicle or fuel-efficient
technology and, as a result, may suffer a decline in our competitive position.
The failure of certain key suppliers to provide us with components could have a
severe and negative impact upon our business. Product liability or other claims
could have a material adverse effect on our business. We may not be able to
protect our Internet address. Our success is heavily dependent upon protecting
our intellectual property rights.
 
 NOTE
2   SIGNIFICANT ACCOUNTING POLICIES
 
 NET
INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
 
 Basic and
diluted net income (loss) per common share is based on net income (loss) for the
relevant period, divided by the weighted average number of common shares
outstanding in each period. Diluted net income per share gives effect to all
potentially dilutive common shares outstanding during the period such as
options, warrants, convertible preferred stock, and contingently issuable
shares. Potentially dilutive securities associated with stock options, warrants
and convertible debt have been excluded from the diluted net loss per share
amounts, since the effect of these securities would be anti-dilutive. At
September 30, 2008, these potentially dilutive securities include options for
12.3 million shares of common stock, warrants for 47.8 million shares of common
stock and debt of $475,000 convertible into shares of common stock on
November 8, 2008, the maturity date at 90% of the closing market price on that
day.
 As on
November 13, 2008, the Company is in discussion with the note holder to either
convert the note to equity or extend the maturity date of the debt.
 
 PRINCIPLES OF CONSOLIDATION -The accounts of the Company and its consolidated subsidiaries are
included in the condensed consolidated financial statements after elimination of
significant inter-company accounts and transactions.
 
 
 - 4
-
 REVENUE
RECOGNITION
 The
Company records revenues only upon the occurrence of all of the following
conditions:
 
 -The
Company has received a binding purchase order or similar commitment from the
customer or distributor authorized by a representative empowered to commit the
purchaser (evidence of a sale);
 
 -The
purchase price has been fixed, based on the terms of the purchase
order;
 
 -The
Company has delivered the product from its distribution center to a common
carrier acceptable to the purchaser. The Company’s customary shipping terms are
FOB shipping point; and
 
 -The
Company deems the collection of the amount invoiced probable.
 
 The
Company provides no price protection. Product sales are net of promotional
discounts, rebates and return allowances.
  The
Company does not recognize sales taxes collected from customers as
revenue.
 
 DEFERRED REVENUE -One of the
Company’s subsidiaries, Voltage Vehicles, sold licenses to auto dealerships
under the ZAP name. The license agreements call for the licensee to purchase a
minimum number of vehicles from ZAP each year.  As the Company
collects monies related to these agreements, it is classified as deferred
revenue until the Company begins delivering a substantial number of vehicles to
these dealerships on a regular basis over the terms of the agreement. The
Company has recognized approximately $10,700 and $114,700 of license revenue and
other adjustments for the three and nine month periods ended September 30, 2008,
resulting in an ending balance of $626,000.
 
 USE OF ESTIMATES -The
preparation of financial statements in accordance with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the Company’s consolidated financial
statements and accompanying notes.  Estimates were made relating to
the useful lives of fixed assets, valuation allowances, impairment of assets and
valuation of stock-based compensation and contingencies. Actual results could
differ materially from those estimates.
 
 ACCOUNTS RECEIVABLE- The
Company performs ongoing credit evaluations of its customers’ financial
condition and generally requires no collateral from its customers. The Company
maintains allowances for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. If the financial
condition of the Company’s customers should deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
 
 INVENTORY- The Company
maintains reserves for estimated excess, obsolete and damaged inventory based on
projected future shipments using historical selling rates, and taking into
account market conditions, inventory on-hand, purchase commitments, product
development plans and life expectancy, and competitive factors. If markets for
the Company’s products and corresponding demand were to decline, then additional
reserves may be deemed necessary.  Inventories consist primarily of
vehicles, both gas and electric, parts and supplies, and finished goods and are
carried at the lower of cost (first-in, first-out method) or
market.
 
 RECOVERY OF GOODWILL AND LONG-LIVED
ASSETS - The Company evaluates the recovery of its goodwill and
long-lived assets at least annually by analyzing its operating results and
considering significant events or changes in the business
environment.
  STOCK ISSUED AS COLLATERAL –
The stock was returned to the Company in January, 2008 and
cancelled.
 
 WARRANTY - The Company
provides 30 to 90 day warranties on its personal electric products and records
the estimated cost of the product warranties at the date of sale. The estimated
cost of warranties has
  - 5
-
 not been
significant to date. Should actual failure rates and material usage differ from
our estimates, revisions to the warranty obligation may be
required.
 
 The
Company has provided a 6 month warranty for the Xebra® vehicles. At September
30, 2008, the Company has recorded a warranty liability for $144,000 for
estimated repair costs, up from $94,000 at December 31, 2007.
 
 CASH AND CASH EQUIVALENTS -
The Company considers highly liquid investments with maturities from the date of
purchase of three months or less to be cash equivalents.
 
 NOTE
3   STOCK-BASED COMPENSATION
  We have
stock compensation plans for employees and directors, which are described in
Note 8 to our consolidated financial statements in our 2007 Annual Report on
Form 10-KSB as filed with the SEC on April 14, 2008. We recognize the
stock-based compensation expense over the requisite service period of the
individual grantees, which generally equals the vesting period. All of our
stock-based compensation is accounted for as an equity instrument.
  On
January 26, 2007, the Company extended the expiration date of 21.8 million
warrants previously issued to employees and officers by five years to July 1,
2012, with new exercise prices ranging from $1.00 to $1.20. As a result of the
modification of the warrants, the Company determined the fair value of the
warrants immediately prior to and after the modification. The incremental
difference in value resulted in the recognition of $11.7 million in non-cash
compensation expense during the first quarter of 2007. The Company valued the
modified warrants at $0.57 per share using a Black-Scholes option pricing model
with the following assumptions: risk free interest rate of 4.98%; dividend rate
of 0.00%; volatility of 123%, and expected term of 2.7 years.
 
 Under the
provisions of SFAS 123R, we recorded $ 536,000 of stock compensation, net
of estimated forfeitures, in  general and administrative expenses, in
our unaudited condensed consolidated statement of operations for the three
months ended September 30, 2008 . We utilized the Black-Scholes valuation model
for estimating the fair value of the stock compensation granted after the
adoption of SFAS 123R, with the following range of assumptions.
 
 Three
      Months Ended
                September
      30, 2008Expected
      Dividend yield
              
              0%Expected
      volatility
              
              
              109.68-153.98Risk-free
      interest rate
              
              
              2.64-3.31%Expected
      life (in years) from grant date
              
              
              2.5
      to 6.00Exercise
      price
              
              
              $0.50
      to$1.26
 
 The
dividend yield of zero is based on the fact that we have never paid cash
dividends and have no present intention to pay cash dividends. Expected
volatility is based upon historical volatility of our common stock over the
period commensurate with the expected life of the options. The risk-free
interest rate is derived from the average U.S. Treasury Constant Maturity Rate
during the period, which approximates the rate in effect at the time of the
grant. Our unvested options vest over the next three years. Our options
generally have a 10-year term. The expected term is calculated using the
simplified method prescribed by the SEC’s Staff Accounting Bulletin 107. Based
on the above assumptions, the weighted-average fair values of the options
granted under the stock option plans for the three and six months ended
September 30, 2008 was $0.84 and $0.97, respectively.  We estimate
forfeitures of employee stock options and recognize compensation cost only for
those awards expected to vest. Forfeiture rates are determined based on
historical experience.  Estimated forfeitures are adjusted to actual
forfeiture experience as needed.
  - 6
-
 A summary
of options under the Company’s stock option plans from December 31, 2007 through
September 30, 2008 is as follows:
  Number
      of
                Shares
              
              Weighted
                Average
                Exercise
      Price
              
              Weighted
                Average
                Remaining
                Contractual
                Term
                (in
      years)
              Aggregate
                Intrinsic
                ValueOutstanding
      December 31, 2007
              11,276,000
              
              $
              1.03
              
              8.32Options
      granted under the plan
              104,000
              
              $
              0.84
              
              9.75
              —Options
      exercised
              —
              
              
              —
              
              —
              —Options
      forfeited and expired
              —
              
              
              —
              
              —
              —Outstanding
      March 31, 2008
              11,380,000
              
              $
              1.03
              
              8.33Options
      granted under the plan
              72,000
              
              $
              0.97
              
              10.0
              —Options
      exercised
              (38,100)
              
              $
              0.29Options
      forfeited and expired
              (33,000)
              
              
              —
              
              —
              —Outstanding
      June 30, 2008
              11,380,900
              
              $
              1.03
              
              8.39Options
      granted under the plan
              904,500
              
              $
              0.78
              
              10.0Options
      exercised
              (137,400)
              
              $
              0.45Options
      forfeited and expired
              -
              
              
              —
              
              —
              —Outstanding
      September 30, 2008
              12,148,000
              
              $
              1.00
              
              8.41
  Aggregate
intrinsic value is the sum of the amounts by which the quoted market price of
our stock exceeded the exercise price of the options at September 30, 2008, for
those options for which the quoted market price was in excess of the exercise
price (“in-the-money-options”). There were no options in the money at September
30, 2008.
 
 As of
September 30, 2008, total compensation cost of unvested employee stock options
is $1.1 million. This cost is expected to be recognized through September 2011.
We recorded no income tax benefits for stock-based compensation expense
arrangements for the nine months ended September 30, 2008, as we have cumulative
operating losses, for which a valuation allowance has been
established.
 
 NOTE 4   INVENTORIES, NET-Inventories at September 30, 2008 are summarized as follows
(thousands):
 
 Vehicles
      - conventional
              
              $
              475Advanced
      transportation vehicles
              
              
              906Parts
      and supplies
              
              
              825Finished
      goods
              
              
              371$
              2,577Less
      - inventory reserve
              
              $
              (522)$
              2,055
 
 
 - 7
-
 NOTE
5    SHORT-TERM DEBT
 
 As of
September 30, 2008 the Company had borrowed $1.5 million on the note with
maturity dates of December 2008 and January of 2009. The funds were used for
inventory purchases. The Company is currently in discussions to extend the
maturities until a later period In addition, the Company borrowed $410,000 from
Portable Energy LLC which is due on demand. Thus, the total short-term notes
payable at September 30, 2008 is $1,910,000. On November 10, 2008 the Company
was advanced another $800,000 on the note which has a maturity date of March 11,
2009. The funds were also used to purchase inventory. Repayment of an Inventory
Advance is due four (4) months after the date of such Advance. Repayment of a
Working Capital Advance is due six (6) months after the date of such Advance.
The repayment term maybe extended upon written request of the Company and at the
Lender’s sole discretion.
 
 NOTE
6    LONG-TERM DEBT
 
 PROMISSORY
NOTE
  On July
30, 2008, ZAP (the “Company”) executed a Promissory Note for a $10 million
credit line (the “Note”) and a Deed of Trust, Assignment of Leases and Rents and
Security Agreement and Fixture Filing (the “Security Agreement”), both in favor
of Al Yousuf LLC (the “Lender”). The Al Yousuf Group is a Dubai-based
conglomerate and a major shareholder of ZAP. The President of Al Yousuf LLC is
Mr. Eqbal Al Yousuf who is also the Chairman of the Board of ZAP.
  The
following description is a summary of the material terms and conditions of both
the Note and the Security Agreement.
 
 The
maximum principal loan under the Note is $10,000,000. The initial outstanding
principal sum advanced to the Company is $1,760,000. This advance was used to
pay-off the existing secured note payable on the building which was held by an
outside party. The Note matures February 28, 2010. Interest only payments are
due under the Note monthly commencing August 30, 2008. Other advances shall be
for (i) the purposes of inventory from June 1, 2008 consistent with the
currently applicable budget of the Company, as approved by its board of
directors (an “Inventory Advance”) or (ii) general working capital to be used
consistently with the Company’s budget (a “Working Capital Advance”). The
interest rate shall accrue daily at a rate per annum equal to the greater of (i)
one month LIBOR plus 3% per annum and (ii) eight percent (8.00%) per annum,
commencing on the date of the Note.
  The Note
matures February 28, 2010. Interest only payments are due under the Note monthly
commencing August 30, 2008. Repayment of an Inventory Advance is due four (4)
months after the date of such Advance. Repayment of a Working Capital Advance is
due six (6) months after the date of such Advance. The repayment term may be
extended upon written request of the Company and at the Lender’s sole
discretion. The Note is pre-payable in whole or in part without penalty and upon
30 days’ written notice to Lender. All principal and interest due under the Note
is secured by the corporate headquarters building in Santa Rosa, California.
  The Note
contains customary Events of Default, including but not limited to the
following: (i) failure by the Company to make any scheduled payment of
principal, interest or other amounts due under the Note, (ii) failure to pay-off
the Note upon the Maturity Date, (iii) any representation or warranty made in
the Loan Documents by the Company being found false in any material respect,
(iv) consent by the Company to appoint a conservator or liquidator in a
bankruptcy proceeding relating to the Company or all or substantially all of its
assets and (v) failure of the Company to maintain insurance required pursuant to
the Loan Documents. Upon the occurrence of an Event of Default, the Note shall
become due and payable and the interest rate shall increase by 3.00% per annum.
All principal and interest due under the Note is secured by the Company’s
corporate headquarters building.
 
 - 8
-
 LONG TERM
LESS CURRENT PORTION SECURED CONVERTIBLE DEBT
 
 On July
30, 2008 the Company was also advanced $1.7 million on the promissory note with
Al Yousuf  to pay-off the existing secured note on the Company’s
corporate headquarters building which was previously held by an outside
party. The long-term Note matures February 28, 2010. Interest only payments
are due under the Note monthly commencing August 30, 2008. The note may be
extended at the sole discretion of the lender. The interest rate shall accrue
daily at a rate per annum equal to the greater of (i) one month LIBOR plus 3%
per annum and (ii) eight percent (8.00%) per annum, commencing on the date of
the Note.
 
 SHORT-TERM
CONVERTIBLE DEBT
 
 8% Senior
Convertible Notes
 
 On
December 5, 2006, when the market price of the Company’s common stock was $0.89
per share, the Company entered into a Securities Purchase Agreement with three
institutional and accredited investors or purchasers pursuant to which the
Company sold to the purchasers $1.5 million aggregate principal amount of 8%
senior convertible notes due December 5, 2008 (the “Notes due 2008”) and
warrants to purchase 450,000 shares of common stock of the Company (the “Initial
Warrants”) in a private placement. The Notes due 2008 were originally
convertible at $1.00 per share (the “Conversion Price”) into 1,500,000 shares of
the Company’s common stock, subject to anti-dilution and other adjustments. The
Initial Warrants, each immediately exercisable and expiring on December 5, 2011,
are exercisable at $1.10 per share, subject to anti-dilution and other
adjustments.
 
 On
February 20, 2007, when the market price of the Company’s common stock was $1.08
per share, the Company entered into a Purchase and Amendment Agreement (the
“Amendment”), amending the Securities Purchase Agreement entered into by the
Company on December 5, 2006 (the “Original Agreement” and as amended by the
Amendment, the “Agreement”), with several institutional and accredited investors
or purchasers pursuant to which the Company sold to the purchasers $1.2 million
aggregate principal amount of 8% senior convertible notes due February 2009 (the
“Notes due 2009” and with the Notes due 2008, the “Notes”) and warrants to
purchase 360,000 shares of the common stock of the Company (the “Additional
Warrants” and with the Initial Warrants, the “Warrants”), in a private
placement. The transaction closed on February 22, 2007 (the “February 2007
financing”). The Notes due 2009 were originally convertible at $1.00 per share
into 1,200,000 shares of the Company’s common stock, subject to anti-dilution
and other adjustments.
 
 On June
26, 2007, the Company entered into an Amendment Agreement (the “Second
Amendment”) with the purchasers to adjust certain provisions of the Notes and
Initial Warrants as a consequence of selling shares to a third party investor
for per share consideration less than the conversion price of the Notes and
exercise price of the Initial Warrants. As a result, the conversion price of the
Notes was reduced to $0.72 per share.
 
 On May 7,
2008, the Company entered into a settlement with Gemini Master Fund ,LTD and
Gemini Strategies, LLC, the holders of the  8% Senior Convertible
Notes. The agreement reached requires the termination and cancellation of the
notes in exchange for $475,000 in cash and 100,000 common shares of ZAP common
stock. In connection with the aforementioned agreement ZAP has obtained the
funds necessary for the payment of $475,000 through a note payable to Al Yousuf
LLC. Eqbal Al Yousuf, who is the Chairman of the Board of ZAP, is also the
President of Al Yousuf LLC.
 
 The note
bears interest at the greater of 6 month LIBOR plus 250 basis points or 6% per
annum and may be converted in whole or in part into securities of the Company
November of 2008 in accordance with the terms of the note.  The price
was agreed to be at 90% of the closing market price on the date selected for
conversion. As on November 13, 2008, the Company is in discussion with the note
holder to either convert the note to equity or extend the maturity date of the
debt.
 
 NOTE
7   INCOME TAXES
  We
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109,or FIN 48, on
January 1, 2007. Upon adoption of FIN 48, we commenced a review of our
tax position taken in our tax returns that remain subject to examination. Based
  - 9
-
 upon our
review, we do not believe we have any unrecognized tax benefits or that there is
a material impact on our financial condition or results of operations as a
result of implementing FIN 48.
  We file
income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. We are subject to U.S. federal or state income tax
examinations by tax authorities for all years in which we reported net operating
losses that are being carried forward. We do not believe there will be any
material changes in our unrecognized tax positions over the next 12
months.
  We
recognize interest and penalties accrued on any unrecognized tax benefits as a
component of income tax expense. As of the date of adoption of FIN 48, we did
not have any accrued interest or penalties associated with any unrecognized tax
benefits, nor was any interest expense recognized for the period ended September
30, 2008.
  NOTE
8    SHAREHOLDERS’ EQUITY
 
 ZAP’s
common stock is quoted on the OTC Bulletin Board under the symbol “ZAAP.
OB”
  NOTE
9    RELATED PARTY TRANSACTIONS
  Rental
agreements
 
 The
Company rents office space, land and warehouse space from Mr. Steven Schneider,
its CEO and a major shareholder. These properties are used to operate the car
outlet and to store inventory. Rental expense was approximately $63,000 for both
the nine months ended September 30, 2008 and 2007.
 
 Financing provided to
the Company by Al-Yousuf LLC
 
 The
company entered into various financing arrangements during the second and third
quarter 2008 with The Al Yousuf Group who is a Dubai-based conglomerate and
a major shareholder of ZAP. The President of Al Yousuf LLC is Mr. Eqbal Al
Yousuf, who is also the Chairman of the Board of ZAP.
  On July
30, 2008 we received a $10 million financing arrangement from the Al Yousuf
Group, a Dubai-based conglomerate to provide future working capital to ZAP and
help meet the growing demand for ZAP electric vehicles. The financing
arrangement allows for advances by ZAP over the next few years commencing
on the date of the Note. The initial outstanding principal sum advanced to the
Company is $1,760,000. This advance was used to pay-off the existing secured
note payable on the building. The Note matures February 28, 2010. Interest only
payments are due under the Note monthly commencing August 30, 2008. All
principal and interest due under the Note is secured by the corporate
headquarters building in Santa Rosa, California.
 
 During
the third quarter of 2008, the Company had borrowed another  $1.5
million on the note with maturity dates of December 2008 and January of 2009.
The funds were used for inventory purchases. The Company is currently in
discussions to extend the maturities until a later period. On November 10, 2008
the Company was advanced $800,000 on the note which has a maturity date of March
11, 2009. The funds were also used to purchase inventory. The total advances on
the note payable as of September 30, 2008 is $3.2 million. Thus as of November
13, 2008, the Company has drawn $4 million under the financing
arrangement.
 
 On May 7,
2008, the Company entered into a settlement with Gemini Master Fund ,LTD and
Gemini Strategies, LLC, the holders of the  8% Senior Convertible
Notes. The agreement reached requires the termination and cancellation of the
notes in exchange for $475,000 in cash and 100,000 shares of ZAP common stock.
In connection with the aforementioned agreement ZAP has obtained the funds
necessary for the payment of $475,000 through a note payable to Al
Yousuf LLC. The note bears interest at the greater of 6 month LIBOR plus
250 basis points or 6% per annum and may be converted in whole or in part into
securities of the Company November of 2008 in accordance with the terms of the
note.  The price was agreed to be at 90% of the closing market price
on the date selected for conversion. As on November 13,
  - 10
-
 2008, the
Company is in discussion with the note holder to either convert the note to
equity or extend the maturity date of the debt.
 
 Sale of Portable Energy
Product Line/Investment in Portable Energy LLC
 
 We
reported in our quarterly report as of March 31, 2008 filed on May 15, 2008,
that we signed a draft agreement with Al-Yousuf LLC for the sale of our portable
energy product line for $1,000,000 in exchange for a 50% ownership in a new
company. However, no gain will be recognized on the transaction with Al-Yousuf
LLC since no sale took place. There was a misunderstanding with Mr. Al-Yousuf
our investor from Dubai  and Chairman of our Board of Directors. When
the funds were received in June of 2008, Mr. Al-Yousuf  indicated that
he was not buying 50 % of the portable energy product line from ZAP but rather
purchasing a 50 % interest in the newly formed company called Portable Energy
LLC. We transferred the assets of our Portable Energy Product Line at our
historical cost of approximately $75,000 in June of 2008 to a newly formed
company called  Portable Energy LLC in exchange for a 50% ownership
interest. The $1 million in funds received June 13, 2008 from Al-Yousuf were
also transferred to the new company in exchange for a 50 % interest for Al
Yousuf.
 
 Consulting
Agreement
 
 On
September 1, 2007, the Company and Mr. Albert Lam, who became a director of the
Company, in October 2007 entered into an Independent Consulting Agreement
(“Consulting Agreement”).  Pursuant to the Consulting Agreement, Mr.
Lam was to consult and advise the Company in the areas of Chinese manufacturing,
facilities, tooling, financing, and contract negotiations on an independent
consultant basis.  Mr. Lam’s compensation under the Consulting
Agreement was: 200,000 shares of the Company’s common stock valued at $194,000,
issued under the Company’s 2007 Consultant Stock Plan (the “Plan”); a warrant to
purchase 200,000 shares of the Company’s common stock valued at $131,000,
expiring five years after grant, with an exercise price of $1.00 per share,
issued under the Plan; and a warrant to purchase 1,000,000 shares of the
Company’s common stock valued at $654,000, expiring five years after grant, with
an exercise price of $1.00 per share and a net exercise provision.
 
 The
Consulting Agreement expired on September 30, 2007, and expense totaling
$979,000 related to the consulting agreement was recorded in the third quarter
of 2007.
 
 The
Company also paid Mr. Lam $65,000 in the first quarter of 2008 for consulting
services. In addition his travel expenses were also reimbursed.
 
 In
October of 2008, Mr. Lam resigned as a Director of ZAP, he had no disputes with
the Company.
 
 NOTE 10 SEGMENT
REPORTING
 
 In
accordance with the provisions of SFAS No. 131, the Company has identified four
reportable segments consisting of sales and marketing of electronic consumer
products, the Zappy 3 scooters and ATV’s, Rechargeable portable energy products,
operation of a retail car outlet and sales to and sales of advanced technology
vehicles for the Xebra (TM) electric vehicles.  These segments are
strategic business units that offer different services.  They are
managed separately because each business requires different resources and
strategies.  The Company’s chief operating decision making group,
which is comprised of the Chief Executive Officer and the senior executives of
each of ZAP’s strategic segments, regularly evaluate the financial information
about these segments in deciding how to allocate resources and in assessing
performance.  The performance of each segment is measured based on its
profit or loss from operations before income taxes.
 
 Electric
Consumer products and corporate expenses represent sales of our ZAPPY 3 which is
a three wheeled electric scooter and the overall corporate expenses for the
company. Many of these expenses relate to the overall development of our core
business, Electric Consumer Products.
 
 - 11
-
 Portable
Energy products represent the sales activity of “Recharge-it-all Batteries”
which are battery packs used to power or charge a wide range of mobile
electronics as cellar phones, digital cameras and laptop computers. This product
line was transferred to a separate company in exchange for a 50%
interest.
 
 Car
outlet represents the activity of a retail outlet that sells pre-owned
conventional vehicles and advanced technology vehicles, now the Xebra a
three-wheeled plug in electric vehicle to retail customers.
 
 Advanced
Technology Vehicles represents the sales activity of advanced technology
vehicles, now the Xebra a three-wheeled plug in electric vehicle to ZAP Dealers
through-out the U.S.
  SEGMENT
REPORTING
  ElectronicConsumerProducts
      and
              
              
              
              
              
              AdvancedCorporate
              
              
              Car
              
              
              TechnologyExpenses
              
              
              Outlet
              
              
              Vehicles
              
              
              TotalsFor
      the 3 months ended of September 30, 2008:Net
      Sales
              
              
              364
              
              
              
              528
              
              
              
              2,170
              
              
              
              3,062Gross
      profit (Loss)
              
              
              (48
              )
              
              
              156
              
              
              
              262
              
              
              
              370—Net
      Income (Loss)
              
              
              (2,589
              )
              
              
              42
              
              
              
              64
              
              
              
              (2,483
              )Total
      Assets
              
              
              7,316
              
              
              
              537
              
              
              
              1,815
              
              
              
              9,668For
      the 3 months ended of September 30, 2007:Net
      Sales
              
              
              890
              
              
              
              356
              
              
              
              773
              
              
              
              2,019Gross
      profit (Loss)
              
              
              193
              
              
              
              77
              
              
              
              273
              
              
              
              543—Net
      Income (Loss)
              
              
              (3,897
              )
              
              
              (24
              )
              
              
              177
              
              
              
              (3,744
              )Total
      Assets
              
              
              7,428
              
              
              
              460
              
              
              
              1,382
              
              
              
              9,270For
      the 9 months ended of September 30, 2008:Net
      Sales
              
              
              611
              
              
              
              1,250
              
              
              
              4,180
              
              
              
              6,041Gross
      profit (Loss)
              
              
              (126
              )
              
              
              181
              
              
              
              632
              
              
              
              687—Net
      Income (Loss)
              
              
              (7,279
              )
              
              
              (146
              )
              
              
              (43
              )
              
              
              (7,468
              )Total
      Assets
              
              
              7,316
              
              
              
              537
              
              
              
              1,815
              
              
              
              9,668For
      the 9 months ended of September 30, 2007:Net
      Sales
              
              
              1,352
              
              
              
              1,013
              
              
              
              2,196
              
              
              
              4,561Gross
      profit (Loss)
              
              
              265
              
              
              
              195
              
              
              
              353
              
              
              
              813—Net
      Income (Loss)
              
              
              (21,725
              )
              
              
              (129
              )
              
              
              (33
              )
              
              
              (21,887
              )Total
      Assets
              
              
              7,428
              
              
              
              460
              
              
              
              1,382
              
              
              
              9,270
 
 - 12
-
 NOTE
11 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 Nine
      Months Ended
                September
      30,
                (in
      thousands)2008
              
              
              2007Cash
      paid during the period for interest
              
              $
              —
              
              
              $
              16Cash
      paid during the period for income taxes
              
              $
              4
              
              
              $
              4Non-cash
      investing and financing activities:Stock
      and warrants issued for:Re-payment
      of 8% Senior debt
              
              $
              431
              
              
              $
              —
        
 - 13
-
 ITEM
2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
 
 THIS
QUARTERLY REPORT OF FORM 10-Q, INCLUDING THE FOLLOWING MANAGEMENT’S DISCUSSION
AND ANALYSIS, AND OTHER REPORTS FILED BY THE REGISTRANT FROM TIME TO TIME WITH
THE SECURITIES AND EXCHANGE COMMISSION (COLLECTIVELY THE “FILINGS”) CONTAIN
FORWARD-LOOKING STATEMENTS WHICH ARE INTENDED TO CONVEY OUR EXPECTATIONS OR
PREDICTIONS REGARDING THE OCCURRENCE OF POSSIBLE FUTURE EVENTS OR THE EXISTENCE
OF TRENDS AND FACTORS THAT MAY IMPACT OUR FUTURE PLANS AND OPERATING RESULTS.
THESE FORWARD-LOOKING STATEMENTS ARE DERIVED, IN PART, FROM VARIOUS ASSUMPTIONS
AND ANALYSES WE HAVE MADE IN THE CONTEXT OF OUR CURRENT BUSINESS PLAN AND
INFORMATION CURRENTLY AVAILABLE TO US AND IN LIGHT OF OUR EXPERIENCE AND
PERCEPTIONS OF HISTORICAL TRENDS, CURRENT CONDITIONS AND EXPECTED FUTURE
DEVELOPMENTS AND OTHER FACTORS WE BELIEVE TO BE APPROPRIATE IN THE
CIRCUMSTANCES. YOU CAN GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS THROUGH
WORDS AND PHRASES SUCH AS “SEEK”, “ANTICIPATE”, “BELIEVE”, “ESTIMATE”, “EXPECT”,
“INTEND”, “PLAN”, “BUDGET”, “PROJECT”, “MAY BE”, “MAY CONTINUE”, “MAY LIKELY
RESULT”, AND SIMILAR EXPRESSIONS. WHEN READING ANY FORWARD-LOOKING STATEMENT YOU
SHOULD REMAIN MINDFUL THAT ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY
UNCERTAIN AS THEY ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS CONCERNING
FUTURE EVENTS OR FUTURE PERFORMANCE OF OUR COMPANY, AND ARE SUBJECT TO RISKS,
UNCERTAINTIES, ASSUMPTIONS AND OTHER FACTORS RELATING TO OUR INDUSTRY AND
RESULTS OF OPERATIONS, INCLUDING BUT NOT LIMITED TO THE FOLLOWING
FACTORS:
 
 o
              WHETHER
      THE ALTERNATIVE ENERGY AND GAS-EFFICIENT VEHICLE MARKET FOROUR PRODUCTS
      CONTINUES TO GROW AND, IF IT DOES, THE PACE AT WHICH IT MAY
      GROW;
  o
              OUR
      ABILITY TO ATTRACT AND RETAIN THE PERSONNEL QUALIFIED TO IMPLEMENTOUR
      GROWTH STRATEGIES,
  o
              OUR
      ABILITY TO OBTAIN APPROVAL FROM GOVERNMENT AUTHORITIES FOR
      OURPRODUCTS;
  o
              OUR
      ABILITY TO PROTECT THE PATENTS ON OUR PROPRIETARY
    TECHNOLOGY;
  o
              OUR
      ABILITY TO FUND OUR SHORT-TERM AND LONG-TERM FINANCING
    NEEDS;
  o
              OUR
      ABILITY TO COMPETE AGAINST LARGE COMPETITORS IN A RAPIDLY CHANGINGMARKET
      FOR ELECTRIC AND GAS-EFFICIENT
VEHICLES;
  o
              CHANGES
      IN OUR BUSINESS PLAN AND CORPORATE STRATEGIES;
  AND
  o
              OTHER
      RISKS AND UNCERTAINTIES DISCUSSED IN GREATER DETAIL IN VARIOUS SECTIONS OF
      THIS REPORT, PARTICULARLY THE SECTION CAPTIONED “RISK
      FACTORS.”
 
 SHOULD
ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR
PLANNED.
 
 EACH
FORWARD-LOOKING STATEMENT SHOULD BE READ IN CONTEXT WITH, AND WITH AN
UNDERSTANDING OF, THE VARIOUS OTHER DISCLOSURES CONCERNING OUR COMPANY
AND OUR BUSINESS MADE IN OUR FILINGS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON ANY
FORWARD-LOOKING STATEMENT AS A PREDICTION OF ACTUAL RESULTS OR DEVELOPMENTS. WE
ARE NOT OBLIGATED TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT CONTAINED IN
THIS REPORT TO REFLECT NEW EVENTS OR CIRCUMSTANCES UNLESS AND TO THE EXTENT
REQUIRED BY APPLICABLE LAW.
  In this
quarterly report on Form 10-Q the terms “ZAP,” “Company,” “we,” “us” and “our”
refer to ZAP and its subsidiaries.
 
 - 14
-
 Overview
 GENERAL
 
 ZAP
stands for Zero Air Pollution(R). With its new product offerings,
the Company is positioned to become a leading brand and distribution portal
of electric and other advanced technology vehicles. ZAP is committed to
running its business based on a strong philosophical foundation that
supports the environment, social responsibility and
profitability.
 
 ZAP’s
strategy is to serve the growing and underrepresented consumer that
seeks electric and fuel efficient vehicles. With the recent increases in
the cost of oil and increasing concern about the environment and the
effects of global warming, we believe there is a large and untapped demand in
the areas of transportation and consumer products. During the energy crisis
of the 1970s, Japanese automobile manufacturers penetrated the United
States market when domestic automobile manufacturers failed to anticipate
changes. ZAP believes a similar opportunity is present today, enhanced by
heightened environmental awareness, climate changes and economic pressures.
ZAP has assembled a complete line of products to meet the growing demands
of the environmentally conscious consumer focused on two primary businesses: ZAP
Automotive and ZAP Power Systems.
 
 ZAP was
incorporated under the laws of the State of California, on September 23, 1994,
as “ZAP Power Systems.” The name of the Company was changed to “ZAPWORLD.COM” on
May 16, 1999 in order to increase our visibility in the world of electronic
commerce. We subsequently changed our name to ZAP on June 18, 2001 in order to
reflect our growth and entry into larger, more traditional markets. Our
principal executive offices are located at 501 Fourth Street Santa Rosa,
California, 95401. Our telephone number is (707) 525-8658. Our website is www.zapworld.com.
Please refer to it for further information on ZAP.
 
 SUBSIDIARIES
 
 We have
the following wholly owned subsidiaries : Voltage Vehicles, a
Nevada company (“Voltage Vehicles”), ZAP Rental Outlet, a Nevada company
(“ZAP Rentals”), ZAP Stores, Inc., a California company (“ZAP Stores”), ZAP
Manufacturing, Inc., a Nevada company (“ZAP Manufacturing”) and ZAP World
Outlet, Inc., a California company (“ZAP World”) ; Voltage Vehicles is engaged
primarily in the distribution and sale of advanced technology and
conventional automobiles; ZAP Stores is engaged primarily in consumer sales
of ZAP products at one location and ZAP Manufacturing is engaged primarily
in the distribution of ZAP products. ZAP World Outlet, ZAP Rental Outlet and RAP
Group are not currently operating subsidiaries.
  Recent
Developments
 
 Some of
the noteworthy events for the Company that occurred during the third quarter of
2008 and through the date of this report are as follows:
 
 1.
              On
      July 30, 2008 we received a $10 million financing arrangement from the Al
      Yousuf Group, a Dubai-based conglomerate to provide future working capital
      to ZAP and help meet the growing demand for ZAP electric vehicles. The
      Al-Yousuf group is a major investor of ours and the President of Al-Yousuf
      LLC, Mr. Eqbal Al-Yousuf is our Chairman of the Board. The financing
      arrangement allows for advances by ZAP over the next few
      years.
  - 15
-
 2.
              We experienced record Third
      Quarter Electric VehicleShipments.In the quarter ended September
      30, 2008, we shipped 240 Xebra vehicles as compared to 80 in the quarter
      ended September 30, 2007, or an increase of 160
      vehicles.
 
 3.
              Work
      commenced at the site of an electric car factory in Franklin, Kentucky,
      according to officials for Integrity Automotive, to expand electric
      vehicle manufacturing in the USA for ZAP. The Kentucky Economic
      Development Finance Authority gave preliminary approval for $68 million in
      state incentives for a large-scale manufacturing initiative with
      Integrity.
  4.
              Zap’s
      South American arm, ZAP Latin America, began sales of Zap’s products in
      Uruguay and other South American and Latin American
    countries.
  Results
of Operations
 
 The
following table sets forth, as a percentage of net sales, certain items included
in the Company’s Statements of Operations (see Financial Statements and
Notes) for the periods indicated:
  Three
      months ended
                September
      30
              Nine
      months ended
                September
      302008
              2007
              2008
              2007Statements of
      Operations Data:Net
      sales
              100%
              100%
              100%
              100%Cost
      of sales
              (87.9)
              (73.1)
              (88.6)
              (82.2)Operating
      expenses
              (91.4)
              (201.4)
              (129.6)
              (479.7)Loss
      from operations
              (79.3)
              (174.5)
              (118.2)
              (461.9)Net
      loss
              (81.0)
              (185.4)
              (123.7)
              (480.0)
 
 Quarter
Ended September 30, 2008 Compared to Quarter Ended September 30,
2007
  Net sales for the quarter
ended September 30, 2008 were $3.1 million compared to $2 million for the
period ended September 30, 2007.
 
 Our third
quarter sales of Advanced Technology vehicles such as the Xebra, our three
wheeled electric car and Zapino, a full size electric road scooter increased
from $773,000 in 2007 to $2.1 million in 2008. The primary reason is greater
consumer demand due growing EV awareness and a larger number of dealers carrying
our products.
 
 We
experienced an increase in retail sales by our car lot in the third quarter of
$172,000 from $356,000 in 2007 to $528,000. Increase was due to a better mix of
energy efficient cars and lower cost car models. In our Consumer Product segment
third quarter sales increased from $156,000 in 2007 to $242,000 in 2008. The
increase was due to sales of our new model of the ZAPPY PRO in
2008.
  Gross profit decreased by
$173,000 from $543,000 for the third quarter ended September 30, 2007 to
$370,000 for the quarter ended September 30, 2008.
 
 The third
quarter gross profits for our Advanced Technology vehicles were approximately
$262,000 for 2008 and $273,000 for 2007. The gross profit percentage decreased
from 35% in third quarter of 2007 to 12% in 2008. The
reason for the decrease was start up production issues for the new metal Xebra
electric vehicles and upgrades to the Zapino which required additional labor
post production.
  - 16
-
 The
Consumer Products segment experienced a decrease in gross profits in the third
quarter from $195,000 in 2007 to a gross loss of $64,000 in 2008. The
primary reason for the decrease was due to the deletion of portable sales with
higher margins in third quarter of 2008 to a new company due to competition in
the market place.
 
 The gross
profits in the third quarter for our car lot sales increased from $77,000 or 22%
of sales in 2007 to $156,000 or 29% of sales in 2008. The higher profits are due
to the mix of vehicle models sold during the quarter.
 
 Sales and marketing expenses
decreased by $81,000 from $519,000 for the quarter ended September 30, 2007 to
$438,000 in 2008.  As a percentage of sales it represents a decrease
from 25% to 14%.  The decrease was due less use of outside consultants
used to promote the sales efforts and a decrease in trade show
attendance.
 
 General and
administrative expenses decreased by $1.3
million from $3.5million for the quarter ended September 30, 2007 to $2.2
million in 2008. The reason for the decrease was due to less expenditures for
consulting and professional fees. Also the expense for stock options was less in
the 2008 quarter since 2007 expenses included some one time grants to key
employees.
 
 Research and development
expensesincreasedby $112,000 from $23,000
in 2007 to $135,000. The primary reason for the increase was expenses incurred
in the new ATV, ZAP Dude, in the final development of a  four (4)wheel
product line, a line of low cost wheel motors and to build a full scale model of
our new vehicle, the ZAP-Alias. This vehicle will be a production-ready all
electric highway vehicle.
 
 Interest expense, netdecreased from an expense of $210,000 in third quarter 2007 to
$55,000 in third quarter of 2008. The decrease was due to lower interest
bearing balances on the 8% senior convertible debt.
 
 Other income (expense), netincreased from an expense of $10,000 for the third quarter of 2007
to other income of $2,000 in the third quarter of 2008.
 
 Net Lossfor the quarter ended
September 30, 2008 was $2.5 million compared to a net loss of $3.7 million for
period ended September 30, 2007.
 
 Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007
  Net sales for the nine months
ended September 30, 2008, were $6 million compared to $4.5 million for the nine
months ended September 30 in the prior year. Sales in the Advanced
Technology segment increased from $2.2 million in 2007 to $4.2 million in 2008
primarily due to greater demand. With the high price of gasoline in the U.S.
many consumers are seeking alternatives such as electric vehicles both our Xebra
electric vehicle and our Zapino a full-size electric scooter.
 
 We
experienced a decrease of $243,000 in sales of consumer products from $543,000
in 2007 to $300,000 in 2008. Our main consumer product the ZAPPY3 electric
scooter was not available in 2008 since our previous manufacturer experienced
financial difficulties in early 2008 and we switched to a new contractor but did
not receive new products until June 2008.
 
 Sales in
our Portable Energy segment decreased from $800,000 in 2007 to $173,000 in 2008.
The primary reason for the decrease was the transfer in June of 2008of this
product line to a new company, Portable Energy LLC in exchange for a 50%
interest and a new product mix
 
 Our
retail car lot experienced a slight increase in sales from $1,012,000 in 2007 to
$1,250,000 in 2008. However, the overall U.S. market for retail cars remains
sluggish due to the tight economy.
 
 - 17
-
 Gross profitwas
$687,000 for the nine months ended September 30, 2008 compared to 813,000
for the nine months ended September 30, 2007 resulting in a decrease of
$207,000.
 
 In our
Advanced Technology segment our gross profit increased from $353,000 in 2007 to
$632,000 in 2008 or 16% of sales for both years. The increase was due to greater
units sold from 60 vehicles in 2007 to 160 in 2008.
 
 In our
Consumer Products segment we experienced a decrease of $416,000 in gross profit
from $265,000 in 2007 to a gross loss of $126,000 in 2008. As per above we did
not have product available in 2008 but still incurred fixed expenses for labor,
rents etc.
 
 Gross
profits in our retail car lot decreased from $195,000 or 19% of sales to
$181,000 or 14 % of sales in 2008. This reflects lower margins on car sales due
to the tight economy.
  Sales and marketing expenses
in the first nine months of 2008 increased by $86,000 from $1.1 million in
2007 to $1.2 million in 2008. The increase was due to higher salaries with
more personnel in the function and outside consultants used to promote the sales
efforts.
 
 General and administrative
expensesfor the nine
months ended September 30, 2008 decreased by $14.2 million from $20.3 million in
2007 to $6.1 million in 2008.  The primary reason for the decrease was
due to the 2007 one-time non-cash expense of $12 million to account
for the modification and extension of certain expiring warrants that were issued
to shareholders pursuant to the plan of reorganization in June of 2002 and also
to current ZAP employees for compensation purposes. The warrants were extended
by five years until July 2012 with the exercise prices also
adjusted.
 
 Research and development
expenses increased by $44,000 from $412,000 in 2007 to $456,000 in
2008.
 The
higher expenses were due additional costs to build a full scale model of our new
vehicle, the ZAP-Alias. This vehicle will be a production-ready all electric
highway vehicle. We also incurred expenses to develop a heavy duty ATV for ZAP
in the USA market and a four wheeled electric truck.
 
 Interest expense, netdecreased by $526,000 from an interest expense of  $810,000 for
the first nine months of 2007 to interest expense of $284,000 in the nine months
ended September 30, 2008. The decrease was due to less interest and penalties
paid in connection with the senior convertible debt that was issued in late 2006
and early 2007.
 
 Other expenseincreased from $11,000 for the nine months ended September 30, 2007
to $42,000 in the first nine months of 2008. The main reason for the increase
was our donation of $25,000 to the Red Cross for China earthquake
relief.
 
 Net Losswas $7.5 million for
the nine months ended September 30, 2008 as compared to a net loss of $21.9
million for period ended September 30, 2007. The additional losses in 2007 were
primarily due to the modification and extension of certain expiring warrants
that were issued by the Company to selected shareholders and current ZAP
employees, as well as stock-based compensation expense due to the adoption of
SFAS 123R.
 
 Liquidity
and Capital Resources
 
 In the
first nine months of 2008 net cash used for operating activities was $5.3
million. Cash used in the first nine months of 2008 was comprised of the net
loss incurred for the first nine months of $7.3 million plus net non-cash
expenses of $4.2 million and the net decrease of $2.1 million in operating
assets and liabilities. In the first nine months of 2007, the Company used cash
for operations of $4.1 million was comprised of the net loss of $22.9 million
plus net non-cash expenses of $18.2 million, and the net change in operating
assets and liabilities of $458,000.
 
 Investing
activities used cash of $60,000 in the first nine months ended September
30, 2008 compared with a use of cash of $20,000 in 2007.
  - 18
-
 Financing
activities for the first nine months ended September 30, 2008 provided cash of
$2 million compared with investing activities providing cash of $2.7 million in
2007. In 2007, we issued senior convertible debt and stock and warrants to
generate cash. In 2008 we borrowed $2.9 million in advances from the credit
facility and from another related Company.
 
 The
Company had cash of $996,000 million at September 30, 2008 as compared to $
739,000 at September 30, 2007. The Company had working capital of $235,000 and a
working capital deficit of $1.5 million for the periods ended September 30, 2008
and 2007 respectively.
  On
July 30, 2008 we received a $10 million financing arrangement from the Al Yousuf
Group, a Dubai-based conglomerate to provide future working capital to ZAP and
help meet the growing demand for ZAP electric vehicles. The Al-Yousuf group is a
major investor of ours and the President of Al-Yousuf, Mr. Eqbal Al-Yousuf is
our Chairman of the Board. The financing arrangement allows for advances by ZAP
over the next few years commencing on the date of the Note.
  CRITICAL
ACCOUNTING POLICIES
 
 Revenue
Recognition
 
 The
Company records revenues only upon the occurrence of all of the following
conditions:
 
 The
Company has received a binding purchase order or similar commitment from the
customer or distributor authorized by a representative empowered to commit the
purchaser (evidence of a sale);
 
 The
purchase price has been fixed, based on the terms of the purchase
order;
 
 The
Company has delivered the product from its distribution center to a common
carrier acceptable to the purchaser. The Company’s customary shipping terms are
FOB shipping point; and
 
 The
Company deems the collection of the amount invoiced probable.
 
 The
Company provides no price protection. Product sales are net of promotional
discounts, rebates and return allowances.
  The
Company does not recognize sales taxes collected from customers as
revenue.
 
 Allowance for Doubtful
Accounts
  The
Company performs ongoing credit evaluations of its customers’ financial
condition and, generally, requires no collateral from its customers. The Company
records an allowance for doubtful accounts receivable for credit losses at the
end of each period based on an analysis of individual aged accounts receivable
balances. As a result of this analysis, the Company believes that its allowance
for doubtful accounts is adequate at September 30, 2008 and 2007, respectively.
If the financial condition of the Company’s customers should deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
 
 Inventory
Valuation
  We adjust
the value of our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions and
development of new products by our competitors.  Inventories consist
primarily of vehicles, both gas and electric, parts and supplies, and finished
goods, and are carried at the lower of cost (first-in, first-out method) or
market.
  - 19
-
 Deferred Tax Asset
Realization
 
 We record
a full valuation allowance to reduce our deferred tax assets to the amount that
is more likely than not to be realized.  While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made.
 
 BUSINESS
DEVELOPMENT
 
 Founded
in 1994, ZAP has invented, designed, manufactured, and marketed
numerous innovative products since the Company’s inception. In 1995, ZAP
began marketing electric transportation on the Internet through our
website, www.zapworld.com. ZAP
has been a pioneer in developing and marketing electric vehicles such as
a zero-emission ZAP(R) electric bicycle, ZAP Power System, which adapts to
most bicycles, and the ZAPPY(R) folding electric scooter. From 1996 through
1998, we continued to add to our product line; in 1999, ZAP added electric
motorbikes; in 2001, it added electric dive scooters; in 2003, ZAP
announced its first electric automobiles, including the first-ever
production electric automobile imported from its manufacturing partner in
China; in 2004 ZAP introduced electric all-terrain vehicles and the
fuel-efficient Smart Car; and in 2005 ZAP introduced multi-fuel vehicles,
capable of running on ethanol and/or gasoline. To date, we have delivered
more than 100,000 electric vehicles and consumer products to customers in
more than 75 countries, which we believe establishes us as one of the
leaders in the alternative transportation marketplace.
 
 Today,
ZAP is continuing its focus as one of the pioneers of
advanced transportation technologies and leveraging its place in the market
as a magnet for new technologies. The Company believes there is a growing
and underrepresented market for fuel efficient transportation vehicles and
we are capitalizing on the opportunities enhanced by heightened
environmental awareness, climate changes and economic pressures. The
technology is available to deliver transportation solutions that are
practical and affordable. With our products such as the XEBRA and ZAPPY 3,
ZAP is already delivering such solutions to the market. Our goal is to
become one of the largest and most complete brand and distribution portals
in the United States for advanced technology vehicles and 100% plug-in
electrics.
  To
distribute our practical, affordable and advanced
transportation technologies, we have established and are growing both our
portal of qualified automotive dealers and our relationships with specialty
dealers/distributors for our power system products. Through these distribution
channels, coupled with the continued establishment of partnerships with
select manufacturers, we intend to expand our market recognition by
building awareness of the evolving technologies available for automotive
transportation and in reducing our nation’s dependency on foreign
oil.
 
 PRODUCT
SUMMARY
 
 Our
existing product line, which includes completed, market ready products
and planned introductions, is as follows:
 
 ZAP
AUTOMOTIVE
  ZAP
believes it is positioned to become one of the leading distributors of
fuel efficient alternative energy vehicles in the United States. We believe
that we are one of only a few companies distributing a 100% production
electric vehicle capable of speeds up to 40 mph. Within the next twelve to
thirty-six months, we hope to have distribution agreements in place with
vehicle manufacturers whose products fit ZAP’s mission. To distribute
our product to end consumers and fleets, we have established more than 50
licensed automotive dealers and intend to grow this base significantly over
the next several years.
 
 In 2006,
ZAP Automotive introduced the following automobile products:
 
 o
              the
      100% electric XEBRA sedan with an MSRP of
      approximately$11,000;
 
 - 20
-
 o
              the
      100% electric XEBRA utility vehicle truck with an MSRP of approximately
      $12,000; and
 
 In 2007,
ZAP Automotive introduced a new electric scooter, the ZAPINO, with an advanced
3,000 watt brushless DC hub motor, perfect for city commuting and able to
reach speeds of 30 MPH with an MSRP of $3,500.
 
 Our
future offerings that are currently in the developmental stage
include:
 
 o
              The
      ZAP Alias, which has a target price of $32,500 per vehicle and an
      estimated range of 100 miles per charge. This vehicle launch date is for
      2009.
 
 o
              The
      ZAP Truck XL, which is a low speed 4 wheel utility truck and having a MSRP
      of approximately $14,900, scheduled for launch in the 4th
      quarter, 2009.
 
 We are
also in discussions with other foreign manufacturers and hope to establish
additional relationships within the next twelve to thirty-six months for
other vehicle platforms.
 
 XEBRA
 
 We
believe that XEBRA is the only series production electric vehicle in
the United States that can legally travel faster than 25 mph. The car’s
suggested retail price of $11,000 is significantly less expensive than most
of its competitors, some of which cost more than $100,000 and are not yet
widely available today. XEBRA has three wheels and is being imported as a
motor-driven cycle, yet, unlike most other motor-driven cycles, the XEBRA
is enclosed with windows and a roof, affording it protection from inclement
weather.
 
 Working
with our Chinese manufacturing partner, we have designed two XEBRA models:
a sedan and a utility pick-up truck. The Chinese manufacturer’s
current manufacturing capacity is approximately 1,000 vehicles per month.
Subject in large part to the level of financing secured, our current target
is to distribute approximately 200 vehicles per month over the next 12
months. Initial market demand has been strong, both from end consumers
using the vehicle as a “city-car” and from fleet managers of
municipalities, states, green friendly corporations, and universities who
have a preference or mandate to purchase zero emission vehicles.
  We are
working closely with our manufacturing partner to continually upgrade
the XEBRA, adding features while balancing the goal of maintaining an
affordable price level. We are in the process of looking into incorporating
options to enhance the consumer’s experience, including providing lithium
battery packs for additional (up to 100 mile) range.   Solar
options were introduced in the current quarter for true Zero Air
Pollution.
  XEBRA
Sedan (ZAPCAR (R))
 
 ZAP
launched the sedan version of its XEBRA ZAPCAR on July 11, 2006. The
sedan has a seating capacity for four and is being targeted for
city/commuter use. Based on initial feedback, ZAP will be marketing the
XEBRA sedan to government and corporate fleets as well as to families with
two or more cars, but with plenty of occasion to use their vehicles for
short, city drives.
 
 XEBRA PK
(ZAPTRUCK(R))
 
 ZAP
launched its utility pick-up truck version of the XEBRA, the XEBRA
ZAPTRUCK, on August 24, 2006. This electric vehicle seats two with a
multi-purpose platform behind the passenger compartment that serves as a
hauler, dump truck or flatbed. The XEBRA ZAPTRUCK is targeted to
municipalities, maintenance facilities, universities, ranches and
warehouses. Since its launch, we have received overwhelming inquiries for
test drives. To date, we have focused on our west coast market and sales
have exceeded our initial distribution and sales plans.
  - 21
-
 LOTUS
 
 In 2007,
we announced and entered into a development and feasibility contract with
Lotus Engineering to develop an electric all-wheel drive crossover high
performance vehicle for the U.S. market. A combination of the lightweight
aluminum vehicle architecture, a new efficient drive and advanced battery
management systems is intended to enable a range of up to 350 miles between
charges.  An auxiliary power unit is planned to support
longer distance journeys.
 
 The ZAP-X
is proposed to be powered by revolutionary in-hub electric
motors, delivering 644 horsepower in all wheel drive mode, theoretically
capable of powering the ZAP-X to a potential top speed of 155mph. A new,
strong, lightweight and highly efficient structure based on the Lotus technology
is projected to give the car a very attractive power-to-weight ratio. We
are in the midst of the development plan for the ZAP-X and seeking a
manufacturing partner.
 
 We are
also developing a $32,000 all electric vehicle with a targeted 100
mile range, the ZAP Alias (TM), which is expected fourth quarter
2009.
 
 Future Automotive
Offerings
 
 Over the
next 36 months, we hope to establish relationships with additional manufacturers
who can supply automobiles and related vehicles that meet our mission of
affordable, advanced transportation technologies that are socially
responsible and environmentally sustainable. In 2008, we have identified
the following products as potential future offerings for the Company: (1)
an affordable 100% electric two-seater sports coupe; (2) a high performance
highway all electric vehicle and (3) electric trucks.
 
 ZAP Power
Systems
  We
launched the Company in 1994 with the invention of the ZAPPY electric
scooter and quickly established a presence as one of the market leaders in
the electric “personal” transportation product segment. Since inception,
the Company has been able to maintain a steady business and committed
buyers in this segment. In keeping with our initial product offerings, at
the beginning of 2006, we revitalized our consumer products line (recently
renamed “Power Systems”), including an updated version of the electric
scooter. As part of the segment’s revitalization, we reduced the number of
suppliers and placed more emphasis on upgrading existing models with newer
component technology and more robust features in order to provide a higher
quality consumer experience and product.
 
 Our
current product offerings include:
 
 o
              Three-wheeled
      personal transporters (ZAPPY3, ZAPPY3 Pro,
  ZAPPY3 EZ);
  o
              Off-road
      vehicles (electric quads and motorcycles);
and
  o
              Portable
      energy (universal recharge-it-all batteries and auxiliary
      batteries).
 
 The ZAPPY
3 Personal Transporters
 
 Seaway’s
highly publicized “human transporter to change the world” unearthed
a growing need for a “scooter for adults,” better known as personal
electric transportation. The Company responded to this demand by designing
the ZAPPY3. Unlike the Segway, the ZAPPY3’s 3-wheeled vehicle design
provides stability and maneuverability allowing just about anyone to ride
this vehicle without training. It has a top speed of 15 mph, and the Pro
has the farthest range of any personal transporter available today at 25
miles range per charge.
 
 - 22
-
 The
Company initially thought that the ZAPPY3 would be great for the
consumer market. Over the past year, the Company has revisited its sales
strategy and come to recognize that the largest market opportunities are in
the industrial and commercial applications. The Company’s primary sales
channels are now more clearly defined as security, sporting goods and
material handling.
 
 With the
increased emphasis on homeland security, there are several
product competitors in the security and police market segment. Segway, the
most well known, can be found in select police departments and airports and
sells for about $5,500. American Chariot, which is a chariot-like transporter,
has entered the market selling between $1,500 to $2,500. Newest to the
security transporter business is T3Motion, which is built like a small tank
and priced at up to $8,000. The ZAPPY3 meets the need of a majority of the
security transportation needs and with a selling price range of $530 to
$900, depending on the model purchased, which we believe is the most
economical of all offerings.
 
 The
ZAPPY3 retail focus has continued strong in 2008. As the product line
has gained momentum and market acceptance, we plan to grow distribution in
the retail channel through larger regional and specialized chain
stores.
 
 The
material handling, warehousing, fabrication, and construction industries
are the ideal markets for the ZAPPY3 Pro. We are not currently aware of any
major competitors in this market. The traditional solution for short
distance transportation has been bicycles. The ZAPPY Pro offers the perfect
utility vehicle for shuttling, picking and packing and getting into small
areas like elevators. While the Company’s entrance into this market is
still in the early stages, the product response has been very favorable,
demonstrated by our newly established relationship with Indoff, the largest
distributor of material handling equipment in the United
States.
 
 The
Zapino is an electric scooter that is a great link between ZAP’s
personal transporters and electric cars. Not only economical and
eco-friendly, the Zapino is powerful with an advanced 3000-watt brushless
DC hub motor, perfect for city commuting. Able to reach speeds of 30 MPH,
the Zapino is able to keep up with city traffic without contributing to
city pollution. The rear wheel hub motor on the Zapino creates more room on
board for additional batteries and performance. This innovative drive
system eliminates the need for belts or chains with lower overall maintenance.
It also delivers a more enjoyable ride because it is nearly silent,
accelerates smoothly with no shifting, has no engine vibration, no tailpipe
or heat exhaust -- just good, clean fun.
 
 Off-Road
Vehicles
 
 All
terrain vehicle (“ATV”) manufacturers recognized in excess of $5.0
billion in revenues in 2006 with the market for ATVs. In the United States
alone, approximately 800,000 units were sold in 2006. To date, all of the
ATV’s on the market are gas-powered. We believe electric ATV’s have
practical environmental benefits over their gas-powered counterparts: they
are silent and generate no emissions. Moreover, there are now over 8,000
organic farms in the United States which are committed to reducing
pollutants that may put organic certification at risk. The electric ATVs
can provide the ruggedness of the traditional ATV in areas never before
accessible, while being more versatile than golf carts.
  We
entered the electric ATV market in 2006 with our ZAP Buzz mini ATV. The Buzz has
a 450 watt geared-motor and a top speed of 15 mph with a range
of approximately 20 miles. In the 1st quarter of 2007, we introduced the
800 watt “mid size” ATV for sale in the United States and some of our
existing ZAP dealers already have placed preorders. We hope to launch a
heavy duty ATV in the 3rd quarter 2008 with product features and styling
comparable to existing gas-models. We believe our position as an innovator
in the electric vehicle market, coupled with first-mover advantage in the
electric ATV market, will allow us to capitalize on this market segment. If
we are able to capture 1% of the all terrain vehicle market share, it could
equate to over $40 million in revenues per year. However, there can be no
assurances that we will be able to achieve such market share.
  - 23
-
 Portable
Energy - Recharge-It -All Batteries
 
 We
believe we were one of the first and now one of the leading producers
of rechargeable battery sources using lithium-ion and lithium polymer
technology. Through our Recharge-It-All line, we sell battery packs to
power or charge a wide range of mobile electronics such as cellular phones,
digital cameras and laptops, providing significantly more charge time than
currently available technologies. Our Portable Energy devices fall under
two product lines: universal chargers and made-for iPOD models. The
universal chargers are rechargeable battery packs that extend the use of
most small and medium-sized electronic devices up to 2 to 5 times their
normal battery life. The made-for iPOD models are a series of portable
energy devices designed to work specifically with all the major iPOD
products, including the iPOD, iPOD nano, iPOD shuffle and the iPOD with
video.
 
 We
launched our Portable Energy products at the end of 2006 with
marketing targeted to large electronic retailers. Market statistics
indicate that there will be over two billion users of mobile electronic
devices by the end of 2007.
 
 Our goal
with Portable Energy is to provide a solution that helps solve the energy
management challenge for electronic and mobile internet users. Today, there
are only a few companies that have begun to address the mobile
device backup power/charge market. The currently available products include
Energizer’s “Energi to Go”, Charge 2 Go, Cell Boost, and Medis Power Pack.
We believe that no manufacturer offers rechargeable devices that offer the
ability to re-charge a myriad of electronic devices from the same device as
effectively as ZAP’s Portable Energy.
 
 In June
of 2008 we transferred the assets of the portable energy product line to a new
Company called Portable Energy LLC in return for a 50% interest.
 
 Risk
factors
  We have a
history of losses and our future profitability on a quarterly or annual basis is
uncertain, which could have a harmful effect on our business and the value of
ZAP’s common stock.
 
 We
incurred net losses of $7.5 million, $28 million, $11.9 million, for the nine
months  ended September 30, 2008 and the years ended December 31,
2007, 2006 respectively.  We can give no assurance that we will be
able to operate profitably in the future.
  We
face intense competition which could cause us to lose market
share.
 
 In the
advanced technology vehicle market in the United States, we compete with large
manufacturers, including Honda, Toyota, and Daimler-Chrysler, who have more
significant financial resources, established market positions, long-standing
relationships with customers and dealers, and who have more significant name
recognition, technical, marketing, sales, manufacturing, distribution, financial
and other resources than we do.  Each of these companies is currently
working to develop, market, and sell advanced technology vehicles in the United
States market.  The resources available to our competitors to develop
new products and introduce them into the marketplace exceed the resources
currently available to us.  We also face competition from smaller
companies with respect to our consumer products, such as our electric bicycle
and scooter.  We expect to face competition from the makers of
consumer batteries and small electronics with respect to the ZAP Portable Energy
line.  This intense competitive environment may require us to make
changes in our products, pricing, licensing, services, distribution, or
marketing to develop, maintain, and extend our current technology and market
position.
 
 Changes in the market for electric
vehicles could cause our products to become obsolete or lose
popularity.
 
 The
electric vehicle industry is in its infancy and has experienced substantial
change in the last few years.  To-date, demand for and interest in
electric vehicles has been sporadic.  As a result, growth in the
electric vehicle industry depends on many factors, including:
  - 24
-
 ·
              continued
      development of product technology;·
              the
      environmental consciousness of
customers;
 
 ·
              the
      ability of electric vehicles to successfully compete with vehicles powered
      by internal combustion engines;·
              widespread
      electricity shortages and the resultant increase in electricity prices,
      especially in our primary market, California, which could derail our past
      and present efforts to promote electric vehicles as a practical solution
      to vehicles which require gasoline;
and
 
 ·
              whether
      future regulation and legislation requiring increased use of nonpolluting
      vehicles is enacted.
  We cannot
assure you that growth in the electric vehicle industry will
continue.  Our business may suffer if the electric vehicle industry
does not grow or grows more slowly than it has in recent years or if we are
unable to maintain the pace of industry demands.
  We
may be unable to keep up with changes in electric vehicle technology and, as a
result, may suffer a decline in our competitive
position.
 
 Our
current products are designed for use with, and are dependent upon, existing
electric vehicle technology.  As technologies change, we plan to
upgrade or adapt our products in order to continue to provide products with the
latest technology.  However, our products may become obsolete or our
research and development efforts may not be sufficient to adapt to changes in or
create necessary technology.  As a result, our potential inability to
adapt and develop the necessary technology may harm our competitive
position.
 
 The
failure of certain key suppliers to provide us with components could have a
severe and negative impact upon our business.
 
 We rely
on a small group of suppliers to provide us with components for our products,
some of whom are located outside of the United States.  If these
suppliers become unwilling or unable to provide components, there are a limited
number of alternative suppliers who could provide them.  Changes in
business conditions, wars, governmental changes, and other factors beyond our
control or which we do not presently anticipate could affect our ability to
receive components from our suppliers.  Further, it could be difficult
to find replacement components if our current suppliers fail to provide the
parts needed for these products.  A failure by our major suppliers to
provide these components could severely restrict our ability to manufacture our
products and prevent us from fulfilling customer orders in a timely
fashion.
 
 Product
liability or other claims could have a material adverse effect on our
business.
 
 The risk
of product liability claims, product recalls, and associated adverse publicity
is inherent in the manufacturing, marketing, and sale of electrical
vehicles.  Although we have product liability insurance for our
consumer products for risks of up to an aggregate of $5,000,000, that insurance
may be inadequate to cover all potential product claims.  We also
carry liability insurance on our automobile products.  Any product
recall or lawsuit seeking significant monetary damages either in excess of our
coverage, or outside of our coverage, may have a material adverse effect on our
business and financial condition.  We may not be able to secure
additional product liability insurance coverage on acceptable terms or at
reasonable costs when needed.  A successful product liability claim
against us could require us to pay a substantial monetary
award.  Moreover, a product recall could generate substantial negative
publicity about our products and business and inhibit or prevent
commercialization of other future product candidates.  We cannot
assure you that such claims and/or recalls will not be made in the
future.
 
 - 25
-
 We
must devote substantial resources to implementing a product distribution
network.
 
 Our
dealers are often hesitant to provide their own financing to contribute to our
product distribution network.  As a result, we anticipate that we may
have to provide financing or other consignment sale arrangements for dealers who
would like to participate as our regional distribution
centers.
 
 The
further expansion of our product distribution network will require a significant
capital investment and will require extensive amounts of time from our
management.  A capital investment such as this presents many risks,
foremost among them being that we may not realize a significant return on our
investment if the network is not profitable.  Our inability to collect
receivables from our dealers could cause us to suffer losses.  Lastly,
the amount of time that our management will need to devote to this project may
divert them from performing other functions necessary to assure the success of
our business.
  Failure to manage our growth
effectively could adversely affect our business.
 
 We plan
to increase sales and expand our operations substantially during the next
several years through internally-generated growth and the acquisition of
businesses and products.
 
 To manage
our growth, we believe we must continue to implement and improve our
operational, manufacturing, and research and development
departments.  We may not have adequately evaluated the costs and risks
associated with this expansion, and our systems, procedures, and controls may
not be adequate to support our operations.  In addition, our
management may not be able to achieve the rapid execution necessary to
successfully offer our products and services and implement our business plan on
a profitable basis.  The success of our future operating activities
will also depend upon our ability to expand our support system to meet the
demands of our growing business.  Any failure by our management to
effectively anticipate, implement, and manage changes required to sustain our
growth would have a material adverse effect on our business, financial
condition, and results of operations.  We cannot assure you that we
will be able to successfully operate acquired businesses, become profitable in
the future, or effectively manage any other change.  An inability to
successfully operate recently acquired businesses and manage existing business
would harm our operations.
 
 The loss of certain key personnel
could significantly harm our business.
 
 The
Company’s performance is substantially dependent upon the services of its
executive officers and other key employees, as well as on its ability to
recruit, retain, and motivate other officers and key employees. Competition for
qualified personnel is intense and there are a limited number of people with
knowledge of and experience in the advanced technology vehicle industry. The
loss of services of any of our officers or key employees, or our inability to
hire and retain a sufficient number of qualified employees, will harm our
business. Specifically, the loss of Mr. Schneider, our Chief Executive Officer
or Mr. Starr, our Director and founder, who is also head of our R&D efforts,
whose specialized knowledge of the electric vehicle industry is essential to our
business, would be detrimental. We have employment agreements with Mr. Schneider
and Mr. Starr that provide for their continued service to the Company until
October 1, 2013.
 
 Regulatory
requirements may have a negative impact upon our business.
 
 While our
products are subject to substantial regulation under federal, state, and local
laws, we believe that the products we have sold are materially in compliance
with all applicable laws.  However, to the extent the laws change, or
if we introduce new products in the future, some or all of our products may not
comply with applicable federal, state, or local laws.  Further,
certain federal, state, and local laws and industrial standards currently
regulate electrical and electronics equipment.  Although standards for
electric vehicles are not yet generally available or accepted as industry
standards, our products may become subject to federal, state, and local
regulation in the future.  Compliance with this regulation could be
burdensome, time consuming, and expensive.
 
 Our
automobile products are subject to environmental and safety compliance with
various federal and state regulations, including regulations promulgated by the
EPA, NHTSA, and Air Resource Board of the State
  - 26
-
 of
California, and compliance certification is required for each new model
year.  The cost of these compliance activities and the delays and
risks associated with obtaining approval can be substantial.  Although
the Company had marketed its Smart Car product in the United States, the car
must be certified by the California Air Resources Board before it can be sold in
California, New York, and three other states.  In addition, the two
models of our OBVIO products will need to satisfy all regulatory requirements
before they can be sold in the United States.  The risks, delays, and
expenses incurred in connection with such compliance could be
substantial.
 
 Manufacturing
overseas may cause problems for us.
 
 We have
been shifting our manufacturing overseas. There are many risks associated with
international business.  These risks include, but are not limited to,
language barriers, fluctuations in currency exchange rates, political and
economic instability, regulatory compliance difficulties, problems enforcing
agreements, and greater exposure of our intellectual property to markets where a
high probability of unlawful appropriation may occur.  A failure to
successfully mitigate any of these potential risks could damage our
business.
 
 We
may not be able to protect our internet address.
 
 We
currently hold the internet address, http://www.zapworld.com, a portal through
which we sell our products.  We may not be able to prevent third
parties from acquiring internet addresses that are confusingly similar to our
address, which could adversely affect our business.  Governmental
agencies and their designees generally regulate the acquisition and maintenance
of internet addresses.  However, the regulation of internet addresses
in the United States and in foreign countries is subject to
change.  As a result, we may not be able to acquire or maintain
relevant internet addresses in all countries where we conduct
business.
 
 Our
success is heavily dependent on protecting our intellectual property
rights.
 
 We rely
on a combination of patent, copyright, trademark, and trade secret protections
to protect our proprietary technology.  Our success will, in part,
depend on our ability to obtain trademarks and patents.  We hold
several patents registered with the United States Patent and Trademark
Office.  These registrations include both design patents and utility
patents.  In addition, we have recently submitted provisional patents
which may or may not be afforded the limited protection associated with
provisional patents.  We have also registered numerous trademarks with
the United States Patent and Trademark Office, and have several pending at this
time.  We cannot assure you that the trademarks and patents issued to
us will not be challenged, invalidated, or circumvented, or that the rights
granted under those registrations will provide competitive advantages to
us.
 
 We also
rely on trade secrets and new technologies to maintain our competitive
position.  Although we have entered into confidentiality agreements
with our employees and consultants, we cannot be certain that others will not
gain access to these trade secrets.  Others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets.
 
 We
may be exposed to liability for infringing intellectual property rights of other
companies.
 
 Our
success will, in part, depend on our ability to operate without infringing on
the proprietary rights of others.  Although we have conducted searches
and are not aware of any patents and trademarks which our products or their use
might infringe, we cannot be certain that infringement has not or will not
occur.  We could incur substantial costs, in addition to the great
amount of time lost, in defending any patent or trademark infringement suits or
in asserting any patent or trademark rights, in a suit with another
party.
  Risk
of Unregistered Securities Offering.
 
 In the
past, we have had numerous sales of our securities which were not registered
under federal or state securities laws.  We have strived to comply
with all applicable Federal and state securities laws in
  - 27
-
 connection
with our issuances of unregistered securities.  However, to the extent
we have not complied, there may be liability for the purchase price of the
securities sold together with interest and the potential of regulatory
sanctions.
 
 Our
stock price and trading volume may be volatile, which could result in
substantial losses for our stockholders.
 
 The
equity trading markets may experience periods of volatility, which could result
in highly variable and unpredictable pricing of equity
securities.  The market price of our common stock could change in ways
that may or may not be related to our business, our industry or our operating
performance and financial condition.  In addition, the trading volume
in our common stock may fluctuate and cause significant price variations to
occur.  We have experienced significant volatility in the price of our
stock over the past few years.  We cannot assure you that the market
price of our common stock will not fluctuate or decline significantly in the
future. In addition, the stock markets in general can experience considerable
price and volume fluctuations.
 
 We have
not paid cash dividends on our common stock and do not anticipate paying any
cash dividends on our common stock in the foreseeable future.
 
 We have
not achieved profitable operations and if we do realize a profit in the future,
we anticipate that we will retain all future earnings and other cash resources
for the future operation and development of our
business.  Accordingly, we do not intend to declare or pay any cash
dividends on our common stock in the foreseeable future.  Payment of
any future dividends will be at the direction of our board of directors after
taking into account many factors, including our operating results, financial
conditions, current and anticipated cash needs and plans for
expansion.
 
 Seasonality
and Quarterly Results
 The
Company’s business is subject to seasonal influences for consumer products.
Sales volumes in this industry typically slow down during the winter months,
November to March in the U.S. The Company’s auto distribution network is
affected by the availability of cars ready to sell to dealers.
 
 Inflation
 Our raw
materials and finished products and automobiles are sourced from stable,
cost-competitive industries. As such, we do not foresee any material
inflationary trends for our product sources.
  Item
4T. Controls and Procedures
 
 Disclosure
Controls and Procedures
  Our
management, under the supervision and with the participation of the Chief
Executive Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)) as of the end of the period covered by this
report. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, our
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by us in the reports filed, furnished or submitted under the Exchange
Act. Our Chief Executive Officer and Chief Financial Officer also concluded that
our disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosures.
  - 28
-
 Changes
in Internal Control Over Financial Reporting
 
 There
were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by
this report that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
 
 PART
II - OTHER INFORMATION
 
 ITEM 1. LEGAL
PROCEEDINGS.
 
 In the
normal course of business, we may become involved in various legal proceedings.
Except as stated below, we know of no pending or threatened legal proceeding to
which we are or will be a party which, if successful, might result in a material
adverse change in our business, properties or financial condition. However, as
with most businesses, we are occasionally parties to lawsuits incidental to our
business, none of which are anticipated to have a material adverse impact on our
financial position, results of operations, liquidity or cash flows. The Company
estimates the amount of potential exposure it may have with respect to
litigation claims and assessments.
  Robert
Chauvin; Mary Chauvin; Rajun Cajun, Inc. dba ZAP of Carson City, dba ZAP of
Reno, dba ZAP of Sparks (“Robert Chauvin, et al.”) v. Voltage Vehicles; ZAP; ZAP
Power Systems Inc.; ZAPWORLDCOM; Elliot Winfield; Steven Schneider; Phillip
Terrazzi; Max Scheder-Breschin; Renay Cude; [sic] and Does I-XX, Second Judicial
District Court State of Nevada, County of Washoe, Case No. CV06 02767. On
November 17, 2006, Robert Chauvin, et al. filed a complaint alleging breach of
contract, breach of the covenant of good faith and fair dealing, breach of
warranties, fraud/misrepresentation, negligent misrepresentation, quantum merit
or unjust enrichment, civil conspiracy, violation of Security [sic] and Exchange
Act/federal securities law, and deceptive trade practices, pursuant to a License
Agreement (for a distribution license) entered into between Rajun Cajun, Inc.
dba ZAP of Carson City, dba ZAP of Reno, dba ZAP of Sparks (“Rajun Cajun”) and
Voltage Vehicles. The complaint seeks general damages in an amount in excess of
$10,000, special damages in an amount in excess of $10,000, punitive damages in
an amount in excess of $10,000, attorneys’ fees and cost of suit, for judgment
in an amount equal to treble actual damages, and recession in the amounts of
$397,900 and $120,000. On January 19, 2007, defendants Voltage Vehicles and ZAP
filed a Motion to Dismiss on the grounds that the License Agreement entered into
between Rajun Cajun and Voltage contains a forum selection clause designating
Sonoma County, State of California as the only appropriate forum. The court
granted that Motion on April 13, 2007. In its order on that motion, the court
also found that all other motions pending in the Nevada court in this matter are
now moot. (As of that time, the following motions were still pending: (1)
Chauvin, et al.’s Notices of Intent to Take Default against two of the named
corporate defendants and against the individual defendants, except Renay Cude;
(2) a Motion to Quash Service of Process or Alternatively for Dismissal by each
of the individual defendants and both of the defunct corporate defendants; and
(3) Chauvin, et al.’s Motion for Publication of Summons against the named
individual defendants.)
  Voltage
Vehicles v. Rajun Cajun, et al., Superior Court of California, County of Sonoma,
Case No. SCV 240179, filed February 9, 2007. (This suit is related to the Nevada
case of Robert Chauvin, et al. v. Voltage Vehicles, et al. discussed immediately
above.) In its complaint, Voltage Vehicles requests Declaratory Relief against
Rajun Cajun, asking the Court to declare that the License Agreement between
those two parties does not grant Rajun Cajun an exclusive dealership in northern
Nevada to distribute Voltage Vehicle products and that Voltage Vehicles has
performed its obligations under the License Agreement. On May 24, 2007, Rajun
Cajun filed a Cross-Complaint in substantially the same form as the Complaint
filed in Nevada, alleging breach of contract, breach of the covenant of the good
faith, etc. The Cross-Complaint seeks general damages in an amount in excess of
$25,000, special damages in an amount in excess of $25,000, punitive damages in
an amount in excess of $25,000, attorneys’ fees and cost of suit, for judgment
in the amount equal to treble actual damages, and rescission in the amounts of
$397,900 and $120,000, plus interest. Cross-Defendants intend to vigorously
defend against the claims set forth in the Cross-Complaint and so, on August 22,
2007, Cross-Defendants filed both a special demurrer for abatement to prohibit
Cross-Complainants from maintaining a cross-complaint and a demurrer to the
Cross-Complaint itself. On
  - 29
-
 February
11, 2008 ZAP and Voltage Vehicles filed a demurrer to Cross-complainants’ third
through fifteenth causes of action. A hearing on that demurer is currently set
for June 11, 2008.  In its tentative ruling, the Court ruled in ZAP
and Voltage Vehicles’ favor and granted Rajun Cajun leave to file a Second
Amended Cross-Complaint.  The Second Amended Cross-complaint seeks
general damages in an amount in excess of $50,000, damages for Cross-plaintiffs’
lost earnings, both past and future, in a sum to be proven at trial, a sum in
excess of $50,000 for Cross-complainants’ mental pain, a sum in excess of
$50,000 for willful and wanton misconduct, and such other and further relief the
court may deem just and equitable.  On September 16, 2008 ZAP and
Voltage Vehicles filed a demurrer to the Second Amended
Cross-complaint.  The hearing on Zap and Voltage Vehicle’s demurrer to
the Second Amended Cross-complaint is set for November 19, 2008.  A
Settlement Conference is set for March 25, 2009 and Trial Call is set for April
24, 2009.  In the meantime, discovery is ongoing.
 
 CIT
Communications Finance Corporation v. ZAP, formerly known as ZapWorld.com and as
Zap Power Systems, and DOES 1-20, complaint filed on February 26, 2008, Case No.
242445, in the Superior Court of California, County of Sonoma.  CIT
Communications Finance Corporation (“CIT”) has served ZAP with a complaint, an
application for writ of possession, and an application for writ of attachment.
CIT’s complaint and its applications for the two writs are based on three
telephone equipment leases CIT alleges it has with ZAP, through predecessors in
interest.  The Complaint includes five causes of action:  (1)
breach of written lease agreements; (2) recovery of personal property; (3)
conversion; (4) quantum valebant; and (5) quantum meruit or unjust
enrichment.  For each of those claims, CIT alleges that ZAP entered into
the leases, never returned the equipment, and, in or about June 2002, ceased
payment of amounts owed under the leases.  CIT is now seeking both return
of the equipment and a monetary award covering amounts owed under the
leases.  More particularly, for its breach of contract claim, CIT is
seeking recovery of $108,967.26 allegedly owed on the leases.   On its
recovery of personal property claim, CIT is seeking either return of
all the leased equipment or a monetary damages to cover the value of
the leased equipment.  On the conversion claim, CIT is seeking general
damages for ZAP’s continued possession and use of the equipment, as well as
punitive damages based on a claim that ZAP’s actions were malicious,
willful, and oppressive.  On its quantum valebant and quantum meruit
claims, CIT is seeking general damages for the value of ZAP’s continued use and
possession of the equipment since June 24, 2002.  CIT is also seeking
reimbursement of all of its attorneys’ fees and costs of suit, as well as any
additional legal and equitable relief that the court may deem proper. 
ZAP’s Answer to the Complaint was filed on April 24, 2008.  CIT has
also applied for both a writ of possession, seeking return of all of the leased
equipment, and a writ of attachment, seeking attachment of
$122,588.26 against ZAP.  The hearing on CIT’s writ applications
was held on June 3, 2008.  At that hearing, the Court denied CIT’s
application for writ of attachment, finding that CIT had not proven, based on
the record to date, that it was more likely than not to prevail at trial on its
breach of contract cause of action against ZAP.  The Court did,
however, grant CIT’s application for writ of possession, finding no dispute
between the parties regarding ZAP’s willingness to give to CIT all components of
the at-issue telephone equipment still in ZAP’s possession.  Given
ZAP’s multiple offers to date to cooperate in returning any such equipment, the
Court refused CIT’s demand that ZAP be required to post a bond to support the
writ of possession.  The writ of possession was issued on June 17,
2008, but, to date, ZAP is unaware of any action by CIT to enforce that
writ.  On June 20, 2008, ZAP sent CIT an Offer to Compromise, offering
to settle the matter with ZAP’s payment to CIT of $2,500, inclusive of
attorneys’ fees and costs to date.  CIT has not responded to that
offer. A Case Management Conference was held on September 25, 2008, at
which time the Court set a trial date for May 1, 2009, and also ordered the
parties to mediation.  ZAP and CIT are presently attempting to
schedule that mediation.  In the meantime, CIT has served written
discovery on ZAP, and ZAP’s responses to that discovery is due November 12,
2008.  ZAP is in the process of preparing written discovery requests
and will be serving same on CIT shortly.  The next Case Management
Conference is schedule for December 4, 2008. We intend to vigorously defend
ourselves against these claims and believe that we have adequately provided in
our financial statements for this matter.
 
 Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 The
following lists sales of unregistered securities during the quarter ended
September 30, 2008 that were not previously included in a Quarterly Report on
Form 10-QSB or a Current Report on Form 8-K.   We relied on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as
  - 30
-
 amended
(the “Securities Act”) for the issuance of these securities.  Except
as stated below, no underwriting discounts or commissions were payable with
respect to any of the following transactions. The offer and sale of the
following securities was exempt from the registration requirements of the
Securities Act under Rule 506 insofar as (1) except as stated below, each of the
investors was accredited within the meaning of Rule 501(a); (2) the transfer of
the securities were restricted by the company in accordance with Rule 502(d);
(3) there were no more than 35 non-accredited investors in any transaction
within the meaning of Rule 506(b), after taking into consideration all prior
investors under Section 4(2) of the Securities Act within the twelve months
preceding the transaction; and (4) none of the offers and sales were effected
through any general solicitation or general advertising within the meaning of
Rule 502(c).
 
 On  August
14, 2008, the Company issued 3,750 shares of common stock for professional
services valued at $2,925 and 32,051 shares  for R&D purposes
valued at $25,000.
  On
September 10, 2008, the Company issued 12,246 shares for an asset purchase
valued at $7,960.
 
 On  September
11, 2008 the Company issued 127,119 shares valued at $75,000 for asset purchases
and 55,909 shares valued at $30,750 to settle an obligation of the
Company.
  Item 3. Defaults upon Senior
Securities
 
 Not
Applicable
  Item
4. Submission of Matters to a Vote of Security Holders
 
 Not
Applicable
  Item
5. Other Information
 
 Not
Applicable
 
  Item
6. Exhibits
 
 2.1
              Approved
      Second Amended Plan of Reorganization, dated as June 20, 2002.
      (5)
 
 3.1
              Amended
      and Restated Articles of Incorporation.
(4)
 
 3.2
              Certificate
      of Determination of Series SA Convertible Preferred Stock.
      (14)
 
 4.1
              Form
      of common share purchase warrant of the Company held by Fusion Capital
      Fund II, L.P. (6)
 
 4.2
              Form
      of Series B common stock purchase warrant of the Company.
    (14)
 
 4.3
              Form
      of Series K common stock purchase warrant of the Company.
    (14)
 
 10.1
                Settlement
      Agreement between ZAPWORLD.COM, Ridgewood ZAP, LLC, and the
      Shareholders dated June 27, 2001.
(3)
 
 10.3
              2004
      Consultant Stock Plan. (7)
 
 10.4
              Convertible
      Promissory Note, dated April 26, 2004, issued to Banks Living Trust.
      (1)
 
 10.5
              Purchase
      and Sale Agreement dated March 7, 2003 between ATOCHA Land LLC and ZAP.
      (3)
 
 10.6
              Promissory
      Note $2,000,000 - Atocha Land LLC and ZAP.
(3)
 
 - 31
-
 10.7
              Warrant
      Agreement dated April 26, 2004, issued to Banks Living
      Trust.  (1)
 
 10.8
              Common
      Stock Purchase Agreement between ZAP and Fusion Capital Fund II, LLC.
      (6)
 
 10.9
              Registration
      Rights Agreement between ZAP and Fusion Capital Fund II, LLC.
      (6)
 
 10.10
              Form
      of Common Stock Purchase Warrant between ZAP and Fusion Capital Fund II,
      LLC (6)
 
 10.11
              Agreement
      for Consulting Services with Evan Rapoport dated January 8, 2004.
      (1)
 
 10.12
              Asset
      Purchase Agreement dated April 12, 2004 with Jeffrey Banks for purchase of
      various autos (1)
 
 10.13
              Agreement
      for Private Placement Investment received dated April 14, 2004 with
      Phi-Nest Fund  LLP (1)
 
 10.14
              Consulting
      Agreement dated April 21, 2004 with Elexis International
    (1)
  10.15
              Consulting
      Agreement dated April 21, 2004 with Sunshine 511 Holdings
    (1)
  10.16
              Definitive
      Stock Agreement dated October 25, 2004 with Smart-Automobile, LLC
      (2)
 
 10.17
              Master
      Distribution Agreement between Apollo Energy Systems, Inc. and Voltage
      Vehicles Corporation, a subsidiary of ZAP.
  (8)
 
 10.18
              ZAP
      Floor Line and Dealer Development Agreement with Clean Air Motors, LLC for
      a $45 Million Floor Plan Line of Credit for Qualified ZAP Dealers
      (9)
 
 10.19
              Exclusive
      Purchase, License and Supply Agreement between Smart Automobile, LLC and
      ZAP. (10)
 
 10.20
              Amendment
      dated November 15, 2004 to previous consulting agreement with Sunshine
      Holdings 511 (14)
 
 10.21
              Secured
      Promissory Note Payable dated December 30, 2004 with Phi-Nest Fund, LLP.
      (14)
 
 10.22
              ZAP
      assignment of 2.9 million shares of Restricted Common Stock to Phi-Nest
      Fund, LLP as collateral on note payable
(14)
 
 10.23
              Promissory
      note receivable dated January 6, 2005 for $1 million loan  due
      from Smart Automobile, LLC and Thomas Heidemann (President Smart
      Automobile, LLC) (14)
 
 10.24
              Security
      Agreement dated January 6, 2005 from Smart Automobile, LLC and Thomas
      Heidemann (President Smart Automobile, LLC) to secure loan above.
      (14)
 
 10.25
              Common
      Stock Purchase Agreement between ZAP and Platinum Partners Value Arbitrage
      Fund LP (14)
 
 10.26
              Form
      of Common Stock Purchase Warrant between ZAP and Platinum Partners Value
      Arbitrage Fund LP (14)
 
 10.27
              Common
      Stock Purchase Agreement between ZAP and Lazarus Investment Partners LLP
      (14)
 
 10.28
              Form
      of Common Stock Purchase Warrant between ZAP and Lazarus Investment
      Partners LLP (14)
 
 - 32
-
 10.29
              Termination
      of Common Stock Purchase Agreement between ZAP and Fusion Capital Fund
      II,       LLC
  (11)
 
 10.30
              Financing
      Agreement between ZAP and Surge Capital II, LLC
  (12)
 
 10.31
              Exclusive
      Purchase, License, and Supply Agreement between ZAP and Obvio!
      Automotoveiculos S.P.E. Ltda (13)
 
 10.36
              Agreement
      dated July 14, 2006 between ZAP, Thomas Heidemann and Smart Automobile
      (15)
 
 10.37
              Amendment
      Agreement Dated August 30, 2006 between ZAP and Smart Automobile LLC
      (16)
 
 10.38
              Exclusive
      Distribution Agreement dated May 1, 2005, as supplemented by a letter
      dated June 9, 2006 (17)
 
 10.39
              ZAP
      Guarantee (18)
 
 10.40
              Shandong
      Jindalu Vehicle Co., Ltd. Guarantee
(19)
 
 10.41
              Joint
      Venture Negotiations dated September 21, 2006
  (20)
 
 10.42
              Security
      Purchase Agreement between ZAP and Certain Institutional Investors
      (21)
 
 10.43
              Purchase
      and Amendment Agreement between ZAP and Certain Institutional Investors
      (22)
 
 10.44
              Form
      of Convertible
 
 10.45
              Form
      of Warrant
 
 10.46
              Purchase
      order from the Electric Vehicle Company, LLC (“EVC”) for 10,000 of its
      Xebra 2007 model year electric
vehicles
 
 10.47
              Distribution
      agreement this week with PML FlightLink Limited (PML) for the purchase of
      an advanced wheel motor and control
system
 
 10.48
              Joint
      Venture Agreement with Youngman Automobile Co., Ltd to manufacture, market
      and distribute electric a and hybrid vehicles for the worldwide passenger
      car, truck and bus
 
 10.49
              Form
      SB-2 Registration of Common Stock incorporated by reference to SEC filing
      on September 24, 2007 effective on October 2,
  2007.
 
 10.50
              Settlement
      and Mutual Release Agreement with Gemini Master Fund, LTD and Gemini
      Strategies, LLC dated May 7,
2008.(22)
 
 10.51
              Note
      Purchase Agreement with Al Yousuf dated May 8
  ,2008.(22)
 
 10.52
              Promissory
      Note in favor of AlYousuf LLC,dated July 30, 2008 and Deed of Trust,
      Assignment of Leases, Rents and Security Agreement and Fixture Filing by
      ZAP in favor of Al Yousuf LLC, dated July 30,
  2008.(23)
 
 21.1
              List
      of subsidiaries. (3)
 
 31.1
              Certification
      of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
      Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.(22)
 
 - 33
-
 31.2
              Certification
      of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
      Exchange Act, as Adopted Pursuant to  Section 302 of the
      Sarbanes-Oxley Act of 2002. (22)
 
 32.1
              Certification
      of Principal Executive Officer Pursuant to 18 U.S.C.  Section
      1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002. (22)
 
 32.2
              Certification
      of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of
      2002. (22)
 
 (1)
              Previously
      Filed as an exhibit to the Registrant’s Form 8-K for the quarter ended
      March 31, 2004 and incorporated by
reference.
 (2)
              Previously
      filed as an exhibit to the Registrant’s Form 8-K of November 6, 2004 and
      incorporated by reference.
 (3)
              Previously
      filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for
      the year ended December 31, 2003 and incorporated by
      reference.
 (4)
              Previously
      filed with Pre-effective Amendment Number 3 to Form SB-2 registration
      statement filed with the Securities and Exchange Commission on October 3,
      2001.
 (5)
              Previously
      filed as an exhibit to the Registrant’s Form 8-K of October 20, 2002 and
      incorporated by reference.
 (6)
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8-K dated
      July 22, 2004 and incorporated by
reference.
 (7)
              Previously
      filed as an exhibit to the Registrant’s Registration Statement on Form S-8
      (File No. 333-117560) on July 22,
2004.
 (8)
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8K filed
      with the Securities and Exchange Commission on October 6, 2004 and
      incorporated herein by reference.
 (9)
              Previously
      filed as an exhibit to the Registrant’s Quarterly Report on Form 10QSB for
      the period ended September 30, 2004 and incorporated herein by
      reference.
 (10)
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8K filed
      with the Securities and Exchange Commission on April 21, 2004 and
      incorporated herein by reference.
 (11)
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8K filed
      with the Securities and Exchange Commission on February 25, 2005 and
      incorporated herein by reference.
 (12)
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8K filed
      with the Securities and Exchange Commission on September 16, 2005 and
      incorporated herein by reference.
 (13)
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8K filed
      with the Securities and Exchange Commission on September 21, 2005 and
      incorporated herein by reference.
 (14)
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8K filed
      with the Securities and Exchange Commission on July 20, 2006 and
      incorporated herein by reference.
 (15)
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8K filed
      with the Securities and Exchange Commission on September 6, 2006 and
      incorporated herein by reference.
 (16)
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8K filed
      with the Securities and Exchange Commission on November 6, 2006 and
      incorporated herein by reference.
 (17)
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8K filed
      with the Securities and Exchange Commission on November 6, 2006 and
      incorporated herein by reference.
 (18)
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8K filed
      with the Securities and Exchange Commission on November 6, 2006 and
      incorporated herein by reference.
 (19)
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8K filed
      with the Securities and Exchange Commission on November 6, 2006 and
      incorporated herein by reference.
 (20)
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8K filed
      with the Securities and Exchange Commission on December 11, 2006 and
      incorporated herein by reference.
 (21)
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8K filed
      with the Securities and Exchange Commission on February 26, 2007and
      incorporated herein by reference.
 (22)
              Previously
      filed as an exhibit to the Registrant’s Quarterly Report on Form 10Q for
      the period ended March 31, 2008 and incorporated herein by
      reference.
 (23)
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8K filed
      with the Securities and Exchange Commission on August 5, 2008and
      incorporated herein by reference.
  - 34
-
 SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
   ZAPDated: 
       November 13, 2008
              By:
              /s/ Steven
      SchneiderName:  
      Steven SchneiderTitle:    
      Chief Executive Officer (Principal Executive
      Officer)
  ZAPDated: 
       November 13, 2008
              By:
              /s/ William
      HartmanName:  
      William HartmanTitle:    
      Chief Financial Officer (Principal Financial and Accounting
      Officer)
            
 - 35
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