WWW.EXFILE.COM, INC. -- 14369 -- ZAP -- FORM 10-QSB

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB

QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

Commission File Number 0-303000

ZAP

(Name of small business issuer in its charter)

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

501 Fourth Street

Santa Rosa, CA 95401

(707) 525-8658

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

registrant's principal executive offices)

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

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

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

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

34,719,945 shares of common stock as of May 5, 2006.

Transitional Small Business Disclosure Format Yes o No x

ZAP

FORM 10-QSB

INDEX

			Page No.
PART I.	Financial Information


	Item 1.	Consolidated Financial Statements (unaudited) :

		Condensed Consolidated Balance Sheet as of March 31, 2006	2

		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005	3

		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005	4

		Notes to Condensed Consolidated Financial Statements	5

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

	Item 3.	Controls and Procedures	14

PART II.	Other Information


	Item 1.	Legal Proceedings	15

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15

	Item 3.	Defaults Upon Senior Securities	15

	Item 4.	Submission of Matters to a Vote of Security Holders	15

	Item 5.	Other Information	15

	Item 6.	Exhibits	15

SIGNATURES			16

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

ZAP

CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)

(In thousands)

	March 31, 2006
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	2,610
Accounts receivable, net of allowance for doubtful accounts of $317		343
Advances on Smart Car inventory		143
Inventories		2,060
Prepaid expenses and other current assets		294
Total current assets		5,450

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $889		4,905

OTHER ASSETS
Smart Automobile license, net		2,703
Patents and trademarks, net		62
Goodwill		175
Deposits and other		430
Total assets	$	13,725

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES
Current portion of long-term debt	$	104
Accounts payable		177
Accrued liabilities		2,176
License fee payable		906
Deferred revenue		1,100
Total current liabilities		4,463
LONG-TERM LIABILITIES
Long-term debt, less current portion		1,880
Total liabilities		6,343
SHAREHOLDERS’ EQUITY
PrPreferred stock, authorized 50 million shares; no par value, 7,500 shares issued and outstanding		7,500
Common stock, authorized 100 million shares; no par value; 33,394,775 shares issued and outstanding		80,395
Common stock issued as loan collateral		(2,929	)
Notes receivable from shareholders, net		(56	)
Accumulated deficit		(77,528	)
Total shareholders’ equity		7,382
Total liabilities and shareholders’ equity	$	13,725

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

ZAP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Thousands, except share amounts)

	Three Months ended March 31,			Three Months ended March 31,
	2006			2005
NET SALES	$	2,929		$	1,162

COST OF GOODS SOLD		2,505			1,128

GROSS PROFIT		424			34

OPERATING EXPENSES
Sales and marketing		251			193
General and administrative (non-cash of $1,792 and $1,180 for the three months ended March 31, 2006 and 2005)		3,068			2,860
Research and development		—			40
		3,319			3,093

LOSS FROM OPERATIONS		(2,895	)		(3,059	)

OTHER INCOME (EXPENSE)
Gain on revaluation of warrant and put option liabilities		135			1,519
Interest expense,net		(6	)		(7	)
Other		(3	)		—
		126			1,512
LOSS BEFORE INCOME TAXES		(2,769	)		(1,547	)

PROVISION FOR INCOME TAXES		4			4
NET LOSS	$	( 2,773	)	$	(1,551	)

NET LOSS PER COMMON SHARE
BASIC AND DILUTED	$	(0.08	)	$	(0.05	)

WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING --
BASIC AND DILUTED		32,747			30,590

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

ZAP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

	Three months ended March 31,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(2,773	)	$	(1,551	)

Items not requiring the use of cash:
Amortization of note discount		—			10
Stock-based compensation for consulting and other services		1,283			2,792
Stock-based employee compensation		518			(1,645	)
Gain on revaluation of warrant and put option liabilities		(135	)		(1,519	)
Depreciation and amortization		494			371
Loss on disposal of fixed asset		4			—
Allowance for doubtful accounts		(16	)		22
Changes in other items affecting operations:
Receivables		(142	)		(259	)
Note recievable from Smart Auto		—			(1,000	)
Inventories		(188	)		376
Smart car inventory		1,235			—
Prepaid expenses and other assets		(213	)		(55	)
Accounts payable		(12	)		17
Accrued liabilities		(40	)		342
Deferred revenue		50			—
Net cash provided by (used in) operating activities		65			(2,099	)
CASH FLOWS FROM INVESTING ACTIVITES
Purchase of equipment		(24	)		(158	)
Proceeds from sale of equipment		35			—
Net cash provided by (used in) investing activities		11			(158	)

CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock		—			(500	)
Payments on note receivable to stockholder		—			14
Issuance of common stock and warrants, net of offering costs		1,005			1,955
Borrowings and repayments of long-term debt		(18	)		13
Net cash provided by financing activities		987			1,482

NET INCREASE ( DECREASE) IN CASH AND CASH EQUIVALENTS		1,063			(775	)

CASH AND CASH EQUIVALENTS, beginning of period		1,547			5,354

CASH AND CASH EQUIVALENTS, end of period	$	2,610		$	4,579

See accompanying notes to condensed consolidated financial statements (Unaudited)

ZAP

NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

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

The financial statements presented herein, for the three months ended March 31, 2006 and 2005 reflect, in the opinion of management, all material adjustments consisting only of normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flow for the interim periods.

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

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

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

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

(2) SIGNIFICANT ACCOUNTING POLICIES

NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

Basic and diluted loss per common share is based on the weighted average number of common shares outstanding in each period. Potential dilutive securities associated with stock options, warrants and convertible preferred stock and debt have been excluded from the diluted per share amounts, since the effect of these securities would be anti-dilutive. At March 31, 2006, these potentially dilutive securities include options for 6,820,350 shares of common stock, warrants for 52,958,415 shares of common stock, debt convertible into 930,000 shares of common stock and preferred shares that can be converted into 4.14 million shares of common stock.

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

REVENUE RECOGNITION

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

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

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

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

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

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

DEFERRED REVENUE-One of the Company’s subsidiaries, Voltage Vehicles, sold licenses to auto dealerships under the ZAP name. The license agreements call for the licensee to purchase a minimum number of vehicles from ZAP each year. The Company collected $1,100,000 related to these agreements, which is classified as deferred revenue until such time as the Company begins delivering a substantial number of vehicles to these dealerships on a regular basis.

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

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

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

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

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

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

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

The Company also has an agreement with an outside company to provide a 36 month or 36,000 mile warranty on the Smart Car Americanized by ZAP. At March 31, 2006, the Company has recorded a warranty liablility for $77,000.

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. All cash equivalents are in money market funds and commercial paper. The fair value of the funds approximated cost.

(3) STOCK-BASED COMPENSATION

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

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

Under the provisions of SFAS 123R, we recorded $493,265 of stock compensation, net of estimated forfeitures, in selling, general and administrative expenses, in our unaudited condensed consolidated statement of operations for the three months ended March 31, 2006. We utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted after the adoption of SFAS 123R, with the following weighted-average assumptions:

	2006
Dividend yield	—
Expected volatility		140.87	%
Risk-free interest rate		4.63	%
Expected life (in years)		6.0

The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Expected volatility is based upon historical volatility of our common stock over the period commensurate with the expected life of the options. The risk-free interest rate is derived from the average U.S. Treasury Constant Maturity Rate during the period, which approximates the rate in effect at the time of the grant. Our unvested options vest over the next three years. Our options generally have a 10-year term. The expected term is calculated using the simplified method prescribed by the SEC’s Staff Accounting Bulletin 107. Based on the above assumptions, the weighted-average fair values of the options granted under the stock option plans for the three months ended March 31, 2006 was $0.61. As required by SFAS No. 123R, we now estimate forfeitures of employee stock options and recognize compensation cost only for those awards expected to vest. Forfeiture rates are determined based on historical experience. Estimated forfeitures are now adjusted to actual forfeiture experience as needed.

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

	Three months ended March 31,
	2005

Net loss as reported	$	(1,551	)

Add: Stock-based employee/director compensation
included in reported net loss		(1,645	)
Deduct: total stock-based employee compensation
determined under fair value method for all awards		(417	)
Proforma net loss	$	(3,613	)

Loss per share:
Basic and diluted, as reported	$	(0.05	)
Basic and diluted, as adjusted	$	(0.12	)

The assumptions used to determine the pro forma expenses under the Black-Scholes option model for the three months ended March 31, 2005 under SFAS 123 were based on the following assumptions: expected dividend yield: 0; expected volatility: 141%; expected lives, in years: 5; and risk-free interest rate: 4.0%. In the pro forma information for periods prior to 2006, we accounted for forfeitures as they occurred.

A summary of options under the Company’s stock option plans as of December 31, 2005 and changes during the quarter ended March 31, 2006 are as follows:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding December 31, 2005		6,416,350	$	1.04		8.32
Options granted under the plan		150,000	$	0.68
Options exercised		(196,000)	$	0.30
Options forfeited and expired		—		—
Outstanding March 31, 2006		6,370,350	$	1.00		8.11	$	5,159,984

Options vested and exercisable
at March 31, 2006		3,675,418	$	1.00		7.84	$	2,977,089

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 March 31, 2006, for those options for which the quoted market

price was in excess of the exercise price (“in-the-money-options”). The total intrinsic value of options exercised was $222,590 and $8,000 for the three month period end March 31, 2006 and 2005, respectively.

As of March 31, 2006, total compensation cost of unvested options is $2.65 million. This cost is expected to be recognized through November 2008. We recorded no income tax benefits for stock-based compensation expense arrangements for the three months ended March 31, 2006, as we have cumulative operating losses, for which a valuation allowance has been established.

(4) INVENTORIES- The Inventories at March 31, 2006 are summarized as follows (thousands):

Vehicles - conventional	$	452
Advanced Transportation vehicles		660
Parts and supplies		285
Finished Goods		858
		2,255
Less-inventory reserve		(195	)
	$	2,060

(5) LICENSE AND DISTRIBUTION FEE

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

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

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

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

During the fourth quarter of 2005, the Company filed a lawsuit against Daimler Chrysler Corporation ("Daimler Chrysler") and others alleging that Daimler Chrysler has engaged in a series of anti-competitive tactics aimed at defaming ZAP and disrupting its third party relationships including this arrangement. Shortly thereafter, the Company commenced its annual impairment assessment. An independent valuation of the Smart Automobile license as of December 31, 2005 estimated the fair value to be $3.1 million with a remaining life of two years which was less than the $10.6 million recorded cost of the license. The carrying cost of the license was $8.8 million prior to the impairment calculation and accordingly, the Company recorded an impairment charge of $5.721 million for the year ended December 31, 2005. The valuation of the license was based on the Company's discounted projected cash flows from projected sales of Smart Cars over the estimated life of the license agreement. The remaining value of the license is being amortized using the straight-line method over the next two years, which is the revised estimated life of the license. License amortization for the period ended March 31,2006 was $387,500.

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

The Company’s shareholder equity activity for the three months ended March 31, 2006 is summarized as follows:

	Common
	Shares			Amount
Balance at December 31, 2005		32,584,866		$	78,451,000

Issuances of Common Stock for:
Exercise of options and warrants for cash		596,000			515,276
Cash		500,000			500,000
Consulting		171,635			94,900
Employee Compensation		42,274			24,096
		1,309,909			1,134,272
Stock Option and Warrant Transactions
Reclassification of warrant liability					567,525
Fair value of warrants issued for consulting and other services					1,113,938
Fair value of options and warrants issued to employees					493,265

					2,174,728
Reduction in common stock issued as loan collateral		(500,000	)		(600,000	)
Reclassification of deferred compensation					(765,000	)

Balance at March 31, 2006		33,394,775		$	80,395,000

The Company issued common stock as consideration under agreements for consulting and employee services during the three months ended March 31, 2006. The Company recorded the cost based on the market value of the stock at the date of grant. The cost of consulting services resulting from issuing stock and warrants and stock options is being recognized as expense over the term of their respective agreements. Unrecognized compensation on consulting contracts at March 31, 2006 is $765,000 and will be recognized as expense through 2007.

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

The Company also issued options and warrants to consultants for professional services. During the three months ended March 31, 2006, the Company issued warrants to consultants to purchase 1,725,000 shares of common stock at prices ranging from $0.32 per share to $1.50 per share, with a contractual life ranging from 1 to 10 years. With the exception of one warrant grant of 100,000 shares, the warrants and options were nonforfeitable and fully vested at the date of issuance and were valued using the Black-Scholes option pricing model with the following range of assumptions:

	Low	High
Exercise price per share	$0.32	$1.50
Market price	$0.32	$1.23
Assumptions:
Expected dividend yield	0.0%	0.0%
Risk free rate of return	4.63%	4.63%
Expected life	1.0 years	10 years
Volatility	140.87%	140.87%
Fair market value	$0.06	$1.08

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

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

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

A dormant complaint filed in 2002 against the RAP Group and Steve Schneider the CEO of ZAP, individually was reactivated by the plaintiff (Jim Arnold Trucking). The Compliant alleges breach of contract, promissory estoppel and fraud and seeks contract damages in the amount $71,000 plus monthly storage fees and punitive damages of $750,000. The Company has cross-claimed against Plaintiffs seeking compensatory damages, attorneys' fees and equitable relief for breach of oral contract, common count for goods sold and delivered, conversion, liability of surety, violation of statue, and violation of the Unfair Practices Act. On February 17, 2005, the court referred the matter to non-binding arbitration. The non binding arbitration hearing was held on July 27, 2005 where the arbritrator awarded the plaintiff damages in the amount of $68,290 plus prejudgement interest of 7%. On May 2, 2006 a trial was held with the parties agreeing to settle the matter for $40,000 and execute mutual releases of all claims arising out of the subject matter of the litigation.

On October 28, 2005, we filed a complaint against DaimlerChrysler Corporation and others in the Los Angeles Superior Court, under the title ZAP v. DaimlerChrysler AG, et al. The complaint includes claims for intentional and negligent interference with prospective economic relations; trade libel; defamation; breach of contract - agreement to negotiate in good faith; breach of implied covenant of good faith and fair dealing; and unfair competition. The complaint alleges that DaimlerChrysler has engaged in a series of anti-competitive tactics aimed at defaming ZAP and disrupting its third-party business relationships. As a result of the allegations, the complaint requests damages in excess of $500 million and such other relief as the court deems just and proper. DaimlerChrysler has not yet filed a response to our complaint.

(8) RELATED PARTY TRANSACTIONS

Rental agreements

The Company leases office space, land and warehouse space from its CEO and major shareholder. These properties are used to operate the car outlet and to store inventory. Rental expense under these leases was approximately $39,500 and $37,100 for the quarter ended March 31, 2006 and 2005, respectively.

Consulting services and other services

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

Inventory Purchase

In December 2005, the Company purchased inventory from a related entity where three of ZAP’s officers and or Directors are also members of its Board of Directors. The transaction resulted in a payable due to the related Company of $204,000 at December 31, 2005 and March 31, 2006.

(9) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

	Three Months Ended
	March 31,
	2006		2005
Cash paid during the period for interest	$	20		—
Cash paid during the period for income taxes	$	—		—
Non-cash investing and financing activities:
Stock and warrants issued for:
Purchase of real property and equipment	$	—		4
Inventory purchases	$	—		49
Settlement of warrant liability	$	568		6,711
Other assets	$	—		247

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

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

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

• general economic and industry conditions;

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

• our limited operating history;

• industry competition;

• environmental and government regulation;

• protection and defense of our intellectual property rights;

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

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

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

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

Overview

ZAP stands for Zero Air Pollution(R). ZAP was founded on September 23, 1994, during an era when government and industry were debating how to solve the country's growing transportation problems. ZAP began to invent, design, manufacture, and market innovative products like its zero-emission ZAP(R)electric bicycle and ZAPPY(R) electric scooter that were cost-effective and practical for world markets. Today, ZAP is moving forward with a campaign to stay at the forefront of fuel-efficient transportation with new technologies, including energy efficient gas systems, hydrogen, electric, alcohol, hybrid and other innovative power systems. ZAP is also investing in advanced energy solutions, utilizing advanced batteries, trybrid technology and fuel cell designs.

In the process of building ZAP, the Company has pioneered a growing niche for alternative transportation. In 1995, ZAP began marketing electric transportation on the Internet through the website at www.zapworld.com. From 1996 through 1998, we continued to add to our product line; in 1999, ZAP added electric motorbikes; in 2001 ZAP 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 and in 2006 all electric cars.

Today, ZAP is a one-stop portal for a diverse lineup of quality, affordable advanced automotive technologies. ZAP has delivered more than 90,000 vehicles to customers in more than 75 different countries. Our goal is to become the largest and most complete distribution portal in the United States for advanced technology vehicles. We are focused on creating a distribution channel for our automobile and consumer products by establishing qualified automobile-dealers and developing relationships with specialty dealers throughout the United States. We currently market and sell our automobile products through qualified automotive dealers including our subsidiary, Voltage Vehicles. We currently market and sell our consumer products directly to consumers through our Internet Web site, independent representatives, retail outlets and qualified automobile dealers. We continue to develop new products independently and through development and acquisition agreements with companies and manufacturers, and by the purchase of products manufactured to our specifications. We have grown from a single product line to a full product line of electric vehicle and advanced transportation products. Most of our domestic manufacturing has been transferred to lower-cost overseas contract manufacturers.

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

Subsidiaries

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

Recent Developments

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

1.	ZAP reported a record month in March for over $2 million in sales for various models of the Smart Car Americanized by ZAP. The autos were shipped to ZAP Dealers in various states.

ZAP conducted the first cross-country rally of the Smart Car Americanized by ZAP. The tour of six cars started in Santa Rosa California and stopped at the New York International Auto Show in New York City, and ended back in Santa Rosa, CA. The event was held to raise awareness about advanced technology vehicles.

3.	ZAP became listed on the Archipelgo Stock exchange which is now a wholly owned subsidiary of the NYSE Group. At the same time ZAP changed its trading symbol to “ZP”.

4.	ZAP introduced its new line of Lithium Battery Systems for powering hand-held electronic devices at a recent trade show in California.

5.	ZAP has also scheduled for production a new and improved line of electric scooters such as the ZAPPY ® 3 Pro and the ZAPPY® 3 mobility. In addition, the ZAP BUZZZ All Terrain Vehicle and the ZAP MUD’E Trail Bike have also been added to the electric vehicle production line.

	Three months ended March 31,
		2006		2005
Statements of Operations Data:
Net sales		100	%	100	%
Cost of sales		(85.5	)	(97.1	)
Operating expenses		113.3		266.2
Loss from operations		(98.8	)	(263.3	)
Net loss		(94.7	)	(133.5	)

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

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


	ZAP

Dated May 12, 2006	By:	/s/ Steven Schneider
		Name: Steven Schneider
		Title: Chief Executive Officer (Principal Executive Officer)

Dated May 12, 2006	By:	/s/ William Hartman
		Name: William Hartman
		Title: Chief Financial Officer (Principal Financial and Accounting Officer)